Abercrombie & Fitch Co. (ANF)’s latest dissident investor faces an uphill battle toppling the biggest hurdle to a buyout: the chief executive officer.
Engaged Capital LLC sent a letter to Abercrombie yesterday urging the board to replace CEO Mike Jeffries, 69, or consider a sale. The news drove shares of the company, speculated as a buyout target for years, up the most since May. Abercrombie investors have lost more than $4 billion in market value in less than three years, as the stock posted the worst performance of any consumer company in the Standard & Poor’s 500 Index, according to data compiled by Bloomberg. The now $2.75 billion company’s margins and same-store sales have plunged as its fashions failed to keep up with teens’ preferences.
While the lower valuation and room for improvement make Abercrombie a compelling target, Jeffries -- who has been CEO since 1992 -- would need to either support a sale or step aside, according to FBR & Co. Jeffries’ contract is likely to be renewed in February, and any takeover bids would probably fall far short of the price it would take to convince him to sell, SunTrust Banks Inc. said. With only a 0.5 percent stake, Engaged Capital may be fishing for broader shareholder support to be able to take on the board, Stifel Financial Corp. said.
“He’s made it very clear that he’s not going anywhere,” Pamela Quintiliano, a New York-based analyst at SunTrust, said in a phone interview. Jeffries’ influence over the company “is an obstacle, and I don’t think the board would do a deal without his approval.”
With Jeffries’ employment contract expiring Feb. 1, “the board has an important opportunity to set a new direction for the company and reverse the years of disappointment,” Glenn Welling, principal and chief investment officer of Engaged Capital, wrote in the letter to Abercrombie’s board.
“A sale of the company to a private equity buyer may represent the best option for shareholders,” he wrote. “However, as we have learned through discussions with industry insiders and private equity firms, Mr. Jeffries’ presence represents a major stumbling block to a transaction.”
A representative for Newport Beach, California-based Engaged Capital declined to comment beyond the letter. The firm was founded in 2012 by Welling, who previously worked at Relational Investors LLC. Relational had been pressing for changes at Abercrombie last year, a person with knowledge of the matter told Bloomberg News at the time.
“The Abercrombie & Fitch board and management team are committed to creating value, and we welcome input from all shareholders,” the New Albany, Ohio-based company said in an e-mailed statement yesterday. Abercrombie “has had extensive discussions with many of its shareholders, including Engaged Capital, over the past several months. We look forward to continuing our dialogue with shareholders as we execute on our long-term plan.”
Abercrombie has been struggling to reconnect with its customers who have less money to spend. The company has been slow to turn away from their logo-heavy, all-American style, even as competition from fast-fashion retailers like Hennes & Mauritz AB offering the latest looks at a low price force Abercrombie to deepen discounts. Abercrombie also owns the Hollister chain of stores.
The chain earned 5 cents on each dollar of sales in the past 12 months, about a quarter of its operating margin during the same period five years ago, data compiled by Bloomberg show. The stock slid 36 percent in the last three years, the biggest decline in the S&P 500 Consumer Discretionary Index.
Even Abercrombie’s brand value has eroded. In 2012, it ranked as the 45th most valuable U.S. retail brand, according to brand consultancy Interbrand. This year it didn’t even make the top 50.
The weak stock price coupled with a chain in need of a turnaround makes it a “perfect candidate” for a buyout, Susan Anderson, an Arlington, Virginia-based analyst at FBR, said in a phone interview. If Engaged Capital were successful in trying to oust Jeffries, “you would have a lot of interest in the company,” she said.
All nine of Abercrombie’s board members are up for re-election in 2014, including Jeffries who has been chairman since 1998.
A private-equity buyer could pay $38 a share and earn a 29 percent internal rate of return, according to Anderson. She estimates that at $48 a share the return would be 24 percent, or 18 percent if the offer price were $60.
Jeffries would probably insist on at least $60 a share if he were to sell the company, and it’s unlikely that any bidders would be willing to pay that much, Quintiliano of SunTrust said. Abercrombie’s average price in the 20 days leading up to Engaged Capital’s letter was $34.76. Yesterday, the shares rose 5.8 percent to $35.99.
Today, Abercrombie fell 2.1 percent to $35.24 at 9:57 a.m. New York time.
Adding to the deal hurdles is a pay package that would award Jeffries $100 million if there were to be a change in control of the company, according to Richard Jaffe, a New York-based analyst at Stifel. Whether the CEO’s new contract next year has that same clause will make a difference to suitors, Jaffe said in a phone interview.
Engaged Capital’s 400,000 shares make it about the 40th biggest shareholder in Abercrombie, data compiled by Bloomberg show. Even at that level, it’s possible the firm could kick off changes at the retailer, Jaffe said.
“Jeffries is very dedicated to the business and is very much the visionary of the organization,” he said. But, “is Engaged pointing out something to somebody who could take a larger stake and become an influential major shareholder and enforce change in the leadership of this organization? Sure.”
To contact the editor responsible for this story: Sarah Rabil at email@example.com