Activist Investor Looks for a Clean Slate at Abercrombie & Fitch

The moves by Abercrombie & Fitch to rein in its CEO in response to investor angst over his imperiousness isn't enough to mollify Engaged Capital, the hedge fund that set the ball in motion late last year by blasting top exec Michael Jeffries, who they charge runs the teen retailer like his own little fiefdom. They're nominating five directors to the board in a proxy battle to shake the preppy clothing company out of its pop-top collars.

The positioning began last December, when Engaged Capital called for Jeffries' ouster. The hedge fund maintained that despite a leadership position in the teen retail industry -- one that finds Abercrombie as the largest global teen retailer, with a huge direct-to-consumer business generating approximately $700 million in annual sales, and also generating gross margins in excess of the competition -- it hasn't shared the wealth with shareholders. It says to compare Abercrombie to any of its peers over any time frame you want, and that you'll see the retailer generally lags behind the competition.

During the nine-week Christmas season, Abercrombie suffered a 6% decline in revenues, a 4% slide in same-store sales, and a 10% plunge in international comps. While hardly anyone did well this past holiday, Urban Outfitters  saw revenues jump 6% on a 1% increase in same-store sales. Of course, some certainly did worse than A&F, too, this Christmas, as American Eagle Outfitters had a 2% drop in revenues on a 7% fall in comps and Aeropostale saw revenues and comps drop 15% each.

There's only one place the blame can be laid, says Engaged, and that's at the feet of its CEO, who has at times gone out of his way to anger his potential customers while pursuing quixotic ventures that ended disastrously, such as Ruehl 21 and Gilly Hicks. The hedge fund recommended the board not renew Jeffries' contract when it expired this month.

Here's spit in your eye
Hardly giving the proposals due consideration, the board not only rejected Engaged Capital's recommendation but also did so at an accelerated pace, as it didn't bother to wait until Jeffries' contract expired, but reupped it within a week of receiving the hedge fund's letter. While it made some concessions, such as removing sign-on bonuses, the response from Engaged was predictable, as it slammed the "dereliction of the board's fiduciary duties." And the battle was on.

That led Ambercrombie to try to mollify the investor a bit by shedding some of the more shareholder-unfriendly provisions of its corporate-governance policies. Last last month the board said it would split the roles of chairman an CEO, eliminate its so-called "poison pill" defense, and add three more independent directors to the board.

Too little, too late
If the board was hoping the concessions would appease their ire, they were sorely mistaken, as the activist investor says the nine people who comprise the board are the same ones who sat idly by and watched the dismantling of a once-premier retailer. They have been an enabling presence who have disregarded investor concerns for years, but the recent episode with the renewal of Jeffries' contract is the most blatant. It's time for them to go, along with the CEO. With important executive decisions needing to be made in the near future, that task is too critical to Abercrombie's future to allow them to remain.

Nominated for the board is a slate of candidates with extensive retail experience, including executive positions at L Brands' Bath & Body Works, J.C. Penney, and David's Bridal.

Having tried and failed to reach out to the board and work with them, Engaged Capital finds it necessary to assail the ramparts. No doubt Abercrombie & Fitch will circle the wagons, but the hedge fund says it's talked with other big investors and believes it has the support to shake up the boardroom. The teen retailer's failed attempts at mollifying the hedge fund may instead find itself mortified at being tossed out.