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Company: Genesco Inc. (GCO)
Companies: Genesco is a branded footwear, apparel and accessories retailer and wholesaler that operates in four business areas: (i) Journeys Group, comprised of retail shoe chains and e-commerce operations; (ii) Schuh Group, which includes the shoe retail shoe chain and e-commerce; (iii) Johnston & Murphy Group, which comprises the retail stores of Johnston & Murphy, the e-commerce operations and wholesale distribution of products under the J&M brand; and (iv) licensed brands consisting of licensed brands such as Dockers and Levi’s as well there are other brands licensed for shoes. As of September 6, 2019, the company operated approximately 1,490 retail stores in the United States, Canada, United Kingdom, and the Republic of Ireland, primarily through Journeys, Journeys Kidz, Schuh, Schuh Kids, Little Burgundy, and Johnston & Murphy names.
Market value: $ 742.9 million ($ 49.66 per share)
Activist: Legion partner
Percentage ownership: 5.59%
Average cost: $ 42.79
Activist Comment: Legion is an activist investor whose partners are Chris Kiper, previously a member of the Shamrock Activist Value Fund, and Ted White, previously a member of the European activist fund Knight Vinke. Legion prefers to do their activist work behind the scenes and resort to a proxy fight when friendly discussions don’t go well. You have significant experience with retail businesses.
Legion sent a letter to the company proposing a list of the following seven candidates for election to the company’s eight-person board at the 2021 annual meeting: (i) Marjorie L. Bowen, a private investor and former Genesco board member with a 20-year career in investment banking with Houlihan Lokey; (ii) Thomas M. Kibarian, freelance advisor to private equity firms investing in mid-sized retail and wholesale businesses and former CEO of Garden Ridge (n / k / a At Home Group Inc. (HOME)), a home owned company Decor dealers; (iii) Margenett Moore-Roberts, Chief Inclusion & Diversity Officer at IPG DXTRA, a global collective of marketing services and agency brands and a division of the Interpublic Group of Companies, Inc. (IPG); (iv) Dawn H. Robertson, CEO of On Campus Marketing, LLC, a leading e-commerce website for students and their families; (v) Patricia M. Ross, former consultant at Apple, Inc. (AAPL); (vi) Georgina L. Russell, former portfolio manager at Willett Advisors, LLC, an investment management firm; and (vii) Hobart P. Sichel, former CMO and EVP of Burlington Stores, Inc. (BURL), a national off- Price department retailers.
Legion had previously filed a 13D for the company on January 16, 2018. The thesis was that the company should monetize certain areas of the business and return capital to shareholders. On April 25, 2018, Legion and the company entered into a collaboration agreement under which the company added two new directors to the Board of Directors: Marjorie L. Bowen and Joshua E. Schechter. On December 14, 2018, the company announced the sale of Lids Sports Group and stated that it would increase its share buybacks. On August 31, 2018, Legion sold less than 5% and was fully withdrawn from the investment by March 31, 2019. As a result, Bowen and Schechter were not re-nominated for election at the 2019 annual meeting.
Legion does some very good points for increasing shareholder value, such as de-conglomerating and reducing overhead. Between sales of Schuh, Johnston & Murphy and potential related properties, the company could earn up to $ 270 million. Even before the sale, the company has a healthy balance sheet, so the proceeds from these sales could be used to buy back shares and further reduce the free float. This would leave Journeys as a core business that could continue to grow and generate significant cash flow. Legion believes that if the company follows its plan, it could generate earnings per share of $ 7.50 by 2023, doubling its share price today. However, these are the same or similar plans Legion had for the company in 2018, most of them following Legion’s overwhelming activist campaign in which it settled for a year with two non-Legion directors while selling her position. have not been implemented.
This time, Legion nominates seven people from eight possible seats to the board. They stated that they do not want to replace Mimi Vaughn as director or CEO and that Legion intends to vote for her and that their candidates are ready to work with her to implement a strategic plan for Genesco. This is very refreshing, but if you have that much confidence in her as a CEO, why not give her a little more time to put a plan into action – she wasn’t appointed CEO until July 2020. If you have confidence in the CEO and I believe you can work with her. Why do you need seven out of eight directors on the board?
The company may be worse than its competitors and the market, and management may have made mistakes. While the Legion’s plan can help a lot, there is nothing this board or management team has done to replace the majority of a board. Although Legion’s plan is strong again, there is no reason to believe they are more committed to this campaign than in 2018. For one thing, like last time, they are not appointing a Legion Director to the board. While activists don’t always have one of their associates on board of blackboards, it’s rare that one isn’t included on a plan for seven. The addition of a Legion nominee would signal a long-term commitment, and this is even more important after their 2018 campaign in which they began selling four months after adding non-Legion directors to the board.
Legion is a thoughtful, experienced investor with a good plan that the company should definitely consider. However, implementing this plan should not require more than two or three new directors, especially if one of them was a legionary director who would be there to keep him going.
It’s not uncommon for activists to target a company multiple times, but generally this doesn’t work well for them. In a study we conducted in 2019, we examined 14 such situations. In the first campaign, the activist achieved an average return of 46.5% versus a 6.3% return for the S&P 500. The second time, the activist’s average return was only 16.8% versus 28.6% . for the S & P 500.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist assets.