This story has been updated from 11:10 a.m. EST with statement from Engaged Capital and analyst commentary.
NEW YORK (TheStreet) -- Abercrombie & Fitch (ANF) shares were tumbling more than 2% on Monday after the teen retailer renewed yet "restructured" the employment agreement with its controversial Chairman and CEO Michael Jeffries.
The news comes less than a week after investor Engaged Capital, which owns 400,000 shares of the struggling teen retailer, sent a letter to Abercrombie's board in an attempt to deliver what it said is a much-needed shake up at the company's top management.
Shares were falling 2.5% to $33.99.
|Abercrombie renewed its employment contract with Chairman and CEO Mike Jeffries.|
"Today's announcement is the result of an extensive review by the board and detailed discussion with shareholders over several months, and the specific terms of Mike's new contract reflect direct feedback from those discussions," Craig Stapleton, Abercrombie's lead independent director, said in a press release. "The new agreement employs a more simplified, performance-based compensation structure that is designed to align incentives closely with the success of the company and the interests of shareholders."
Abercrombie also plans to look inward for the eventual successor to Jeffries, who is 69. As part of that, the company announced on Monday that it is creating leadership positions for its flagship brand, abercrombie kids and Hollister brands. Abercrombie has hired executive search firm Herbert Mines Associates to assist in filling these leadership positions.
Jeffries started the company in 1992. His current employment agreement, structured in 2008, expires on Feb. 1, 2014; the new agreement will take effect the day after.
"The contract basically extends his tenure as CEO through February 2016, and simplifies the conditions under which he is compensated for performance (and is better aligned with shareholders)," Wells Fargo Securities analyst Paul Lejuez wrote in a note. "We believe these changes have their merits, but may also cause disruption and uncertainty among employees, a near term negative in our view." Lejuez has a "market perform" rating on Abercrombie.
Under the 2013 agreement, Jeffries will continue to receive his current annual base salary of $1.5 million, which will be reviewed annually, according to a Securities and Exchange Commission filing.
Jeffries will continue to participate in the company's annual bonus plan, with an annual target bonus opportunity of 150% of his base salary and a maximum bonus opportunity of up to 300% of his base salary, the filing said.
However, Jeffries' long-term incentive opportunity was revised. He will no longer have a "retention or sign-on grant, and the formula for semi-annual equity grants contained in the 2008 Agreement has been eliminated," the filing said.
Instead, the new agreement said Jeffries is eligible to receive long-term incentive awards each year with a target value of $6 million, which will be reviewed annually and may be increased "if company performance warrants such an adjustment," the filing said.
Additionally, Leslee Herro, Abercrombie's head of merchandise planning, inventory management and brand senses, will retire in the spring.
Engaged Capital said last week that in order for the struggling retailer to "reverse years of underperformance" it must agree to replace its chief executive.
"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."
Most importantly though, Jeffries is the key stumbling block to the possibility of a sale of the company, Engaged Capital said.
"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 said it was "disturbed" that the board's reaction was to "ignore the information and re-sign Mr. Jeffries," according to a statement by Welling on Monday.
"This decision appears to be made without any substantive discussion with shareholders -- a rushed response, less than one week after receiving our letter," the statement read. "We consider this an outright dereliction of the board's fiduciary duties. This action is further proof that our board exists to serve one master, Mr. Jeffries, instead of the shareholders that elected them."
Engaged Capital is "considering all options available to it as shareholders in order to hold the board accountable for its decisions."
Stapleton, Abercrombie's lead director, touted Jeffries accomplishments in the release and reiterated the board's support for him.
"Mike is a visionary in this industry and has been responsible for reinventing, creating and evolving today's Abercrombie & Fitch and Hollister brands," he said. "Under his direction, Abercrombie & Fitch has grown from just 36 domestic stores and $50 million in sales in 1992 to having a global presence and over $4 billion in sales today. Mike and his team have developed a long-term plan that builds upon past successes, while targeting the specific challenges that the company faces today. We believe he is the right person to embark on this plan, which we believe will deliver substantial and sustainable value."
Abercrombie has more than 1,000 stores across the three brands and Gilly Hicks, its struggling lingerie brand.
The embattled retailer reported a net loss for its third quarter after it announced that it plans to close all of its Gilly Hicks stores. 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%.
"We are taking aggressive action to manage through the challenging teen retail environment by increasing our speed to market and enhancing our brand engagement," Jeffries said in the release. "We are also focused on completing the restructuring of our cost base and ensuring we are properly organized to execute against our long-term plan. We are adapting to changing markets and consumer dynamics to drive top-line growth, and I am confident that we are taking the right steps to deliver value for shareholders."
-- Written by Laurie Kulikowski in New York.