It didn't take long for activist investor Engaged Capital to respond to Abercrombie & Fitch's (ANF -3.86%) rejection of its proposal to oust CEO Michael Jeffries, and the response was predictably acerbic in tone.
"We consider this an outright dereliction of the Board's fiduciary duties," said Engaged CIO and Managing Member Glenn W. Welling in a press release. "This action is further proof that our board exists to serve one master, Mr. Jeffries, instead of the shareholders that elected them."
Despite Abercrombie's statement to the contrary, the hedge fund operator suggested it wasn't included in the deliberative process over Jeffries' tenure since it stated there was no "substantive discussion" about the matter. Moreover, even though Jeffries contract doesn't expire until February, the board made the move within one week of having received Engaged's letter, which indeed does make it appear that they were trying to stick their thumb in its eye.
The activist investor noted in its original letter to the board that while Jeffries is to be commended for his efforts in creating two valuable brands, A&F and Hollister, his years of mismanaging the teen retailer has left shareholders out in the cold, unable to participate in the wealth.
Despite Abercrombie remaining a huge global teen retailer, utilizing a huge direct-to-consumer business, and generating gross margins exceeding anything rivals like American Eagle Outfitters and Aeropostale (AROPQ) can cobble together, returns -- both absolute and relative -- lag its peers and the market generally; it is closing down a third of its stores; has had to shutter two expensive failures in Ruehl and Gilly Hicks; and over the past six years has saddled investors with a half billion dollars worth of asset impairments and operating losses.
More recently, third quarter domestic sales tumbled 18% as same-store sales plunged 14% year over year, putting it more in the category of Aeropostale, which is considering strategic alternatives to extricate itself from its dire position, than Urban Outfitters (URBN -0.43%), which enjoyed a 12% jump in total revenues as its Free People brand saw sales surge 30% in the latest period. That's not an idle comparison either. For all the strength of the Hollister brand, sales fell 11% from $603 million last year to $534 million this year, even though it had 10 more stores globally this quarter.
Numerous underperforming retailers have been targeted recently by activist investors who chafe at management's decision to dig in their heels rather than confront the elephant in the room, which is their mismanagement of the business. Men's Wearhouse piqued the ire of hedge fund operator Eminence Capital, for example, when it rejected a takeover bid by Jos. A. Bank and refused to negotiate with its rival.
Like Eminence before it, Engaged Capital says it will not shoulder the snub lightly and will explore all of its options. Eminence readied plans to go directly to shareholders to oust the board for their action (or inaction), and there may be a proxy battle forAbercrombie & Fitch too. In addition to saying the CEO has to go, Engaged Capital may want to wave bon voyage to the board as well.
