Company: Genesco Inc. (GCO)
Business: Genesco is a retailer and wholesaler of branded footwear, apparel and accessories that operates through four business segments: (i) Journeys Group, comprised of retail footwear chains and e-commerce operations; (ii) Schuh Group, which includes the Schuh retail footwear chain and e-commerce operations; (iii) Johnston & Murphy Group, which encompasses the Johnston & Murphy retail operations, e-commerce operations and wholesale distribution of products under the J&M brand and (iv) Licensed Brands, comprised of licensed brands like Dockers and Levi's, as well as other brands licensed for footwear. As of September 6, 2019, the company operated approximately 1,490 retail stores in the United States, Canada, the United Kingdom, and the Republic of Ireland primarily under the Journeys, Journeys Kidz, Schuh, Schuh Kids, Little Burgundy, and Johnston & Murphy names.
Stock Market Value: $742.9M ($49.66 per share)
Activist: Legion Partners
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Percentage Ownership: 5.59%
Average Cost: $42.79
Activist Commentary: Legion is an activist investor whose partners are Chris Kiper, previously of Shamrock Activist Value Fund, and Ted White, previously of European activist fund Knight Vinke. Legion prefers to do their activist work behind the scenes with resorting to a proxy fight if amicable discussions do not go well. They have significant experience with consumer retail companies.
Legion sent a letter to the company nominating a slate of the following seven director candidates for election to the company's eight-person board at the 2021 Annual Meeting: (i) Marjorie L. Bowen, a private investor and former board member at Genesco with a 20-year career in investment banking at Houlihan Lokey; (ii) Thomas M. Kibarian, a freelance advisor to private equity firms that invest in mid-cap retail and consumer wholesale businesses and former CEO at Garden Ridge (n/k/a At Home Group Inc. (HOME)), a home décor retailer; (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 premier ecommerce website for college students and their families; (v) Patricia M. Ross, former executive advisor at Apple, Inc. (AAPL); (vi) Georgina L. Russell, former portfolio manager at Willett Advisors, LLC, an investment management company and (vii) Hobart P. Sichel, former CMO and EVP of Burlington Stores, Inc. (BURL), a national off-price department store retailer.
Behind the Scenes:
Legion previously filed a 13D on the company on January 16, 2018, and their thesis was that the company should monetize certain business segments and return capital to shareholders. On April 25, 2018, Legion and the company entered into a cooperation agreement pursuant to which the company added two new directors: Marjorie L. Bowen and Joshua E. Schechter to the Board. On December 14, 2018, the company announced the sale of Lids Sports Group and that they would be increasing its share repurchases. On August 31, 2018, Legion sold below 5% and by March 31, 2019 was out of the investment completely. As a result, Bowen and Schechter were not re-nominated for election at the 2019 annual meeting.
Legion makes some very good points about enhancing shareholder value, such as de-conglomerizing and cutting overhead. Between selling Schuh, Johnston & Murphy and potential associated real estate, the company could make as much as $270 million. Even before sales, the company has a healthy balance sheet, so proceeds from these sales could be used to buy back shares and continue to decrease the float. This would leave Journeys as the core business, which could continue to grow and generate significant cash flow. Legion believes that if its plan is followed, the company could have EPS of $7.50 by 2023 and double the stock price of today. However, these are the same or similar plans Legion had for the company in 2018, most of which did not get implemented after Legion's underwhelming activist campaign where it settled for two non-Legion directors for one year while it sold down its position.
This time, Legion is nominating seven individuals to the board out of eight possible seats. They stated that they are not looking to replace Mimi Vaughn as a director or as CEO and that Legion intends to vote for her and their nominees are prepared to partner with her in order to implement a strategic plan for Genesco. This is very refreshing, but if they have so much confidence in her as CEO, why not give her a little more time to implement a plan – she was just named CEO in July of 2020. Moreover, if you have confidence in the CEO and believe you can work with her, why would you need seven of eight directors on the board?
The company might be underperforming its peers and the market, and there might have been mistakes made by management. Legion's plan just may remedy much of that, but there is nothing that this board or management team has done that justifies replacing a majority of the board. While Legion's plan is once again strong, there is no reason to think that they have any more commitment to this campaign than they did in 2018. For one thing, just like last time, they are not nominating a Legion principal to the board. While activists do not always include one of their people on board slates, it is rare that one is not included in a seven-person slate. Including a Legion nominee would signal a long-term commitment, and this is even more important after their 2018 campaign where they started selling four months after getting non-Legion directors on the board.
Legion is a thoughtful, experienced investor with a good plan that the company should strongly consider. However, implementing that plan should not take more than two or three new directors, particularly if one of them was a Legion principal who would be around to see it through.
It is not unheard of for activists to target a company multiple times, but generally that does not work out well for them. In a study we conducted in 2019, we looked at 14 such situations and in the first campaign the activist averaged a 46.5% return versus a 6.3% return for the S&P 500. The second time around – the activist averaged just 16.8% versus 28.6% for the S&P 500.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.