Schuh, a highly profitable British retailer of young fashion footwear, has been taken over by Genesco, the American retail group operating Journeys and other formats, for £125 million (€139.3m-$200.3m), less £29.5 million (€32.9m-$47.3m) outstanding under existing credit facilities, which remain in place for Schuh. The deal, which marks Genesco's first acquisition outside North America, should enable the Scottish-based Schuh to expand rapidly around the U.K. market and perhaps also on the European Continent.
The two companies pointed to the striking fit between Schuh and Journeys, which both focus on a wide assortment of full-price branded products. The similarity should enable them to enjoy strong benefits in terms of buying power as well as best practices. Eight out of the 20 top-selling brands are the same at Journeys and Schuh, and there are even more overlaps between other brands sold by the two retailers.
Based in Nashville, Genesco reached a turnover of about $560 million for the fiscal year ended Jan. 29. It operates more than 2,285 stores selling footwear, headwear and sports apparel under banners ranging from Journeys to Lids (former Hat World), Johnston & Murphy and Dockers footwear. Genesco said that the performance of its Journeys stores in Canada, where it is now looking at a potential network of 100 stores, had encouraged it to seek expansion further afield. Exploratory trips revealed that Schuh offered the best fit, in terms of store contents and business practices.
Genesco was particularly impressed with the sharpness of Schuh's management, which has come up with its own systems to achieve remarkable inventory turns of four times per year. The two companies could also keep on top of trends on both sides of the Atlantic, as fashion becomes more international, particularly among young consumers.
Schuh was owned at 75 percent by the company's two leading executives: Colin Temple, managing director, and Mark Crutchley, chief financial officer. The remaining 25 percent of the company belonged to a wider group of staff, who will receive about £20 million (€22.3m-$32.1m) from the transaction. However, another £17.3 million (€19.3m-$27.7m) will be given to other employees who did not previously own shares, to reward them as well for the success of the company. With an average age of 21 years, these employees will receive a payout based on their salary and length of service. All in all, excluding the two leading executives, £37.3 million will be shared among just over 2,800 of Schuh's staff. The retailer is also donating £7 million (€7.8m-$11.2m) from the transaction to a newly established charitable foundation, the Schuh Trust.
The purchase price at closing was £100 million (€111.5m-$160.3m) before adjustments for debt and changes in working capital and debt. The deal further includes a deferred payment of £15 million (€16.7m-$24.0m) three years after the deal and another payment of £10 million (€11.1m-$16.0m) in 2015, provided that the payees are then still with the company. Furthermore, Genesco committed itself to the payment of a management bonus of £25 million by 2015, provided that Schuh's principals stay with the company and that they deliver an Ebitda above the original plan.
Genesco does not expect any cost reductions from the deal. Schuh has become part of the Genesco group and Colin Temple will report to Jim Estepa, chief executive of Journeys, but Schuh will not be integrated into Genesco any further.
Established 30 years ago, Schuh achieved sales of £163.6 million (€182.4m-$262.2m) for the fiscal year ended on March 27, with 59 stand-alone stores in the U.K. and Ireland with an average size of 4,600 square feet, and 16 concessions in Republic fashion stores. Schuh also runs one of the largest online shoe websites in the U.K.
Schuh's business continued to thrive in spite of the weak economic situation in the U.K. and Ireland, with sales up by 11.7 percent for the fiscal year ended last March, and a comparable sales rise of 10.9 percent including online sales. These have been growing at an average rate of more than 25 percent in the last four years, to reach about 14 percent of Schuh's sales for the last fiscal year.
Roughly 85 percent of the U.K. retailer's sales are generated with branded products, while the remaining 15 percent consists of private labels. Unlike most other British shoe stores, it has a roughly equal share of men's and women's footwear. Most impressively, Schuh achieved Ebidta of £18.7 million (€20.8m-$30.0m) for the fiscal year, amounting to an Ebitda margin of 11.5 percent. Its Ebit margin excluding goodwill amortization reached 9.1 percent.
As the two parties discussed the takeover in a conference call earlier this month, Temple went into detail on the methods used by Schuh to “sweat” its stock. Instead of buying a stock management system, Schuh has been constantly refining its own in the last two decades. Its strategy is to buy often in small quantities, to take stock three times per week, shift it around stores depending on sell-through in specific locations, and get rid of poorly selling stock very quickly – in order to keep selling mostly at full prices. Schuh's management has been making particularly smart use of technology, for its stores as well as its online business. It recently invested in an automatic packing machine to further speed up the delivery of its online orders.
Managers of both companies said that the takeover would provide Schuh with easier capital to rapidly build up its store network. Genesco estimated that it could double the number of Schuh's stand-alone stores, starting with about 30 openings in the next four to four and a half years. Bob Dennis, chief executive of Genesco, added that Schuh could be a springboard to the rest of Europe.
As Temple saw it, the rise of the internet has radically changed the potential of footwear retailers in terms of store presence. He reckoned that, before the internet, it would have taken more than 300 stores to cover the U.K., but nowadays 120 stores would be sufficient. Temple explained that the banner, which started from Livingston in Scotland, remains more strongly represented in the north of the U.K. and still had strong potential in the south. He estimated that there was scope in the U.K. market for 40 to 50 stores delivering the same performance as existing stores.
Among other benefits, Genesco said it could take Schuh's private-label products to the U.S. market. Private labels are not a strong focus for Journeys so far. On the other hand, Journeys makes about 10 percent of its turnover with accessories, while the share of such products is less than 1 percent at Schuh. Genesco expects that the takeover will be immediately accretive in terms of earnings per share this fiscal year.
Separately, Genesco announced that its same-store sales for its retail stores other than Schuh increased by 14 percent in the second quarter to date through June 18, with the Journeys group up 15 percent, compared with an increase of 10 percent for the Lids Sports Group, 20 percent for the Johnston & Murphy Group and 9 percent for the Underground Station Group.
The sale of Schuh is the latest deal in a lively period for acquisitions in the U.K. Earlier this month the Jones Group bought Kurt Geiger, the premium shoe retailer, from Graphite Capital in a deal worth £215 million (€239.7m-$344.6m).