Abercrombie & Fitch could become a potential takeover target

Abercrombie & Fitch could become a potential takeover target

Abercrombie & Fitch separated the roles of chairman and CEO yesterday (28 January), appointing former Sears boss Arthur Martinez as non-executive chairman, leaving Michael Jeffries with just his CEO title. While some analysts think these changes could prove positive, others believe the teen apparel retailer still has a long way to go in restructuring its business.

These changes could be significant in providing fresh perspective on management's strategic direction, according to Macquarie Securities analyst Liz Dunn.

One problem with Abercrombie & Fitch, Dunn said, is that its preppy, logoed positioning in the teen/young adult segment has fallen out of favour with its core customer. "That does not change with this announcement," she noted.

Another issue with the company is that is has a poor strategy driven by entrenched management that is unwilling to change, according to Dunn. 

"Today's announcement opens up the door to significant change in strategy and leadership. Thus we view it as a positive."

In addition to splitting the chairman and CEO roles, the retailer also appointed three new board members, including Terry Burman, Charles Perrin, and Martinez.

Susan Anderson, analyst at FBR, said: "All three of these new directors have significant board and retail experience and we believe that the new board members will help improve management accountability."

Potential takeover target
The retailer has also terminated its existing shareholder rights agreement - a defence mechanism often used to prevent a buyout - opening the door to a possible takeover, Anderson noted. 

"We expect activist investors to continue to pressure the company for further change and improvement.

"While there is more progress to be made at the company, particularly in terms of operating performance, today's changes are a step in the right direction and will help to underpin improvement at the company."

In contrast, Barclays analyst Matthew McClintock believes Abercrombie & Fitch has a long way to go in its corporate restructure. 

"While this certainly helps to alleviate some concerns about corporate governance within the investment community, we continue to believe the company remains in the very early stages of a long-term strategic restructuring. We expect results to remain volatile in the near-term and reiterate our underweight rating."

Ongoing challenges
Despite the mixed comments, Abercrombie & Fitch upped its full-year earnings guidance earlier this month, on the back of higher fourth-quarter sales.

The company now expects full-year adjusted earnings per share to be US$1.55-1.65, compared to previous forecasts of $1.40-1.50.

In November, the retailer said it would shutter its 20 standalone Gilly Hicks stores by the end of the first quarter of fiscal 2014, as part of a restructuring of the intimate apparel brand.

Costed linked to the restructure, Abercrombie & Fitch noted, pushed it to report a $15.6m loss during the third quarter, with sales down 12% to $1.03bn.

Abercrombie & Fitch's latest move comes less than a week after rival teen retailer American Eagle Outfitters announced the departure of its CEO, Robert Hanson

The company, which has not given a reason for the sudden departure, said it will start looking for a permanent replacement.

With Abercrombie & Fitch is not the only company seen suffering in a category that is clearly having its problems, can we expect a similar announcement from rival Aeropostale, as it also battles to keep its head above water?