(Adds statement from Engaged Capital; updates share movement)
By Maria Ajit Thomas
Dec 9 (Reuters) - Struggling teen apparel retailer Abercrombie & Fitch Co said it will extend Chief Executive Mike Jeffries' contract by at least a year after it expires in February, days after a shareholder urged the company to replace him.
Abercrombie shares fell as much as 4 percent in early trade on Monday. Shares of the company, which has reported seven straight quarters of declines in same-store sales, had lost 27 percent of their value this year up to Friday's close.
Engaged Capital LLC, which owns less than 1 percent of the company's shares, last week urged the retailer to replace Jeffries or sell itself.
"The ideal scenario that investors were hoping for was that Mike Jeffries would be replaced when his contract expired," Morningstar Inc analyst Bridget Weishaar told Reuters, but said this was unlikely, given the board's support.
Abercrombie instead announced plans to hire brand presidents for its Abercrombie & Fitch, abercrombie kids, and Hollister brands to help with its succession planning.
"This gives them a chance to introduce at least three new very senior leaders to the organization ... so they have some options in the future when the CEO position is vacated," Weishaar said.
Engaged Capital, a young activist investment firm led by former Relational Investors Managing Director Glenn Welling, said in its letter to the board that there appeared to be no qualified successor within the company to replace 69-year-old Jeffries.
"This decision appears to be made without any substantive discussion with shareholders - a rushed response, less than one week after receiving our letter," Welling said in a statement.
Engaged Capital said it was considering all options available to it as a shareholder.
Jeffries, who has been CEO for 16 years, has been criticized for Abercrombie's recent dismal performance.
The company and rivals Aeropostale Inc and American Eagle Outfitters Inc are struggling to win back teens, who are increasingly shopping at "fast fashion" chains such as Inditex's Zara, which offer more fashionable clothing at cheaper prices.
Abercrombie said last month it would expand sizes, colors and fits for all styles by spring to attract more customers. Jeffries made headlines in 2006 when he said Abercrombie's clothes were made for "cool" and "attractive" kids and not for "fat" people.
The company said on Monday that the new agreement with its CEO has a more simplified compensation structure that is more tied to performance-based targets.
Jeffries' new contract, which can be terminated by either party after Feb. 1 2015, eliminates semi-annual equity grants contained in his previous 2008 agreement and replaces it with long-term incentive awards each year with a target value of $6 million.
Abercrombie also said Leslee Herro will retire as executive vice president of merchandise planning and inventory management in the spring of 2014.
The company's shares were trading down 3 percent at $33.92 on the New York Stock Exchange. (Reporting by Maria Ajit Thomas and Siddharth Cavale in Bangalore; Editing by Sriraj Kalluvila)