The activist investor push to upend the Genesco board of directors has now reached a boiling point. On Thursday, both parties fired out multiple statements defending their board nominee decisions and attacking each others’ credibility after their war of words had reached new heights earlier this week.
Early Thursday morning, the footwear giant took aim at Legion Partners Asset Management LLC, which wants to replace four of Genesco’s 11 board members with its own nominees.
The owner of Johnston and Murphy alleged that Legion’s recently issued investor presentations consisted of “200 pages of misinformation, misleading claims and superficial suggestions,” and it dismissed the activist’s “inaccurate assertions regarding Genesco’s commitment to ESG and DE&I.”
“Legion does not have a thoughtful plan to create shareholder value,” Genesco stressed, before going into why feels the ideas presented are only attempts to gain short-term value at the expense of long-term value creation.
The owner and operator of footwear retailers including Journeys, Journeys Kidz, Little Burgundy, Schuh, and Schuh Kids explained that its slate of businesses have significant synergies in today’s retail environment, pointing to shared vendor bases, sourcing platforms, real estate, parcel carriers and point-of-sale systems.
In the letter, Genesco said, “Legion fundamentally misunderstands the dynamics of today’s footwear retail and branded market and implications for Genesco.”
The footwear seller pointed to the asset management firm’s GCOForward presentation as an example of brick-and-mortar retail “suggestions that run counter to the creation of shareholder value.” In the presentation, Legion laid out that Journeys could expand into 490 more malls, and said that Genesco could open 200+ additional Johnston & Murphy stores.
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Legion reveals financial goals in nominee letter to shareholders
Legion, which owns approximately 5.9 percent of the outstanding common shares of Genesco, Inc., sent its own missive to Genesco shareholders Thursday morning from the four recommended independent director candidates: Marjorie L. Bowen, Margenett Moore-Roberts, Dawn H. Robertson and Hobart P. Sichel.
The letter, penned on Wednesday, goes over the relevant experience and skills of each candidate, explaining the specific financial directions the potential directors have set out to achieve.
On the financial front, the Legion nominees are looking to drive annual savings of $20 million to $30 million, with non-business divestitures including the sales of the Schuh and Johnston & Murphy brands potentially producing approximately $350 million; grow the Journeys’ segment EBITDA margin by 2 percent, resulting in an increase from 8 to 10 percent; and augment total Genesco sales by 4 percent to 6 percent annually.
To reach these goals, the nominees recommended improved basic offerings like buy online pick-up in store, curbside pickup and same-day delivery, as well as the implementation of a loyalty program, a new mobile app and website improvements.
A strong growth emphasis would be put on the core Journeys business, specifically on penetrating high-growth consumer categories and upgrading the footwear retailer’s digital and e-commerce capabilities. But unlike Genesco’s initial statement, Legion said nothing about expanding the brick-and-mortar presence.
Additionally, the nominees want to address cost structure and capital efficiency by assessing paths to improving inventory turns, cutting “bloated” SG&A expenses and analyzing potential sale-leaseback real estate transactions.
If implemented, the ideas could lead to annual earnings of $13 per share, the nominees said. This would be a “substantial” increase from the $5 per share of earnings that Genesco achieved pre-pandemic.
Genesco says stock has gone up despite of activist campaign
In a rebuttal to Legion’s shareholder letter, on Thursday afternoon Genesco argued that its increased share price since the start of the year is a direct result of the execution of its footwear-focused strategy under the current board and management team. In 2020, the company implemented a five-year growth plan focused on six strategic growth pillars aimed at accelerating Genesco’s transformation and capitalizing on significant synergies across its businesses.
Using a stock chart, Genesco said that its stock price, which sat at $64.37 per share at market close Thursday, increased by 112 percent year-to-date, significantly outperforming its peer index (84 percent) and the Russell 2000 (17 percent) over the same period.
Genesco argued that Legion’s campaign, launched on April 12, had a negative impact on the footwear retailer’s stock, causing it to underperform peers. From Legion’s inaugural attack until Genesco announced first-quarter earnings on May 27, the stock traded below its peer group on 64 percent of days.
However, from May 27 on, Genesco’s stock traded above its peer group every single day. And in the 2021 period leading up to Legion’s campaign announcement, Genesco’s stock traded above its peer group on 75 percent of days.
The retailer and wholesaler said: “We believe the data is clear: Genesco’s share price performance is driven by its operational performance, not by Legion’s baseless and value-destructive campaign.”
Legion fires back: stock price argument is ‘absurd’
Later Thursday afternoon, Legion once again declared the need for boardroom change, and went after what it called the “seemingly absurd arguments” about “Genesco’s share price movements,” dismissing them as “the most damning instance of its apparent desperation.”
The investment management firm even alleged that Genesco’s current board is trying to divert attention away from substantive issues by “disseminating an array of self-serving misrepresentations.”
Legion argued that Genesco’s stock has been appreciating over the course of the past several months as the pandemic has eased, and suspected that the most recent share price appreciation is largely the result of two factors. Shareholders are anticipating more boardroom changes and are expressing enthusiasm for the activist’s vision for reversing years of underperformance, it claims.
Chris Kiper and Ted White, Legion Partners’ managing directors, said in the joint statement that prior to publicly announcing any board nominations, the firm initially made multiple attempts to reach a settlement for one designee, provided that 20-year director Matthew Diamond stepped down in 2022.
“We believe the current board has continually impugned its credibility by stating we have not engaged to avert an election contest and we have not set forth a clear potential strategy,” Kiper and White said in the statement. “The incumbents are spending $8.5 million of shareholders’ resources on external advisors in order to craft and promote these distortions, representing a blatant misallocation of capital.”
Expect shareholders to make final decision
Legion first went public with plans to nominate a controlling slate of seven candidates to Genesco’s then-eight-member board in April, with the footwear firm since claiming that the hedge fund hasn’t responded to its “repeated requests” for communication prior to and after receiving the board nomination.
But since April, the back-and-forth had grown uglier, with Genesco pointing out that none of Legion’s nominees have specific footwear experience or have operated an e-commerce business the size of Genesco’s. Additionally, they have been involved in eight combined bankruptcies.
Legion then attacked the board’s alleged history of poor capital allocation stemming from its “ill-conceived plan to operate as a retail conglomerate holding company and think of itself as a private equity investment platform.” Genesco called the attacks on its corporate structure as “mischaracterizations.”
The firm later pared back number of board members it wanted to replace to four after the shoe maker named three new independent directors. Two current directors, Kathleen Mason and Marty Dickens, will retire at the start of Genesco’s annual shareholders meeting on July 20, taking the number back to nine.
Legion was also part of an activist board shakeup with Kohl’s earlier in 2021. As part of the overhaul, Kohl’s added three new board members, two of whom are independent directors, when the deal was settled.
Unless Legion and Genesco come to some form of settlement, which seems unlikely at this stage, all eyes will be on the July 20 meeting, where shareholders will get to decide the company’s board makeup.