Why the Abercrombie CEO Departure Is Good

Abercrombie & Fitch Co. (NYSE: ANF) has announced that Michael Jefferies is retiring as chief executive and a member of the board effective immediately. This comes right in the middle of the holiday shopping season, when most retail companies make their year. Abercrombie is known as a racy retailer with a very sexualized advertising scheme. Jefferies in fact embraced this and used it as a tool to attract customers from a young demographic.

Arthur Martinez, the non-executive chairman of the board, will become the new executive chairman. He will also head the office of the chairman in conjunction with Chief Operating Officer Jonathan Ramsden and brand presidents Christos Angelides and Fran Horowitz. The group will oversee the company’s strategic direction and be responsible for managing the day-to-day operations until a new CEO is appointed.

Jeffries has been with Abercrombie since the early 1990s and served as both chairman and CEO in that time. His base salary, most recently agreed upon in 2008, was $1.5 million with an annual target bonus opportunity of at least 150% of the base salary to a maximum of 300%.

Jefferies commented on his retirement:

It has been an honor to lead this extraordinarily talented group of people. I believe now is the right time for new leadership to take the company forward in the next phase of its development.

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Jeffries has non-compete clause for one year after he leaves the company.

According to the most recent proxy statement:

Subject to the conditions described in the SERP, upon his retirement, Mr. Jeffries will receive a monthly benefit for life equal to 50% of his final average compensation (base salary and actual annual incentive as averaged over the last 36 consecutive full months ending prior to his retirement. If Mr. Jeffries had retired on February 1, 2014, the estimated annual benefit payable to him would have been $1,236,600, based on his average compensation for the 36 consecutive months ended February 1, 2014. Due to the structure of the SERP, years of service credited are not applicable.

Shares of Abercrombie were up about 5% at $27.62 just after the opening bell in reaction to the changing of the guard. The stock has a consensus analyst price target of $32.85 and a 52-week trading range of $26.19 to $45.50. The market cap is almost $2 billion.

The board has commenced a search for a successor to Jeffries and has engaged a leading executive search firm to identify and evaluate both internal and external candidates.

Abercrombie & Fitch’s woes have been well known for some time. The company had recently lowered its 2015 guidance, and Jeffries’s contract had been extended. Still, the company’s shares were down about 20% so far in 2014 when the broader market was doing much better, but the stock was down much more if you consider the 52-week high was above $45.50. At what point does an on-the-spot and immediate retirement after years of woes really get counted as a retirement?

When you see a stock rise 5% or more on a CEO departure, without a named permanent successor in place, the market is telegraphing that almost anyone else would be better in the role.

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