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Sapna Maheshwari
The
actors and models who worked on an Abercrombie & Fitch 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' dogs — identified in the document as Ruby,
Trouble and Sammy — had different seating arrangements based on which
ones were travelling.
The document has come to light at a time
when Jeffries' management style is being questioned. Abercrombie's
shares have erased half their value in the past year, and activist
investor Ralph Whitworth is pressing for changes, according to a person
familiar with the matter. While Jeffries' 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 risque 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
independent equity research firm Tiburon Research Group.
"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'
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 per cent stake in Abercrombie, stands to get
more than $100 million if control of the company changes hands and he's
pushed out.
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' 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.
Board support
In
a company statement, lead independent director Craig Stapleton said the
board supports Jeffries' strategy. General Counsel Rocky Robins said
the company doesn't comment on rumours and speculation, and that the
pilot's lawsuit is without merit.
For years, investors didn't
focus much on Jeffries' 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 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.
Fleeing customers
Since
the recession, though, the Ohio-based retailer has stumbled as
customers flee to the likes of American Eagle Outfitters and Hennes
& Mauritz AB's H&M chain. Abercrombie forecast same-store sales
will fall 10 per cent in the second half of the year after an 8 per cent
decline in the six months to July, and is closing 180 US locations
between now and 2015.
Abercrombie's US revenue slipped 2.5 per
cent in its previous two fiscal quarters, and as of yesterday the
retailer was trading at an 18 per cent 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 per cent
premium to the index, H&M at an 11 per cent premium.
Abercrombie rose 0.1 per cent to $32.52 yesterday. The company's shares have declined 33 per cent so far this year.
Jeffries'
focus on a youthful, physically fit, all-American look helped put
Abercrombie on the map. Models and actors aren't 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.
Flying habits
Abercrombie
pays the salary and travel expenses of four cabin attendants provided
by Cosmopolitan Management and doesn't directly employ pilots, according
to an August 2009 aircraft management agreement with Jet Aviation
Business Jets. 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.
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. 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 with the collar
flipped, and the thongs were mandatory in flight and when meeting
passengers. Men were not allowed to wear jewellery except for watches
and wedding rings.
The standards manual was personalised by Smith
in conjunction with the Jeffries Family Office, a limited-liability
corporation he heads that "advocates for the personal interests of
Abercrombie's CEO". Smith negotiates Jeffries' compensation and manages
his investments and residences.
Similar rules for staff,
including "do not expose the toilet paper and do not fold the end
square," also apply to Jeffries' 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' 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 2pm,
"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.' "
Corporate jet
In the
June deposition, Smith said that TJFO may employ 40 to 60 people. 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.
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.
Discrimination lawsuit
While
TJFO was dismissed as a defendant in the discrimination lawsuit in June
2011, the judge presiding over the case has ordered a brief revisiting
the company's involvement after being shown new evidence by Bustin's
lawyers.
TJFO has no comment on Bustin's complaint, said Edward
Ellis, an attorney 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 2004. "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."
Employment contract
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. That compares with the
company's $127.7 million of net income in the year ended January 28. If
Jeffries is fired for cause, such as being convicted of a felony, he may
still receive $11.6 million.
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; Tom Mendenhall, now
chief operating officer of Tom Ford International; Mark Breitbard,
president of Gap's North American division; and Chad Kessler, chief
merchandising officer at Urban Outfitters. Kessler's exit in 2010
particularly surprised employees, as he was viewed as the most likely
successor.
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."
With Jeffrey McCracken and Andrew Harris.
Read more: http://www.watoday.com.au
http://www.thesmokinggun.com
http://www.bloomberg.com
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