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Abercrombie & Fitch Co
American Eagle Outfitters Inc
Urban Outfitters Inc
The actors and models who worked on an Abercrombie & Fitch Co. (ANF) Gulfstream G550 jet had crystal-clear rules for serving Chief Executive Officer Michael Jeffries.
Clean-shaven males had to wear a uniform of Abercrombie polo shirts, boxer briefs, flip-flops and a “spritz” of the retailer’s cologne, according to an “Aircraft Standards” manual, disclosed in an age-discrimination lawsuit brought by a former pilot. Among the 40-plus pages of detailed instructions: black gloves had to be used when handling silverware and white gloves to lay the table, the song “Take Me Home” had to be played when passengers entered the cabin on return flights and Jeffries’s dogs -- identified in the document as Ruby, Trouble and Sammy -- had different seating arrangements based on which ones were traveling.
The document has come to light at a time when Jeffries’s management style is being questioned. Abercrombie’s shares have erased half their value (ANF) in the past year, and activist investor Ralph Whitworth is pressing for changes, according to a person familiar with the matter. While Jeffries’s penchant for details helped turn Abercrombie into a global brand, the 68-year-old CEO is struggling to reverse falling same-store sales as shoppers grow weary of the fashions and risqué marketing.
Amid takeover speculation, it’s hard to see Jeffries relinquishing control over the company he has spent 20 years building, said Rob Wilson, president and founder of Tiburon Research Group, an independent equity research firm based in San Francisco.
“There’s many strategic decisions over the last few years that make you scratch your head, and it kind of plays into what people think of as his ‘his way or the highway’ managerial philosophy,” said Wilson, who recommends selling the shares.
At least one private-equity firm considered the idea of a takeover before walking away over concerns about Jeffries’s leadership, according to a person familiar with the matter. Private-equity firms may only be willing to invest if they could move Jeffries aside after a leveraged buyout, another person said. Jeffries, who may hold about a 2.8 percent stake (ANF) in Abercrombie, stands to get more than $100 million if control of the company changes hands and he’s pushed out, regulatory filings show.
The lawsuit containing the airplane manual was filed in 2010 in federal court in Philadelphia by corporate jet pilot Michael Stephen Bustin, who is now 55, and claims he was fired and replaced by a younger man. Excerpts from depositions and documents filed in court since then highlight the extent of Jeffries’s grip on Abercrombie, both personally and through a self-funded family office that’s run by his live-in partner, Matthew Smith, who doesn’t work for Abercrombie.
In an e-mailed statement provided by the company, lead independent director Craig Stapleton said the board supports Jeffries’s strategy. The company doesn’t comment on rumors and speculation, General Counsel Rocky Robins said in the same e- mail. The pilot’s lawsuit is without merit, he said in a telephone interview.
For years, investors didn’t focus much on Jeffries’s management style because they were cheering his transformation of a safari-and-camping chain into a retail juggernaut that posted $4.2 billion in revenue in its latest fiscal year. Between 1995 and 2008, the apparel chain boosted (ANF) sales almost 23-fold and net income almost 58-fold. Jeffries made the final merchandising calls across Abercrombie’s brands and chose details down to the songs played in stores, according to former executives. It became widely understood throughout the retail industry that he was, in essence, Abercrombie.
Since the recession, though, the New Albany, Ohio-based retailer has stumbled as customers flee to the likes of American Eagle Outfitters Inc. (AEO) and Hennes & Mauritz AB’s H&M (HMB) chain. Abercrombie forecast same-store sales will fall 10 percent in the second half of the year after an 8 percent decline in the six months through July, and is shuttering 180 U.S. locations through 2015.
Abercrombie’s U.S. revenue slipped 2.5 percent in its previous two fiscal quarters, and as of yesterday the retailer was trading at an 18 percent discount to the Standard & Poor’s 500 Retailing Index on a price-to-earnings basis, down from more than double the index’s valuation in April 2010, according to data compiled by Bloomberg. American Eagle was trading at a 1.7 percent premium to the index, H&M at an 11 percent premium.
Abercrombie rose 0.1 percent to $32.52 at 10:04 a.m. in New York. The company’s shares had declined 33 percent this year through yesterday.
Jeffries’s focus on a youthful, physically fit, all- American look helped put Abercrombie on the map. Models and actors aren’t just limited to advertisements and flagship stores: They surround Jeffries and Smith on the plane and in the home they share in Columbus, Ohio, according to court documents and the former executives.
Abercrombie pays the salary and travel expenses of four cabin attendants provided by Cosmopolitan Management LLC and doesn’t directly employ pilots, according to an August 2009 aircraft management agreement with Jet Aviation Business Jets Inc. filed by Bustin with papers in the lawsuit. Jeffries has come under fire for his flying habits in the past. In 2010, the board agreed to pay him $4 million to limit his personal use of the company jet to $200,000 annually beginning with the fiscal year ended Jan. 29, 2011.
Cosmopolitan is a New York company that hires out actors and models “with just the right look and personality” for events and as personal assistants, according to its website. Cosmopolitan also provides house staff for Jeffries, Smith said in a June 18 deposition filed in August. The aircraft manual, filed by the ex-pilot together with his opposition to a dismissal motion in April 2011, references the role of “houseman” in the section about boarding the dogs on the plane.
The flight crew uniform included Abercrombie jeans, polo shirts, flip-flops, sweatshirts and a winter coat, with some items applying just to males: a belt, hat, gloves, boxer briefs and a “spritz” of the retailer’s cologne. The coats were only to be worn when the temperature fell to 50 degrees or lower, with the collar flipped, and the flip-flops were mandatory in flight and when meeting passengers. Men were not allowed to wear jewelry except for watches and wedding rings.
The standards manual was personalized by Smith in conjunction with the Jeffries Family Office, an Ohio limited liability corporation he heads that “advocates for the personal interests of Abercrombie’s CEO,” court documents show. Smith negotiates Jeffries’s compensation and manages his investments and residences, he said in the June deposition, which was filed by the ex-pilot on Aug. 6.
Similar rules for staff, including “do not expose the toilet paper and do not fold the end square,” also apply to Jeffries’s homes, Smith said in the deposition. The uniform worn by the flight crew is similar to that worn by doormen at flagship stores, he said.
Funded by the CEO, the Jeffries Family Office -- also known as TJFO -- was created about 14 years ago to oversee and determine when to sell Jeffries’s stock in the company.
The manual includes directions for serving Smith throughout, such as notes on his tea service: Assam tea in the morning and Darjeeling after 2 p.m., “served on a small tray with a small tray liner.”
It also included a primer on how to address the boss and his entourage in flight: “When Michael, Matthew, or a guest make a request, respond by saying ‘No Problem.’ This should be used in place of phrases like, ‘Sure’ or, ‘Just a minute.’”
In the June deposition, Smith said that TJFO may employ 40 to 60 people; 52 workers participated in its 401(k) retirement savings program at the end of 2011, according to forms filed with the U.S. Department of Labor. TJFO, which sets standards for the maintenance, operation and staffing of the corporate jet, contracts the flight stewards and recommends them for work on the aircraft, where they are then contracted by Abercrombie, Smith said in the June deposition.
Smith has consulted on certain creative and real-estate decisions at Abercrombie, according to the former executives.
Smith also regularly received his own copies of non-public Abercrombie reports on the airplane, including daily sales overall and by brand and direct-to-consumer orders, according to the aircraft standards manual. Attendants were instructed to “bring Michael’s lucky wallet to him” after presenting the report binders.
“I do believe the relationship with TJFO and its associates is legal, and in fact, not only legal, but legal and appropriate,” General Counsel Robins said in a telephone interview.
While TJFO was dismissed as a defendant in the discrimination lawsuit in June 2011, the judge presiding over the case ordered a brief revisiting the company’s involvement on Aug. 30 after being shown new evidence by Bustin’s lawyers.
TJFO has no comment on Bustin’s complaint, said Edward Ellis, an attorney at Littler Mendelson PC in Philadelphia who worked on behalf of TJFO in the case. Timothy Kolman, an attorney for Bustin, declined to comment on the case.
Abercrombie has fought other discrimination lawsuits and paid almost $50 million to settle three related class-action discrimination lawsuits in 2004.
“We have, and always have had, no tolerance for discrimination,” Jeffries said in a November 2004 statement. “We decided to settle this suit because we felt that a long, drawn out dispute would have been harmful to the company and distracting to management.”
Buying Abercrombie and pushing Jeffries out would be costly, according to his most recent employment contract. The agreement, which expires in February 2014, may award him as much as $105.6 million if control of the company changes hands and he loses his job, according to a regulatory filing from May. That compares with the company’s $127.7 million of net income (ANF) in the year ended Jan. 28. If Jeffries is fired for cause, such as being convicted of a felony, he may still receive $11.6 million, according to the documents.
At the same time, it’s uncertain who would succeed Jeffries were he to leave. There are concerns at Abercrombie from “a leadership vacuum perspective,” Tiburon’s Wilson said.
Potential successors who left in the past decade include Robert Singer, who decamped to pasta-maker Barilla Holding SpA and now advises at private-equity firm CCMP Capital Advisors LLC; Tom Mendenhall, now chief operating officer of Tom Ford International; Mark Breitbard, president of Gap Inc. (GPS)’s North American division; and Chad Kessler, chief merchandising officer at Urban Outfitters Inc. (URBN) Kessler’s exit in 2010 particularly surprised employees, as he was viewed as the most likely successor, four former employees said.
In the e-mailed statement, lead independent director Stapleton said the company has both short- and long-term succession plans, both of which are reviewed regularly.
Abercrombie “has a great number of talented individuals throughout all key operational areas,” Stapleton said. “The talent pool for successors, not only of the CEO but also other key executives, is deep.”
The pilot’s case is Bustin v. Abercrombie & Fitch Co., 10- cv-01675, U.S. District, Eastern District of Pennsylvania (Philadelphia).
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