Abercrombie & Fitch Co. Clips CEO's Wings

Maybe the board of directors of Abercrombie & Fitch (NYSE: ANF  ) didn't want to admit publicly it agreed with activist shareholder Engaged Capital that company Chairman and CEO Michael Jeffries operated the teen retailer as his own personal fiefdom, but ever since it seemingly snubbed the hedge fund operator by doing the exact opposite of what it suggested, the board has been actively reducing his control.

Engaged said Jeffries doesn't have the acumen to lead the company, that other than its Hollister brand, Abercrombie was an also-ran in teen fashion. It was falling behind troubled rivals like American Eagle Outfitters, let alone better situated peers Aeropostale and Urban Outfitters, and comments he made years ago that came back to haunt him and the retailer last year were an unnecessary distraction that only served to hurt the brand. It was a situation the PE firm said meant Jeffries had to go, or, alternatively, it should seek a leveraged buyout. 

Because it took Ambercrombie's board less than a week to respond, and do so emphatically by reupping Jeffries' contract even though it didn't expire for months, it was widely viewed as the board sticking its thumb in Engaged Capital's eye. 

Yet ever since then, the board has been chipping away at Jeffries' power by adopting more shareholder-friendly governance policies, including just yesterday when it announced it would be adding three more independent directors to the board while separating the positions of chairman and CEO. It also said it would eliminate its shareholder rights plan, a so-called "poison pill" defense that entrenches management by dramatically diluting the shares of any investor that acquires more than the threshold allows.

Naturally, Jeffries says he's "thrilled" by the moves, but one can't really be happy about ceding power and control. He is likely feeling the heat for the underperformance the teen retailer is experiencing even though much of the rest of the marketplace is wobbling as well. For three straight quarters now, Abercrombie & Fitch has witnessed sales decline, and in fact the falloff is accelerating. Revenues were down 12% in the third quarter to $1 billion, a far more dramatic drop from the previous two periods and putting them back where they were in 2011.

That's worse than even American Eagle, whose sales fell 5% in the third quarter, even if it was somewhat better than the 15% plunge experienced by Aeropostale. And not many people are expecting Christmas to lift spirits, let alone sales, for the soon-to-be-reported quarter. Despite being a time when customers usually launch retailers back into the black, analysts anticipate Abercrombie's revenues falling another 8.5% on average, with the most pessimistic among them forecasting a 15% drop.

So let's just say the board of directors of Abercrombie & Fitch is being political, judiciously clipping his wings to limit how far Jeffries can fly. No, they haven't completely incapacitated him, but the shareholder-friendly actions indicate they'd like him to stay grounded.

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