Your business is stagnating. Your shares are down nearly 30% in 2013. Signs of improvement are few and far between. So what do you do? Extend your CEO’s contract, of course.
Bloomberg At least that’s what the board of Abercrombie & Fitch (ANF) decided would be the appropriate course of action. From Abercrombie & Fitch’s press release announcing the contract extension:
Abercrombie & Fitch Co. today announced that it has entered into a new and restructured employment agreement with Michael Jeffries, which will take effect upon the expiration of Mr. Jeffries’ current agreement on February 1, 2014. The terms of Mr. Jeffries’ new employment agreement are included in a Form 8-K to be filed with the Securities and Exchange Commission today.
Craig Stapleton, Lead Independent Director of the Board, said, “Today’s announcement is the result of an extensive review by the Board and detailed discussion with shareholders over several months, and the specific terms of Mike’s new contract reflect direct feedback from those discussions. The new agreement employs a more simplified, performance-based compensation structure that is designed to align incentives closely with the success of the company and the interests of shareholders.”
The Wall Street Journal has the reaction from one unhappy investor:
Activist investor Engaged Capital LLC reacted negatively to the decision. The fund had sought to replace Mr. Jeffries, arguing that he had continued to pull in high pay despite poor performance and was an obstacle to a sale of the company to a private equity buyer.
The fund said it was “disturbed” to learn of the decision and said it would consider all its options for holding the board accountable. Activists sometimes mount proxy fights against companies by seeking to replace directors nominated by management with their own candidates.
“This decision appears to be made without any substantive discussion with shareholders,” Glenn Welling of Engaged wrote in an emailed statement. “We consider this an outright dereliction of the Board’s fiduciary duties.”
RBC Capital Market’s Howard Tubin and Courtney Willson consider the announcement good news. They write:
While we had expected Mr. Jeffries to enter into a new contract, some in the market will, no doubt, be disappointed by this development. We do believe that the hiring of individual brand presidents to aid Mr. Jeffries in running the company could turn into a positive over the intermediate term.
In our opinion, one of the major issues ANF had been struggling with has been a sameness in the merchandise offering, a lack of differentiated and compelling merchandise in-stores to excite the customer, and an offering that was too similar within the A&F and Hollister brands. Bringing on new talent to run the brands on more of an individualized basis could help to alleviate those issues. However, 1) the hires have to have appropriate and significant experience managing global lifestyle brands, and 2) the individuals need to be of a senior level and be respected by Mr. Jeffries. Hiring “yes men” or “yes women” will not bring anything beneficial to the company. These leaders must challenge Mr. Jeffries and Mr. Jeffries must accept and implement input from these new executives. Should this happen, ANF will likely be better off over the next 1-2 years as the new presidents make an impact on the business.
Let’s just say the market’s reaction hasn’t been quite as positive. Shares of Abercrombie & Fitch have dropped 2.6% to $34.01 today, even as American Eagle Outfitters (AEO), which had been competing for worst retail stock of the year not named J.C. Penney (JCP), has gained 0.1% to $14.87.
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