Genesco Invades Britain with Schuh Acquisition

“We have talked about international expansion as one of our strategic goals in connection with our five-year plan, and we have been pleased with the performance of our Lids business as well as our first three Journeys stores in Canada,” said Genesco president and CEO Robert Dennis, on a conference call with analysts. “This has fueled our desire for further expansion outside the United States, and so we have now made our next move, this time through acquisition.”

Dennis said Schuh is similar to its Journeys Group in customer demographics and the products they offer. Schuh’s core customer is 15 to 24 years old. Eight of Journeys top 20 brands overlap with Schuh’s top 20 brands with more overlap outside the top 20. The stores are slightly larger than Journeys – an average about 4,600 square feet.

But Dennis particularly raved about the opportunity to build on the successful 30-year-old concept.  For the fiscal year ended March 27, 2011, Schuh’s sales increased 12 percent to £164 million ($268 mm), driven by a 10.9 percent comp increase, inclusive of e-commerce. That came on top of comp increases of 5.1 percent, 8.7 percent, and 1.9 percent during the previous three years, also inclusive of ecommerce. Total EBITDA reached approximately £19 million ($31 mm) last year, which equates to an EBITDA margin of 11.5 percent of sales. Sales per square foot was roughly £477 ($787) with inventory turning four times a year.
Dennis said what differentiates Schuh in the market is its breadth of branded assortment, with almost twice the offerings of its next closest competitor. Schuh’s e-commerce revenues have also been expanding at an annual rate of over 25 percent for the last four years and now represent 14 percent of its business.

“Given other UK footwear competitors, we believe Schuh, with 59 freestanding stores, has the potential to roughly double its store base to 100 to 120 freestanding stores in its current geographic market,” said Dennis. “Our plan for the business is to open about 30 stores over the next 4 to 4.5 years.”

Other benefits include gaining more scale with vendors in buying, including access to exclusive product, as well as gaining quicker read on fashion trends.

“With the continued globalization of the footwear market, more and more trends that start in the U.S. are migrating to Europe and vice versa,” said Dennis. “We will now have earlier intelligence as these trends develop and more visibility into newly emerging vendors, which will help in our merchandise planning and inventory buy.”

A critical part of the deal was having Schuh’s management team, led by Managing Director Colin Temple, a 29-year company veteran, and Finance Director Mark Crutchley, join Genesco. Schuh’s management will report to Jim Estepa, the CEO of Journeys.

“We do not plan any large-scale integration of our businesses and we do not plan to rebrand Schuh, which already has strong brand equity across the UK and the Republic of Ireland,” said Dennis. “Mark and Colin will continue to lead this business as they have before. However, we will align ourselves to capture the merchandise and best-practice opportunities.”

Looking for opportunities for its U.S. banners, GCO sees the 15 percent mix of private brands at Schuh’s and sees potential that expertise may help in the development of new brands for Journeys. The acquisition also provides a footing for Genesco to explore other expansion opportunities overseas for Journeys and Lids while Schuh may be an opportunity to expand in the U.S. down the road.

Dennis concluded, “Genesco has a proven track record with its ability to successfully integrate and grow entrepreneurial businesses. The Hat World, now Lids Sports, acquisition was one example of this; and we are excited about the potential for Schuh to be yet another.”

In addition to the £70.5 million that Genesco is paying for Schuh Group, it is assuming debt of £29.5 million ($47 million) under existing Schuh credit agreements.

Genesco also agreed to pay a total of $40 million in deferred purchase payments on the third and fourth anniversaries of the closing of the deal and up to another $40 million to Schuh managers in 2015 if the business meets performance targets. The acquisition is expected to add to Genesco’s earnings per share in its current fiscal year.

Genesco also provided a bullish update on second quarter sales trends. Same store sales for its retail stores other than Schuh had increased 14 percent in the second quarter to date through June 18, with the Journeys Group up 15 percent, the Lids Sports Group up 10 percent, the Johnston & Murphy Group up 20 percent and the Underground Station Group up 9 percent. 

“We are pleased with the strength of our U.S. based businesses and look forward to presenting an updated outlook for the balance of the year, including Schuh, when we announce our second quarter results in August,” Dennis said.