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The board of Abercrombie & Fitch Co. has trimmed some of Michael Jeffries’ power.
The struggling teen retailer on Tuesday said that it has split the positions of chairman and chief executive officer and named Arthur Martinez, 74, non-executive chairman. Jeffries, 69, who had been chairman for 18 years, remains ceo and a director.
A&F also moved to bolster its retail talent on its board, increasing the number of board members to 12 with the appointments of Martinez; Terry Burman, chairman of Zale Corp., and Charles R. Perrin, former chairman and ceo of Avon Products Inc. The three are considered independent directors.
In addition, the company ended its shareholder rights plan, more often referred to as a poison pill, which is used as an antitakeover defense. The maneuver, if still in place, wouldn’t have prevented someone from coming in, but would have made it more difficult for someone to take over the $4.5 billion chain.
The moves are further concessions by the A&F board to increasing pressure from activist investor Engaged Capital, which originally was pushing for the ouster of Jeffries. Engaged owns 0.5 percent of A&F.
Wall Street reacted strongly to the news, sending shares of A&F up 4.8 percent to close at $36.27 in trading on the New York Stock Exchange. More than 6.2 million shares changed hands, compared with an average three-month volume of 3.5 million shares.
While equity analysts in general viewed the board changes as a positive for A&F, they were mixed on how long it might take to turn around the fortunes of the teen retailer.
Matthew McClintock at Barclays Capital Inc. noted, “While this certainly helps to alleviate some concerns about corporate governance within the investment community, we continue to believe the company remains in the very early stages of a long-term strategic restructuring. We expect results to remain volatile in the near term and reiterate our ‘underweight’ rating.”
Susan Anderson at FBR Capital Markets & Co. said the three additions to A&F’s board will “improve management accountability” and has an “outperform” rating on shares of A&F. She also expects activist investors to “continue to pressure the company for further change and improvement.”
In contrast, Randal Konik at Jefferies has a “hold” on shares of A&F: “We remain on the sidelines for now as we view current risk-reward as fair given weak business momentum and lack of visibility on stabilizing fundamentals.”
Paul R. Charron, former chairman and ceo of Fifth & Pacific Cos. Inc. when it was Liz Claiborne Inc., knows both Martinez — who joined the Claiborne board during Charron’s tenure — and Perrin, who is a board colleague at Campbell Soup Co.
According to Charron: “Both are bottom line, results-oriented and shareholder-friendly. I believe they will forge a strong operating partnership. Charlie is particularly capable in corporate compensation issues.”
Joseph R. Gromek, former president and ceo of The Warnaco Group Inc., also knows both individuals. He knows Martinez from his days when the latter was at Saks Inc. Perrin and Gromek both joined the Warnaco board at the same time. Perrin a year later became non-executive chairman of Warnaco, and the two served as board members over a nine-year period. Gromek is now chairman of Tumi Holdings Inc., as well as The New School.
Gromek said, “A&F is lucky and fortunate to have them. They add tremendous value to A&F.”
He believes the two will work collaboratively in their new roles on the A&F board as both “have management styles that are very similar. They will serve the shareholders well.”
Perhaps more importantly, the latest moves by the A&F board speak directly to how it views its fiduciary responsibilities.
According to Charron, “These are good directors that the board is bringing in. The board is active, and doing exactly what it should be doing from a corporate governance standpoint.”
Craig R. Johnson, president of research and consultancy firm Customer Growth Partners, said that separating the chairman and ceo roles is “among the most dramatic improvements we have seen in corporate governance, particularly since weak board governance has been at the root of A&F’s long-running underperformance.”
Johnson noted the “more modest governance change” at Lululemon Athletica Inc., where the board removed founder Chip Wilson to pave the way for new ceo Laurent Potdevin, and how retailers with stubborn performance issues, such as Sears Holdings Corp., “are often dominated by long-tenured and controlling shareholder ceo’s, with a board without the gumption or wherewithal to provide governing guidance over the ceo.”
Gumption is clearly not an issue facing the A&F board, as one individual familiar with the issues confronting the retailer observed, “This change is what A&F needed. Board members who are nice guys, but don’t stand up to Jeffries, are wimps. What you have at A&F is a very strong board,” said the source, who requested anonymity.
Ted D. Rosen, partner in the corporate practice at the law firm Fox Rothschild, said, “The Abercrombie board followed what good corporate governance guidelines recommend. They separated out the roles of chairman and ceo, added new independent directors and did away with the poison pill. They also [earlier] tied Jeffries’ pay to his performance, putting the ceo’s feet to the fire. If he performs, he is paid well, and if not, his compensation for someone at that level will be less than adequate, which could be an incentive in itself.”
Rosen added that one of the problems with executives who are entrenched in their companies is that they sometimes “control the board too much.”
He also noted that with the ending of the poison pill, it could mean that the company “may be looking to be sold, and that they’re not going to be hostile to a takeover. You now have independent board members who are in the best position from a fiduciary duty standpoint to analyze any bids. For stockholders, that’s a very good thing.”
To be sure, acting proactively might also have been a move to placate Engaged Capital. Glenn Welling, founder, chief investment officer and managing member of Engaged, said, “We are pleased to see the board respond to our stated concerns at Abercrombie by enacting the earlier announced governance changes. While a good first step, we believe these reactive changes alone will not be sufficient to put the company back on a course towards creating shareholder value. It is imperative that the board, independent of management, objectively evaluate value-maximizing strategic and organizational changes at all times, and not just when convenient to placate shareholders.”
In the case of Engaged, they had called for the removal of Jeffries. Instead, what it got in December was a new employment agreement for Jeffries that came with the beginning of a succession process and a lower price of entry for anyone attempting to buy the company. The new agreement can be ended by either the ceo or the company with 12 months’ notice after the first anniversary in February 2015, and there’s now a search for two divisional leaders, one for its namesake and abercrombie kids brands and the other for the Hollister business, both of whom have the potential to become a successor to Jeffries.
For now, some wonder how well Jeffries will get along with Martinez. That’s because each man, while highly regarded for his individual talents and skill set, is not known to be shy about vocalizing his viewpoint.
One C-level executive with experience running a Fortune 500 firm in the apparel sector said, “I think Michael Jeffries has met his match.”
This person said Martinez “is highly principled, but can be demanding, and he won’t be reluctant to challenge anyone. He’s smart and financially savvy, which could be a good thing for an entrenched ceo who is taken with himself and who has led a company that has underperformed the market.”
Gilbert Harrison, chairman of investment banking firm Financo Inc., who said Martinez is “one of the brightest executives I have worked with,” wasn’t so quick to rule out Jeffries’ ability to regain some footing at the teen retailer. “Mike is an extremely effective merchant. He has run into similar problems like this in the past and has come through phenomenally well. These changes help position the company for the future, particularly on the issue of succession, [provided] there is a plan in place.”
Both Martinez and Jeffries declined requests for comment on the changes. Martinez said in a statement that he is “honored” to join the A&F board, while Jeffries noted in the same statement, “I have strongly supported the significant corporate governance enhancements the company has made in the past few years,” adding, “Arthur Martinez brings extensive sector expertise, deep boardroom experience and valuable perspectives to the new role of non-executive chairman. I am confident that he is the right choice to lead the board of Abercrombie & Fitch as we execute against our strategic plans and move into the next phase of the company’s growth.”
The changes at A&F are the latest to hit the teen sector, one that has been challenged in the last quarter or two.
Last week, Robert Hanson’s two-year tenure as ceo of American Eagle Outfitters Inc. ended when he abruptly left the firm, leaving chairman Jay Schottenstein to serve as interim ceo. American Eagle has struggled in what has been a highly promotional teen apparel sector. Aéropostale’s challenges include a “diminishing visibility on the timing of a turnaround that has yet to materialize,” according to Jefferies’ Konik, while its merchandise changes “have failed to connect with consumers.” Activist investor Crescendo Partners is agitating for change at Aéropostale, whether a sale of the chain to another retailer or be taken private, while The Clinton Group is in the midst of exploring financing alternatives to take The Wet Seal Inc. private.
The teen sector’s problems seem centered on merchandising and product-related issues and less on operational concerns, said some analysts. There’s no real quick fix if the merchandising is wrong, and some believe the result will be continued price promotions to clear out inventory for the following season’s product line.
Meanwhile, investors are still making their selective bets in the teen sector.
A regulatory filing with the Securities and Exchange Commission on Monday showed that Schottenstein acquired 500,000 shares of American Eagle at an average price of $12.84 a share, giving him beneficial ownership through various entities of about 13 million shares. In Tuesday’s series of filings, Blackrock upped its stakes in American Eagle and A&F to 7.4 percent at 14.3 million shares from 6.5 percent and 8.8 percent at 6.8 million shares from 5.2 percent, respectively. It also took down its stake in Aéropostale to 8.6 percent at 6.5 million shares from 10.2 percent.
The Blackrock filings reflect only purchases made prior to the change in the structure of Abercrombie’s board.