Sometimes, leadership changes are good, adding shareholder value and creating a spark of excitement. In the case of Abercrombie & Fitch's (NYSE: ANF ) CEO Mike Jeffries, is it time to make that change?
Change is often good
In the last couple of years, high-profile CEO changes from Yahoo!, Hewlett-Packard, Groupon, and Chesapeake Energy have all created waves throughout Wall Street.
When Yahoo! hired Marissa Mayer, its stock traded at just $15.65, but has since risen to nearly $28. Revenue growth has been nonexistent, but new designs, higher traffic, and strong performance from Alibaba have investors excited.
HP's stock has been mostly flat since Meg Whitman took the job as CEO back in 2011. But guidance for growth in 2014, a focus on its enterprise business, and maximized cash flow has led the stock to being the Dow's best-performing security in 2013. Unfortunately, the stock has crashed after earnings, but has still been a strong performer this year.
Former Groupon CEO Andrew Mason famously sent a message to employees announcing his "decision" to spend time with his family, only to disclose his sense of humor by following up with, "I was fired today." The CEO was fired earlier this year after the stock's near 80% loss since the company's IPO. Since then, longer offerings on deals and U.S. growth have caused Groupon's stock to double.
Chesapeake co-founder and CEO Aubrey McClendon was forced out in January 2013 after a year of controversy and a 30% stock decline in 2012. Since then, the company's decision to reduce CAPEX and deleverage some of its assets has the stock trading at 52-week highs, a 35% gain since McClendon's departure.
The key point with each of the above management changes is that we saw a change in sentiment. Sure, HP's stock is only flat, but the hire of Whitman did stop the bleeding from a continuous decline in HP's valuation. Yahoo!'s fundamentals have not improved drastically, but sentiment and excitement is strong with the new leadership.
Not to mention, data from comScore showing that Yahoo! had more U.S. unique visitors than Google in the month of July proves that Mayer's strategy and new designs are creating new traffic, which bodes well for future fundamental performance.
Is this retail executive next?
Simply put, when billions of revenue is at stake, and competition is at an all-time high, companies can either change with the market or crash with defeat (e.g., J.C. Penney). Looking ahead, Abercrombie might be the next company seeking a change, following its dismal second-quarter earnings.
The idea of Abercrombie looking to fire CEO Mike Jeffries was first noted by retail analyst Brian Sozzi, who reminded us that Jeffries' contract expires at year end. Currently, Abercrombie's stock is lower by 18% after the company posted a quarter in which net income declined 33% and same-store sales fell 10% year over year.
For those of you who are Abercrombie loyalists, don't expect improvements anytime soon, as the company noted that next quarter's same-store sales will be even worse than in the second quarter.
However, despite Abercrombie's weakness, some might defend Jeffries' position due to the overall weakness of the teen retail space, from the likes of American Eagle and Aeropostale. While this is true, it is the comments and the controversial PR from Jeffries that most likely have the hot seat warming up.
Most notably, Jeffries made the decision to not carry XL and XXL women's clothes, perhaps not considering larger women to be "cool." Jeffries went on to dig his grave deeper, saying the company hires "good-looking people" because they attract "other good-looking people, and we want to market to cool, good-looking people."
Perhaps the bigger question is whether or not new leadership can save this company. I already noted that competitors American Eagle and Aeropostale have also been weak, but then again competitor Urban Outfitters (NASDAQ: URBN ) continues to shine.
Last week, Urban Outfitters announced earnings in which gross profit improved 169 basis points year over year and comparable sales exploded 5% for Urban and 38% for its brand Free People. I think it is definitely possible for Abercrombie to likewise see a turnaround, but until new management is found, I think Urban Outfitters stands alone as the clear leader in the space, and I wouldn't bet on Abercrombie or Jeffries' shenanigans.
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