BEVERLY HILLS, Calif.,
Feb. 27, 2018 /PRNewswire/
-- Legion Partners, LLC and 4010 Partners, LP today released a
letter calling on the Board of Directors of Genesco, Inc. (NYSE:
GCO) to implement a series of immediate reforms and explore
strategic alternatives.
Together, Legion and 4010 own more than 5% of the specialty
retailer's outstanding shares. The activist investors claim Genesco
– whose brands include Johnston & Murphy, Lids, Schuh and
Journeys – underperform its peer group and that "good-faith efforts
to work constructively with the Company to find a better solution
for shareholders have not been taken seriously."
"Dramatic change is required at Genesco," said Legion Managing
Director Christopher S. Kiper.
"Genesco's return on invested capital has declined from 15% in
FY2013 to 6% in the most recent 12-month period. Despite the
precipitous deterioration in returns and underperformance of the
Company's stock price, we have seen little willingness to re-think
the status quo under current leadership."
Specifically, Legion and 4010 believe the Genesco board
should:
- Expand its strategic review to complete an objective evaluation
of all strategic alternatives;
- Perform a comprehensive operational review;
- Reform its corporate governance and implement changes to
long-term incentive plans to better align management with
shareholders.
The full text of the letter follows:
February 26, 2017
Sent via FedEx and Email
Board of Directors
Genesco, Inc.
1415 Murfreesboro Road
Nashville, TN 37217
Members of the Board:
As holders of 5.3% of the outstanding shares of Genesco, Inc.
("Genesco" or the "Company"), Legion Partners LLC and 4010
Partners, LP (and affiliates, collectively "we" or the "Group") are
writing to express our disappointment with the Company's
February 13, 2018 release announcing
the conclusion of a strategic review which resulted in a decision
to sell the Lids Sports Group. Although we agree that Lids
does not fit well with Genesco's other businesses and should
ultimately be separated, we believe it is incumbent upon the board
to complete a more comprehensive evaluation of all strategic
alternatives to enhance shareholder value given the poor track
record of execution by management and the long-term
underperformance of the Company's share price.1
We are deeply concerned by what appears to be a rushed and
superficial response to our suggestion that the board conduct a
thorough strategic review. The board's decision to initiate a
sale of Lids, its worst performing division, appears to be a
defensive measure designed to divert attention from other
potentially more attractive options that must be evaluated in a
rigorous strategic review, including price discovery for all
business units. There are multiple alternatives to improve
long-term shareholder value, but the status quo of continuing to
operate this disparate set of assets with such a poor record of
value creation is unacceptable.
Based on our conversations with management and external
investment bankers, Johnston & Murphy ("J&M") and Schuh
offer limited synergy with the core Journey's operations and would
attract broad strategic interest at premium valuations compared to
the value implied by Genesco's current trading price. In
addition, we believe that the opportunity for Journeys, J&M,
Lids and Schuh to optimize their growth strategies and improve
profitability would be enhanced through separate ownership.
We are also concerned by the timing of the decision to sell Lids
given its poor current performance. We believe there are
several initiatives that can be readily implemented at Lids to
improve the business before marketing it and that this would be a
more prudent course of action to fully realize Lids' value.
Dramatic change is required at Genesco. Genesco's return
on invested capital has declined from 15% in FY2013 to 6% in the
most recent 12 month period.2 Despite the
precipitous deterioration in returns and underperformance of the
Company's stock price3, we have seen little willingness
to re-think the status quo under current leadership. We
believe the best path forward for shareholders includes the
following actions:
(1) The board should
immediately expand the strategic review to complete an objective
evaluation of all strategic alternatives. Our analysis
suggests that Genesco trades at a significant discount to the value
of its individual assets. Each segment has a unique growth,
return and risk profile which is not optimized under the current
structure. Given these characteristics and the opportunity to
substantially increase shareholder value through a separation of
certain businesses, it leads us to the conclusion that the status
quo is not a responsible course of action. As a result,
several units should be evaluated for sale, with the understanding
that quality assets are likely most transactable and have the
potential to be most accretive to shareholder value;
(2) Management should announce
specific targeted actions to improve return on invested capital,
including a comprehensive cost reduction program, the closure of a
significant number of unproductive stores, initiatives to improve
inventory turnover at all divisions, a commitment to further reduce
capital spending, and a revised capital allocation framework which
demonstrates better discipline and prioritizes return of cash flow
to shareholders over additional M&A or brick and mortar
investments; and,
(3) The board should institute
best-in-class corporate governance and implement changes to
long-term incentive plans to better align management with
shareholders. The roles of Chairman and CEO should be
immediately separated to ensure an arms-length relationship between
fiduciaries of shareholders' interests and management.
In addition, revisions to incentive programs should be made to
focus the reward to management on enhancing ROIC, pursuing
divestitures that are accretive to shareholder value, and
increasing long-term value for shareholders.
Unfortunately, the board's recent actions make it clear that our
good-faith efforts to work constructively with the Company to find
a better solution for shareholders have not been taken
seriously. We find it unlikely that the Company would have
been able to conclude a full review of strategic alternatives in
less than four weeks since our Group met with management on
January 19, 2018 and suggested
initiating such a process. We also do not believe that the
decision to sell Lids at this time could possibly be a logical
first step to a full and complete strategic review process.
We view the board's response as an effort to preserve the
status quo and keep the Company's retail empire intact, rather than
a thoughtful evaluation of the actions that would result in the
best outcome for shareholders.
We'd like to schedule a call as soon as possible with Genesco's
Lead Independent Director James
Bradford and any subset of the independent board members to
discuss our analysis and recommendations in greater detail.
We remain open to working together productively toward
substantially improving shareholder value in order to avoid the
significant corporate expense and distraction created by a proxy
fight.
Sincerely,
/s/ Christopher S.
Kiper
/s/ Ted White
Enclosures
cc: Steve Wolosky, Olshan Frome Wolosky LLP
1 See Exhibit A: Genesco's Total Shareholder Return
has underperformed the proxy peer set (used for FY2018 as disclosed
in the 2017 Proxy Filing) over 1-year, 3-year, and 5-year time
periods.
2 See Exhibit B: Historical return on invested capital
since Bob Dennis became CEO.
3 See Exhibit A: Since Bob Dennis became CEO on
August 1, 2008, Genesco's Total
Shareholder Return was 39.1% as compared to the proxy peer set
(used for FY2018 as disclosed in the 2017 Proxy Filing) of
136.6%.
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SOURCE Legion Partners, LLC