Michael S. Jeffries’ long run at Abercrombie & Fitch Co. is over.
The teen retailer, struggling like all of its peers, said Tuesday that the chief executive officer had stepped down — explaining it as a retirement months in the planning even though Jeffries had been under increasing pressure for everything from his lavish spending to the stock’s poor performance.
Wall Street cheered his departure, sending A&F’s shares up 8 percent to close at $28.46. Over 8 million shares changed hands compared with an average three months trading volume of nearly 2.8 million.
“We believe the company is in need of new blood and a new direction given recent disappointing performance,” said Jefferies analyst Randal J. Konik. “The teen space has changed, and while Abercrombie has begun the important process of making changes to its product, the environment clearly shows that possibly an entirely new direction is needed here.”
Jeffries had been battling such criticism most of this year, and had been trying to convince investors that he was still the man to turn the brand around in the era of social media. His latest strategy was to use fewer logos on the A&F products sold in the U.S. — but Wall Street remained skeptical, especially after the retailer cut its full-year guidance last week.
Besides, change was already afoot at the teen retailer in January when the Abercrombie board trimmed some of Jeffries’ power, splitting the positions of chairman and chief executive officer in a corporate governance move. In addition to naming Arthur Martinez as nonexecutive chairman, the company added two members and all three are considered independent directors. The moves were further concessions by the board to increasing pressure at the time from activist investor Engaged Capital, which had been pushing for the ouster of Jeffries.
Given that background, Jeffries’ resignation Tuesday appears abrupt — with no successor named and a search firm just appointed to begin the hunt for a successor. But Martinez claimed otherwise.
“This was the end of a very thoughtful and deliberate process of engagement with the board and Mike. This may seem like a surprise, but succession planning has been on the board’s agenda throughout 2014. There’s no way to tell the world while you’re talking about it until you can talk about it,” Martinez said in an interview.
Martinez said that the board’s succession planning had “zero” involvement from Engaged, stating emphatically that it “had no influence and no role” in the decision or the process.
Jeffries isn’t walking away empty-handed. In an exchange for a release of claims, including a non-disparagement provision, he is leaving with a lump-sum payment of $5.5 million and a continuation of benefits, as if he had been terminated without cause. Based on a formula established in 2003, Jeffries upon his retirement also is entitled to receive every year for the remainder of his life one-half of his average annual compensation — base salary and annual cash incentive bonus — over his last 36 calendar months as ceo. Based on those figures for the last three fiscal years, that would amount to an annual stipend of $1.2 million, although the figure would need to be adjusted for his 10 full months as ceo during 2014.
In addition, he had accumulated $14.1 million in pension benefits through Feb. 1, according to A&F’s definitive proxy for 2013. While Jeffries is no longer ceo, he is still employed by the company until the end of the year, according to a filing with the Securities and Exchange Commission on Tuesday.
Now the challenge facing A&F is finding a ceo who can turn around the ship that Jeffries built — one that, for a time, sailed smoothly on the cult of personality he built around himself at the retailer’s campus in New Albany, Ohio, where the crew of twentysomething employees copied Jeffries’ beach-boy style by walking around in shorts, jeans, T-shirts and flip-flops even in the dead of winter.
“There is no way to replace Mike,” Martinez said. “He is Hall of Fame material. The next ceo has to be more strategic and less of a merchant. The person will be navigating a whole new world of leaders coming into our space. It’s a disruptive space. The person who will be threading the needle here needs to be strategic on where to place our bets [and] where to place our capital.”
Queried further about the tools in one’s arsenal that might be needed due to what’s now influencing retail compared with 10 years ago, and because traditional advertising vehicles don’t seem to work with teens, Martinez said, “Social and digital media, and international, are important for the company. We have about 35 percent of our business coming from outside the U.S. We have a big footprint in Western Europe.”
The chairman didn’t estimate how long the search might take, noting that “our focus is in getting the right person for the job versus getting the right person quickly. There are three executives in the office of the chairman, and all three are [possible] candidates.” Spencer Stuart has been hired to conduct the search for the new ceo, which will include external and internal candidates.
Sources said that potential candidates could be Christine Day, former ceo of Lululemon; Lynn Kilbourne, formerly president of Zumiez; Dimitri Siegel, vice president of global e-commerce and global executive creative director at Patagonia; Diane Neal who is on the board of Abercrombie & Fitch and is the former ceo of Bath & Body Works.
One source said Glen Senk, ceo of Front Row Partners and former ceo of Urban Outfitters, would be a long shot.
With Jeffries’ retirement, Martinez becomes executive chairman. Included in the office of the chairman are Jonathan Ramsden, chief operating officer; Christos Angelides, brand president of Abercrombie & Fitch, and Fran Horowitz, brand president of Hollister. Martinez will oversee the company’s strategic direction and be responsible for day-to-day operations until the new ceo is named. Both Angelides and Horowitz joined the company in October. Ramsden has been with A&F for six years, joining in 2008 as executive vice president and chief financial officer. In January he was named chief operating officer, a new position, two days after the separation of the chairman and ceo roles.
Meanwhile, as the search process continues, Martinez and his team will have to continue with some out-of-the-box thinking on how to improve the retailer’s fortunes, such as continue with the expansion of wholesale options, outside brands within its own stores and online as well as selling its branded merchandise to other retailers.
As for improving sales and margins while the search for a ceo continues, Martinez said the “name of the game is selling more goods to our target customer. We’ve lowered our cost base and have rightsized the store fleet and improved store productivity. The metrics have to accelerate revenue generation. We have to keep margins as we do that. We can’t expense our way to success.”
Even as he exits under something of a cloud, Jeffries’ departure marks the end of an era in retail. The 69-year-old, with his dyed blonde hair, facelifts and casual apparel, forever sought the fountain of youth and for a time in the Nineties was one of the industry’s creative geniuses with products and controversial marketing campaigns that catapulted first A&F and then its sister brand Hollister into globally recognized brands built on their All-American images. The A&F quarterly catalogues, mostly shot by Bruce Weber, pushed advertising to the edge with photos of nude or semi-nude male and female models in provocative poses. Parents screamed while their teenage children rushed to get their hands on a copy and buy the clothes as a sign of rebellion.
Daniel R. Schwarzwalder, senior managing director, Buckingham Capital Management, was at A&S from 1972 through 1982 as a vice president in charge of general merchandise reporting to Jeffries while Jeffries was senior vice president and general merchandise manager of all softlines.
According to Schwarzwalder, “Mike worked 24/7, and respected you if you were the same way. He’d never ask you to do anything that he himself wouldn’t do. He’s one of the smartest guys I know and very people-oriented.”
Schwarzwalder recalled numerous discussions among himself, with buyers and Jeffries and how everyone was free — and encouraged to — bounce ideas off of him, both for business and even on a personal level.
“When Michael spoke with you, you felt that he was focused on you. He stared right at you and he concentrated on the things you were saying,” the Buckingham executive said.
While there have been unflattering, even sometimes weird, stories about Jeffries’ plastic surgery, coming out of the closet and use of company perks, Schwarzwalder said, “We didn’t experience that stuff back in the Seventies.”
As for whether Jeffries lost his focus or lost touch with the teen consumer, Schwarzwalder said, “Even Mickey Drexler when he was at The Gap is having a tough time now at J. Crew and Mickey’s terrific. Sometimes you run out of ideas, sometimes things happen and you get into a tailspin. I don’t know of anyone who stays on top forever.”
In the last couple of years, Jeffries couldn’t revive or reinvent Abercrombie or pump up the less-troubled Hollister to their former status amid difficult sales and new competition, particularly from fast fashion retailers with lower price points and trendier styles less driven by logos.
“Sixteen year olds don’t want to buy a brand launched 20 years ago,” said Les Berglass, founder and chairman of Berglass + Associates. “Someone has to reinvent it and target the skating and board consumer who is roughly 14 to 18 years old, while Hollister is for the surfing crowd.”
“This was long overdue,” said Craig Johnson, president of Customer Growth Partners. “A&F wasn’t going to be fixed until there was change at the top. This company had a long great run and kind of lost its way. At the same time, the teen sector underwent a tectonic change. It’s been a case of female flight, younger women started going to Forever 21 and in last couple of years, to H&M. And at the same time, the amount they have been spending on clothes has been declining as their spending shifted more toward technology, monthly subscription costs for cable, Netflix, phones and video games. On top of that, this company had an acute governance problem where the board was basically a rubber stamp for Jeffries, who overexpanded the company during the mid 2000s even after it was apparent that the look of A&F and Hollister peaked out.”
Johnson added that “Mike kept believing in the concept because it was his own,” noting also that Jeffries was “too invested in his own vision. It had a great run, made a lot of money but those years passed by. Abercrombie represented an exclusive prep feel, a lower-cost Ralph Lauren and that whole concept and the logo became passé. Hollister, which has more of a surf-and-skate look, still appeals to people but not as much as it used to. Zumiez, PacSun and even Forever 21 to a degree provide the look.”
Jeffries was recruited in 1992 by Leslie Wexner, chairman and ceo of L Brands, which owned A&F, to reinvent what was then a small moribund safari outfitter that Wexner believed still had a name that resonated. While others preceding Jeffries couldn’t figure out what to do with the retailer, he hit on the right formula and orchestrated one of the most successful retail runs ever.
Continuing in the spirit of youth, Jeffries started Hollister from scratch in 2000, as a younger, Southern California surf-inspired counterpart to its older sibling that customers would a few years later grow into shopping at Abercrombie. Jeffries, who considers building a brand like making a movie or creating a personality, would devise storylines for the brands. “A brand is a person, a living, breathing thing,” he once told WWD.
He also created Ruehl and Gilly Hicks, both of which have since been shuttered.