Activist investor Engaged Capital demanded a leadership change in Abercrombie & Fitch Co. (NYSE:ANF) citing mismanagement and a history of under-performance as the primary reasons in a letter to the board of directors of the retailer.
Engaged Capital invested in Abercrombie & Fitch Co. (NYSE:ANF) because it believed the share of the company is “deeply undervalued” despite owning the two strongest brands in teen apparel. The activist investor owns 400,000 shares in the company.
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Engaged Capital charges Abercrombie & Fitch with failure of leadership
Engaged Capital concluded that the perennial underperformance of Abercrombie & Fitch Co. (NYSE:ANF) was caused by a failure in leadership after conducting its own research and analysis, and on-going and constructive dialogue with the management team of the company, other large shareholders, and observers in the industry.
The activist investor believed that Abercrombie & Fitch Co. (NYSE:ANF) has the capability to reverse its years of under-performance and create significant shareholder value by correcting its missteps and implementing necessary changes such as changing its leader.
Given the upcoming expiration of the employment contract of Michael Jeffries, the chairman and CEO of Abercrombie & Fitch Co. (NYSE:ANF) in February next year, Engaged Capital pointed out that the board has a critical opportunity to position the company in a new direction.
“We are confident that an independent and objective evaluation of management’s performance would result in the conclusion that an immediate leadership change is necessary,” according to the activist investor.
In its letter, Engaged Capital pointed out that despite the “enviable competitive position” of Abercrombie & Fitch Co. (NYSE:ANF) for owning two of the most valuable brands in teen apparel such as Hollister, its shareholders did not benefit from it because of many of years of mismanagement that led to persistent underperformance.
The activist investor even quoted Jim Cramer’s observation that Abercrombie & Fitch Co. (NYSE:ANF) “used to be the hottest teen brand in the world,” but it became “practically irrelevant” under Jeffries’ leadership.
Abercrombie & Fitch’s recent history of under-performance
Engaged Capital noted that the company total returns underperformed by -26% over the past three years and -24% over in one year and two years. “Investors have endured poor performance due to poor leadership. The company’s management team has a reputation for habitually under-estimating and under-executing on the changes needed to remain competitive in the fast moving teen apparel market,” according to the activist investor.
Engaged Capital said the management knew the challenges brought by shifting industry dynamics five years ago and acknowledged the necessity for changes, but its progress was slow and its execution continues to miss the target.
The activist investor further stated that Jeffries is a “major stumbling block” for the company to pursue any acquisition transaction with private equity investors despite the fact that it is one of the most attractive takeout candidates among the specialty retailers.
Engaged Capital encouraged the board of directors of Abercrombie & Fitch Co. (NYSE:ANF) to start a CEO search for executives with relevant retail and turnaround experience. The activist investor pointed out that a leadership change is absolutely necessary to restore investor confidence in the future of the company.