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| Mike leaving after a visit to A&F Paris which recently suffered from fire damage. Image used for illustrative purposes only. | (image source) |
Michael "Mike" S. Jeffries is to retain his position as Chairman & CEO of Abercrombie & Fitch Co. upon the 2 February 2014 activation of the all-new "2013 Agreement" which was finalized on December 9 of this year. Henceforth beyond 1 February 2015, Mike is susceptible to remain although the contract – now focusing primarily on performance – may be expired within a 12 month notice by either Mike or the Company...
" Today's announcement is the result of an extensive review by the Board and detailed discussion with shareholders over several months, and the specific terms of Mike's new contract reflect direct feedback from those discussions. The new agreement employs a more simplified, performance-based compensation structure that is designed to align incentives closely with the success of the company and the interests of shareholders. Mike is a visionary in this industry and has been responsible for reinventing, creating and evolving today's Abercrombie & Fitch and Hollister brands. Under his direction, Abercrombie & Fitch has grown from just 36 domestic stores and $50 million in sales in 1992 to having a global presence and over $4 billion in sales today. Mike and his team have developed a long-term plan that builds upon past successes, while targeting the specific challenges that the company faces today. We believe he is the right person to embark on this plan, which we believe will deliver substantial and sustainable value. " – Craig Stapleton, Lead Independent Director of the Board
As set forth in this new 2013 Agreement as filed on December 9 in a Form 8-K with the Securities and Exchange Commission, Mike will be receiving his current annual base salary of US$1,500,000 under annual review; will still take part in the Company's annual bonus plan allowing him a 150% annual target bonus opportunity and 300% maximum bonus opportunity of base salary; entitled US$10,000,000 life insurance coverage and employee benefit programs and senior officers' arrangements; personal usage of up to US$200,000 of the corporate aircraft for "security purposes"; and eligibility to A&F Supplemental Executive Retirement Plan benefits.
However, this time around, Mike is afforded no retention or sign-on grant and the 2008 Agreement semi-annual equity grants structure has been done away with. Mike is now only eligible as recipient for annual long-term incentive awards with a US$6,000,000 target value susceptible to yearly review and, should performance justify, the Compensation Committee may also allow an increase by its sole discretion. In regards to individual, annual long-term incentive awards, discretion by the Compensation Committee in basis of performance will also determine an at-minimum 60% vesting.
In regards to possible variables of ending employment:
- Should the 2013 Agreement terminate in subsequence of the set expiration date (by mutual consent between Mike and Company), by A&F Co. for Cause, by Mike for anything other than Good Reason, or for Retirement, the Form 8-K states that Mike is entitled to "his then current accrued and unpaid base salary through the date of termination; any earned or accrued and unpaid bonus or other incentive compensation for any completed fiscal years preceding the year of termination; any previously deferred compensation, reimbursement of reasonable expenses; and any other benefits and payments to which he is then entitled under the Company’s employee benefit plans (collectively, the “Accrued Compensation”)." Furthermore, circumstances for long-term incentives accelerated venting have been limited unlike in the 2008 Agreement. If agreement ends because of anything other than Good Reason or for Retirement, Mike would also forfeit unvested long-term incentive awards that were granted to him at least two years beforehand "unless the Compensation Committee determines otherwise." To become fully vested upon termination date will be any unvested long-term incentive awards held by Mike: "to the extent such awards contain performance-based vesting criteria, vesting will occur at the end of the applicable performance period and vesting will be based on actual performance over the entire performance period."
- Should the 2013 Agreement terminate by A&F Co. without Cause, or Mike for Good Reason before a Change of Control and subject to personal general claims release execution, Mike will be entitled to: "Accrued Compensation and will continue to receive his then current base salary and medical, dental and other associated welfare benefits for two years after his termination date. [Mike] will also receive an additional payment equal to 150% of his salary pro-rated for the portion of the year of termination that he was employed by the Company. The Company will also continue to pay the premiums on [Mike’s] term life insurance policy until the later of the last day of the Term or the last day of his welfare benefits coverage." If agreement ends because of Good Reason before Change of Control, Mike would also forfeit unvested long-term incentive awards that were granted to him at least two years beforehand "unless the Compensation Committee determines otherwise." To become fully vested upon termination date under this circumstance also will be any unvested long-term incentive awards held by Mike: "to the extent such awards contain performance-based vesting criteria, vesting will occur at the end of the applicable performance period and vesting will be based on actual performance over the entire performance period."
- Should the 2013 Agreement terminate by A&F Co. without Cause, or Mike for Good Reason within two years after a Change of Control and subject to personal general claims release execution, Mike will be entitled to: "same severance benefits as those payable prior to a Change of Control, except that his two years of base salary will be paid in a lump sum rather than ratably over the term of the two years."
- Should the 2013 Agreement terminate under the circumstance of disability, Mike is entitled to: "[receiving] Accrued Compensation and will continue to receive his then current base salary for 24 months following the termination date and 80% of his base salary for the third 12 months following the termination date (reduced by any long-term disability insurance payments he may receive) and medical, dental and other associated welfare benefits during that time period. In addition, each outstanding long-term incentive award held by [Mike] will become fully vested either as of the termination date or, with respect to awards with performance-based vesting criteria, at the end of the applicable performance period and vesting will be based on actual performance over the entire performance period. The Company will also continue to pay the premiums on [Mike’s] term life insurance policy until the later of the last day of the Term or the last day of his welfare benefits coverage."
- Should the 2013 Agreement terminate under the circumstance of Mike's death, "his estate or his beneficiaries will be entitled to receive the Accrued Compensation and pro rated target bonus for the year of termination. In addition, each outstanding long-term incentive award held by [Mike] will become fully vested either as of the termination date or, with respect to awards with performance-based vesting criteria, at the end of the applicable performance period and vesting will be based on actual performance over the entire performance period."
The finalization, filling, and press release comes days after Engaged Capital (an investment firm with major shareholdings at Abercrombie & Fitch Co.) expressed its attitude towards Mike in a very direct, bold letter to the A&F Board of Directors. The letter recognizes Mike as having been crucial for the global rise of the Company and for giving it the most valued brands in youth retail, Abercrombie & Fitch and Hollister Co. However, it openly shares that Engaged Capital invested in the Company primarily because it believes it to still be deeply undervalued despite the brands' current stance and that there is more beneficial potential to be realized. It cites the vulnerably expansive retail footprint created in the 2000s, and investment in it in the domestic American market, only to be suffering impacting consequences in the 2010s: "years of store closures and asset impairments"; pale operating margin; deteriorating, poor return on investment; asset impairments and operating losses of up to US$500 million in the most recent six years; and up to 35% of Company stores to be closed by Fiscal 2015. Also noted among many more things were the so-called "high-risk" flagship store strategy; the costly failure of RUEHL No.925 and Gilly Hicks; and Mike's US$140 million compensation in five years with -31% five-year total shareholding returns in that same period. All of it is blamed on poor leadership: "Given the Company’s history of operational missteps, taken together with Mr. Jeffries’ age and his increasingly controversial reputation, the Board must not let this [contract expiration] opportunity pass."
As the letter posited, "With ample evidence of dissatisfaction and persistent underperformance on almost every credible measure, shareholders can only wonder how the Board has remained oblivious to their concerns; or worse, why the Board remains so obstinate in its defense of Mr. Jeffries?"
Well, as C.E.R. (Editor-in-Chief of The Sitch on Fitch) singularly stated – as published in the early-November Q3 FY2013 evaluation gone viral – against others' overtly critical reports, "[Mike] is rather much needed to oversee stabilization throughout this transition[.]" And as Stapleton on the A&F Board of Directors echoed in the December 9 press release, "[...Mike] is the right person to embark on this plan, which we believe will deliver substantial and sustainable value."
"I am honored to lead Abercrombie & Fitch forward, augment the best team in the industry, and capitalize on the value of our iconic brands. We are taking aggressive action to manage through the challenging teen retail environment by increasing our speed to market and enhancing our brand engagement. We are also focused on completing the restructuring of our cost base and ensuring we are properly organized to execute against our long-term plan. We are adapting to changing markets and consumer dynamics to drive top-line growth, and I am confident that we are taking the right steps to deliver value for shareholders. As ever, I am grateful to our team of dedicated and talented Abercrombie & Fitch associates and to the Board for their guidance and support." – Mike, 9 December 2013 press release
As time progresses, the new strategy will foster the development of internal candidates for successor planning.
Furthermore, the Company is now anticipating the creation of individual president positions for the Abercrombie & Fitch, abercrombie, and Hollister Co. divisions. External candidates to bring in their utmost expertise and freshness will be searched for in collaboration with Herbert Mines Associates. As Stapleton shared, "Abercrombie & Fitch has always been highly focused on recruiting and cultivating the best talent for the company's success, and we believe that these new senior additions to the management team will help the company achieve its potential. These new leadership positions will provide fresh perspectives on brand development as well as deepen our bench of talent at this critical time. The Board fully supports the long-term plan that Mike and the management team have developed and the value that this plan and the actions we are taking will deliver for shareholders."
On a concluding and very sentimental note, Leslee Herro will finally be retiring in spring 2014. Leslee has been with the Company since even before the appointment of Mike as president and the subsequent, historic 1992 Revolution of Abercrombie & Fitch. Do to her strong value and wisdom, she will remain at the Company in a non-named executive officer capacity for an unspecified period and offer "advice and counsel to the company's Leadership Team and completing certain special projects." On her departure, Mike beautifully expressed, "Leslee has been an incredible [business] partner to me for the past 22 years. Her deep insights in to the business, strong sense of culture, and constant good humor will be sorely missed by me and everyone else with whom she has worked. Abercrombie & Fitch will never be quite the same without Leslee, and she will always be part of the Abercrombie & Fitch family. We wish her all the best as she chooses to focus on her own family."
Ultimately, these are very critical times only to become more so within the following months. All we can do is stand firm in support as things progress in ensuring the continuation of the legacy of Abercrombie & Fitch as a champion of all-American achievement...
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