Retaining Jeffries as CEO Proves Costly to Abercrombie & Fitch
Even as Abercrombie and Fitch reported a 43 percent decline in net income for fiscal 2008 ended January 31, the board of the teen apparel retailer was rewarding its long-time Chief Executive Michael Jeffries with a lucrative new employment agreement, including retention grants totaling four million shares of common stock.
Jeffries, who has been CEO since 1992, has proven to be a skilled executive, transforming a money-losing men's haberdashery into a consistently profitable and hip, specialty retailer that operates stores and websites selling casual sportswear apparel and accessories -- from sweaters and jeans to personal care products -- under the Abercrombie & Fitch, abercrombie, Hollister and RUEHL brands. The company has rewarded him handsomely for his past successes, paying him more than $37 million in total compensation in just the last two years (including the reimbursement of $2.3 million for personal use of the company airplane and helicopter), according to the company's June 2008 proxy statement. Jeffries has also accumulated a 6.8% controlling interest, worth about $157 million, in his sixteen-year tenure.
Retaining Jeffries as chief executive has proven to be costly to shareholders. A&F recorded an income tax expense of $9.9 million, or share-net of $0.11, in the fourth-quarter of 2008 related to the retention awards, according to the 2008 annual report filed with the SEC:
The effective tax rate for the fourth quarter of Fiscal 2008 was 45.7% compared to 36.9% for the Fiscal 2007 comparable period. Under the previous employment agreement, the Company recorded deferred tax assets based on the anticipated delivery of benefits to the CEO in the calendar year following the year of his retirement. As a result of the new employment agreement, the CEO receives the benefits during his employment; therefore the expected tax benefits are no longer available.Whether sexy promotional campaigns or compensation packages, controversy is not new to Jeffries. As part of an agreement to settle a shareholder lawsuit alleging, among other issues, lax corporate governance, Jeffries agreed in April 2005 to reduce his "stay bonus" in half to $6.0 million and to forego option grant awards in 2005 and 2006.
Looking to protect its premium brand images--a pair of men's denim jeans typically cost $80 - $100 a pair--A&F does not offer promotions or clothing at clearance prices. Given the economic downtrend, however, most industry analysts expect A&F to lose sales to value-priced rivals, such as American Eagle Outfitters, Aeropostale, and Levi Strauss, as teens trade down to less-costly brands. As the warmer weather brings shoppers back to malls looking for spring and summer fashions, shareholder patience--and tolerance--of Jeffries and his compensation awards will likely be tested again.