Abercrombie & Fitch may have lost its crown as the king of teen fashion, but a hedge fund is hoping that a change in leadership could revive the retailer’s fortunes.
Engaged Capital publicly urged Abercrombie on Tuesday to replace the company’s 69-year-old chief executive, Mike Jeffries, after his contract expires in February. Failing that, the activist hedge fund called on the company to put itself for sale.
“We are confident that an independent and objective evaluation of management’s performance would result in the conclusion that an immediate leadership change is necessary,†Glenn Welling, the managing member of Engaged, wrote in the letter to the company’s board.
It isn’t clear how much pressure that Engaged, which owns only about 0.5 percent of the company’s shares, can exert on its own. The hedge fund, founded by a former executive at the much larger Relational Investors, calls itself a “constructive activist†that seeks to work with companies. Other hedge funds, including Citadel and the Clinton Group, reported even smaller stakes earlier this year.
But shares in the retailer were up nearly 7 percent in early morning trading on Tuesday, at $36.31.
The move by Engaged is the most public move by a shareholder yet against Abercrombie, whose risqué advertising and clothing â€" championed by Mr. Jeffries â€" made it a favorite of teens a decade ago. But the retailer has since fallen out of fashion, with its stock having fallen 21 percent over the last 12 months.
Despite embarking on a big expansion of its core Abercrombie and Hollister brands, the company has been forced to retrench. It will have closed nearly 30 percent of its American stores by the end of its fiscal year. By Engaged’s calculations the retailer has suffered more than $500 million in asset impairments and operating losses over the past six years.
Mr. Jeffries and Abercrombie’s board have tumbled out of favor with many investors as well. Four of the six directors who were up for election this year received less than 85 percent of votes from shareholders despite running unopposed. And just 20 percent of investors supported the company’s nonbinding vote on Mr. Jeffries’s pay this year, down from 25 percent last year and 56 percent in 2011.
The hedge fund also mentioned other controversies swirling around Mr. Jeffries. It has been in the spotlight after aBuzzFeed article this year described the involvement of the executive’s partner in the company’s operations.
“The board needs to come to the same conclusion that everyone else already has - it is time for new leadership at ANF,†Mr. Welling wrote in the letter. “The renewal of Mr. Jeffries’s employment contract would be a direct contradiction to what shareholders want and the company needs.â€
Engaged, which claimed to have held conversations with Abercrombie’s management for the past year, added that it was particularly displeased that the company did not appear to have a succession plan in place to fill Mr. Jeffries’s position. The hedge fund argued that the board would find a number of potential qualified candidates to lead the company.
Failing a homegrown turnaround plan, the company should explore a leveraged buyout, Engaged added. It noted two recent analyst reports describing Abercrombie as an attractive takeover target, but Mr. Jeffries’s presence makes such a move unlikely.
A representative for the company wasn’t immediately available for comment.
