NEW YORK (TheStreet) - Abercrombie & Fitch (ANF) could be getting rid of its controversial CEO if one investor has his way.
Shares of the teen retailer, which has stores under both the Abercrombie and Hollister brands, were surging 6.5% to $36.24 on Tuesday after Engaged Capital, owner of 400,000 shares of company stock, told Abercrombie that in order to "reverse years of underperformance" the board must agree to replace CEO Mike Jeffries.
"The board needs to come to the same conclusion that everyone else already has -- it is time for new leadership at ANF," said a Dec. 3 letter written by Glenn Welling, managing member of Engaged Capital. "We urge the board to immediately commence a CEO search for candidates with relevant retail apparel and turnaround experience."
Engaged Capital said the company, based in New Albany, Ohio, is suffering from the same forlorn outlook as many other mall-based retailers. But it has substantial opportunity but only if by "enacting much needed changes and correcting certain missteps."
On the strategic side, the company still maintains brand appeal both domestically and internationally and has a "highly profitable" direct-to-consumer business as well as significant cash flow generation potential.
Most importantly though, removing Jeffries would free up the possibility of a sale of the company.
"A sale of the company to a private equity buyer may represent the best option for shareholders. However, as we have learned through discussions with industry insiders and private equity firms, Mr. Jeffries' presence represents a major stumbling block to a transaction," the letter said.
Engaged Capital also noted that the recent media frenzy surrounding past controversial comments made by Jeffries as well as the apparent intrusion of his private life into company business have caused unnecessary controversy, "no doubt damaging the company's public profile, employee morale, and likely sales," the letter says.
The investor noted that with the Feb. 1, 2014, expiration of Jeffries' employment contract "the board has an important opportunity to set a new direction for the company and reverse the years of disappointment to which ANF shareholders have grown accustomed."
"Investors have endured poor performance due to poor leadership," the letter said. Abercrombie's management "has a reputation for habitually under-estimating and under-executing on the changes needed to remain competitive in the fast moving teen apparel market" despite recognizing shifting industry dynamics more than five years ago.
Shares of Abercrombie are down 27% this year compared to Gap (GPS) shares, which have risen 35% year to date.
Abercrombie reported a net loss for its third quarter after it announced that it plans that close all of its stores under its lingerie store, Gilly Hicks. Adjusted earnings of 52 cents a share came in below analysts' expectations.
The retailer also reported its seventh straight quarter of falling same-store sales, with comparable-store sales down 14%.
"Our results for the third quarter reflect weakness in top-line performance, which we expect to continue in the fourth quarter. However, we continue to work hard to offset these conditions and are aggressively pursuing initiatives we believe will improve the sales trend as we go forward," Jeffries said in its earnings statement.
The embattled retailer is trying to draw consumers back to its stores, even if it means expanding its definition of an ideal target market. During an analyst meeting earlier in this month, executives said they will expand the sizes and fits of its clothing by spring in an attempt to attract increased sales.
The company came under fire earlier this year when comments Jeffries made in 2006 that the brand only wanted to "market to cool, good-looking people" resurfaced. Currently, the store offers women's sizes no bigger than a large.
Abercrombie said in a statement on Tuesday that its board and management team are "committed to creating value, and we welcome input from all shareholders."
"The company has had extensive discussions with many of its shareholders, including Engaged Capital, over the past several months," the statement said. "We look forward to continuing our dialogue with shareholders as we execute on our long-term plan."
-- Written by Laurie Kulikowski in New York.