Genesco: Relatively Cheap And Aggressively Shrinking The Share Count

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Summary

Shares of Genesco (GCO) have lagged the market significantly over the past year, down 15% versus a gain of 24% for the S&P 500. This, in spite of the company announcing that it will grow earnings at least 25%. Based on recent performance, I believe shares are worth $44-52, providing investors with decent upside from current levels in what is largely an expensive market. Let’s take a look at Genesco’s recent results and capital allocation, and why the stock is somewhat underpriced.

Solid performance for Q4’20 compounds solid Q3’20

Genesco’s fourth quarter performance looked relatively solid, in my view, though full figures are not yet available. Total comp sales grew 2% y/y driven by a 21% in e-commerce sales offset by a 1% decline in same-store sales. While this is a decline from the 4% growth the company posted in Q4’19, the company did experience a noticeable uptick in e-commerce growth, which was up 21% y/y compared to a 10% gain in the same year ago period. The entire portfolio of businesses is a bit of a mixed bag, with Journeys two-year stacked comp up 10%, Johnston & Murphy up 2%, and Schuh down 6%, though comps did improve in Q4’20, growing 2% y/y.

Although we do not quite have final results, management noted at the ICR retail conference that full-year EPS will be above the midpoint guidance that management provided during its Q3 call of $4.10-4.40 per share. This means the company probably posted EPS in the neighborhood of $4.25-4.30. EPS in that range translates to growth of 30-31%, which is relatively strong. However, this growth rate is somewhat deceiving. As of the Q3’20 earnings call, the company had repurchased 5.5 million shares for $235 million for an average price of roughly $43 since December of 2018. This translates into a 28% reduction in share count. Ultimately, net income is probably going to grow somewhere between 4-7%, which, although not growth of 30%, is relatively strong. We will see where cash flow ends for the year, but based on inventory trends, I believe free cash flow should grow in the low single digits as well.

New Year, New CEO

Mimi Vaughan has taken over as CEO of Genesco. Vaughan has been with the company since 2003, rising to CFO in 2015 and serving most recently as COO since January of 2018. It is always difficult to pinpoint the performance of executives, but as she has grown within the organization, we have seen the company experience highly volatile performance, consistent with many mall-based retailers. I do, however, believe she was the force behind consolidating Genesco into a footwear focused company, and I believe she will remain hyper focused on creating shareholder value.

Small Licensing Play

Genesco added to its licensing portfolio, acquiring Togast for $33.7 million upfront and $34 million in contingent sales milestones. The acquisition adds Levy brand to Genesco’s licensed footwear portfolio, as well as ADIO, FUBU, and the return of G.H. Bass. By no means is this a portfolio of heavy hitting footwear. Levy shoes are frequently on sale for less than $30 at Marshall’s (TJX) and Ross (ROST). However, the deal should prove highly synergistic with Genesco’s existing portfolio, and maybe Genesco will even put ADIO shoes back into Journeys stores. Overall, I’m fairly indifferent to the acquisition, but I do not see it as a negative.

Shrinking Share Count, Rising Value

Although I do not consider Genesco a great business, the firm holds a unique position with its strong Journeys stores, Schuh’s decent position in the UK, and a strong dress shoe brand in Johnston & Murphy that has not been afraid to experiment. Currently, shares trade at roughly 10x earnings, and as long as the business posts flattish comps next year, I suspect we will see 8-10% EPS growth, again, mostly driven by share repurchases. Ultimately, I am increasing my fair value estimate to $44-52 per share. This puts the company at 9-11x FY21 earnings, which is hardly inflated given general market multiples. If shares continue to languish, I may initiate a position below $40.

Disclosure: I am/we are long TJX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.