Shares of teen apparel retailer Abercrombie & Fitch (NYSE:ANF) rose by more than 6% after an investment firm, Engaged Capital suggested the company change its CEO. In its letter to the company’s board, the firm highlighted the expiration of current CEO Mike Jeffries’ contract in February and said that the retailer has suffered from many years due to his poor leadership. Engaged Capital said that the company should also consider selling its business to a private equity firm.  However, the investment firm holds just 0.5% stake in Abercrombie and will require greater investor support to have an influence over the company’s board. 
For some time now, Abercrombie has been losing its customers to other brands due to weak inventory management and lack of prevailing fashion trends. Some analyst even feel that the company has lost its teen appeal altogether. Moreover, its public relations (PR) have suffered lately as Mike Jeffries was associated with some negative headlines. However, it appears that Mr. Jeffries is under pressure mainly due to the company’s bad performance.
Abercrombie’s management did not make any specific comments related to the letter, but stated that it has had active conversations with many investors over the past several months.  We believe that even though Mike Jeffries has made some valuable contributions to the company in the past, a change in leadership might not be the worst idea. A fresh mind might be able to formulate some new strategies, that can help Abercrombie recover from its slump.
Our price estimate for Abercrombie & Fitch stands at $40, implying a premium of about 15% to the market price.
Engaged Capital Wants A New CEO
In its letter to Abercrombie’s board, Engaged Capital said that the company has struggled of many years due to its leader’s mismanagement. The letter stated that over the last decade, the company’s management had been investing heavily on expanding its domestic footprint. They overbuilt their U.S. store base and had to consolidate that network later. Abercrombie will close about 30% of its domestic store fleet by the end of this year and will take this figure to 35% by 2015. Management invested similarly in building its store base in Europe, that later turned out to be a bad decision. These stores were costly and have been performing poorly for some time now. Additionally, the retailer’s new brands Ruehl and Gilly Hicks were costly failures. 
The investment firm said that poor leadership was more responsible for this under-performance than weak asset quality. It said that the change of CEO is no longer an option, but an absolute necessity given the company’s history of operational missteps, Mr. Jeffries age (69) and increasingly controversial image. Lately, Jeffries has faced a lot of media criticism for his “cool kids” statements (in response to criticism that the store did not stock larger sizes), and reports of his life partner’s involvement in corporate decision making. This has added company’s bad PR.  The letter said that Mike Jeffries’ public statements and the apparent intrusion of his private life in the company’s business have caused unnecessary controversy, which is damaging the brand image, employee morale and likely sales. The investment firm also said that renewing Mike Jeffries’ contract will be a direct contradiction of what the shareholders want.
Going Private Was Also Cited As An Option
Engaged Capital even said that if the CEO is not changed, the company should consider putting itself for sale to a private equity firm. During the last three years, Abercrombie’s stock has posted the worst performance by any consumer company in S&P’s 500 index and its market capitalization has fallen close to $4 billion to the present $2.7 billion. Though a buyout appears to be a viable option, Engaged Capital feels that Jeffries’ presence will be a major roadblock for the transaction.  According to FBR & Co., takeover bids might not be high enough to convince Mr. Jeffries to sell the company.  Hence, we believe that Engaged Capital will need broader support from the investors for either a buyout or the change of CEO.Notes:
- Abercrombie Advances After Call for New CEO, Possible Sale, Bloomberg, Dec 3 2013 [↩] [↩]
- Engaged Capital’s Letter To Abercrombie & Fitch [↩]
- Engaged Capital Tells Abercrombie: Replace CEO, The Wall Street Journal, Dec 3 2013 [↩]
- Exclusive: Abercrombie Execs Troubled By Involvement Of CEO’s Partner, Buzz Feed, May 22 2013 [↩]
- Active Investor: Abercrombie & Fitch Should Boot CEO Jeffries, Forbes, Dec 3 2013 [↩]
- Abercrombie Holder Faces Off With Anti LBO CEO: REAL M&A, Businessweek, Dec 4 2013 [↩]