Tuesday, May 13, 2008

Abercrombie & Fitch's Jeffries Smells the Teen Spirit

Michael S Jeffries, Chairman and Chief Executive of Abercrombie & Fitch (ANF-$75.03), received compensation of $9.9 million and $19.9 million for fiscal year 2007 and fiscal year 2006, respectively, according to a recent proxy filing with the SEC.

Almost all of the increase in FY ’06 was in $8.4 million in stock option awards expensed by the teen apparel retailer in 2006.

In 2007, Messer. Jeffries also received a salary of $1.5 million, performance-based cash incentives of $1.9 million, stock grants of $5.0 million, and other compensation totaling $1.4 million, including $656,545 for personal use of helicopter/aircraft use, $543,033 in contributions to his retirement & savings plans and $111,311 in a related tax gross up.

Similar to other retailers, ANF’s profit strategy largely depends on the timely opening of new stores and/or remodeling of existing stores.

A Competent CEO Still in the Building

Under the stewardship of Jeffries, Chairman and Chief Executive Officer of ANF since May 1998, the company has expanded from 250 stores into a chain of 1040 stores in the United States.

In addition, he shepherded new branded concepts, successfully launching five differentiated retail businesses, including Abercrombie & Fitch, targeting college-age kids with its casual—sometimes provocative—causal sportswear apparel, Hollister, which markets Southern California 'cool' at 14 to 18 year-old guys ("dudes") and girls ("bettys"), and the urban, post-grad style RUEHL for those at 22 to 35 year-old men and women.

Net income as a percentage of net sales averaging more than 12.0% per annum, tangible book value almost tripling in value to $19.17 a share, and a return on equity of 31.6% per annum—Jeffries has steered shareholders to profitable returns (with a pristine balance sheet—nil in long-term debt) during the five-year period ended January 31, 2008.

Among Abercrombie & Fitch Co., The S&P 500 Index
And The S&P Apparel Retail Index

The aforementioned metrics are strong testimony that Michael Jeffries has overseen one of the best business models in the apparel retailing industry.

If Jeffries chose to retire for 'good reason,' he would receive a severance package worth about $99.8 million, which includes cash payment of $10.1 million, ANF equity valued at $68.4 million, and a retirement plan value of $22.6 million, according to regulatory filings.

The cash and equity rewards include a pro-rata "stay bonus" (worth $6.0 million if he stayed on as chief executive until January 31, 2009) and the pro rata value of a 1.0 million "career share" grant awarded to Jeffries (at $25.58 a share), respectively.

You Play. You Win. You Play. You Lose. You Play. ~ British writer Jeanette Winterson

On January 30, 2003, the Company amended Jeffries employment contract, with the intent to secure his continued employment through December 30, 2008. [FY 1999 – FY 2003, shareholder equity and share-net grew from $311.1 million to $871.2 million and $1.39 to $2.06, respectively.]

Growth Drivers

There are few visible growth drivers for specialty apparel companies in the United States—a crowded market with similar concepts competing for the ephemeral clothing tastes of tweens, teens, and young adults.

And I forget just why I taste
Oh, yeah, I guess it makes me smile
I found it hard, it's hard to find
Oh well, whatever, nevermind

In our view, with Jeffries at the helm, ANF has the brand strength and management to successfully navigate and penetrate intenational markets.

Hello, Hello, Hello, How Low
Hello, Hello, Hello

Save for three Abercrombie & Fitch stores and three Hollister Company stores in Canada, the company operates one ANF store in London, opened in May 2007.

With the lights out it's less dangerous
Here we are now, entertain us
I feel stupid and contagious
Here we are now, entertain us
~ Nirvana ("Smells Like Teen Spirit" youtube video)

Consistent with its European expansion plans, Abercrombie & Fitch announced its plan to open a new 16,000-square foot store in Copenhagen, Denmark in 2009. Management is also in the process of securing locations in Italy, France, Germany, Spain, and Sweden. The Company plans to open its first flagship in Asia, centrally located in Tokyo's Ginza district, in late 2009.

Debate over the pay-for-performance orthodoxy aside, as shown by compensation activities at ANF: "to win you gotta' play—pay!"

Editor David J. Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.

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