In football, it’s called a reverse field. A quarterback suddenly changes direction and heads out into new territory. That’s what Genesco did April Fool’s Day when it bought a 481-store retailer called Hat World. At first, it seems far away from shoes, the business on which Genesco was built.
But, over the past decade, Genesco has shucked off its manufacturing divisions, turning itself into a mall-based shoe retailer. Ironically for such a venerable company, its Journeys and JourneysKidz stores take direct aim at the fickle niche of teen fashion, where style trumps utility, changing from month to month and area to area.
As the mall stores took off, the company’s long moribund stock performed a near miraculous recovery, and the company preached concentration on its core theme. Then why would they mess with success, particularly since other earlier acquisitions (Mitre soccer paraphernalia comes to mind) didn’t work out? And why baseball caps?
No matter. With Hat World, Genesco is back to expanding, this time around its new main theme: a mall-based retailer serving “distinctive customer lifestyles,” says Hal Pennington, president and CEO of the Nashville company.
“Hat World is a high-margin, high-growth business,” he says in explaining the acquisition. Its operating margin was nearly 10% in the recent fiscal year, with sales rising 27% to $200 million. “Hat World is dominant in its field, seven times larger than its largest competitor.”
The stores themselves are just 700 square feet apiece—about a third the size of a typical Genesco store. They sell about $600 worth of merchandise per square foot against something in the “high four hundreds” for Genesco’s other stores. “There’s no back room,” Pennington says. “Inventory is shipped daily, usually by overnight express.”
Genesco paid Hat World’s owners—including Bluestem Capital in South Dakota and SKM Growth Investors, a Dallas firm that made 4.5 times its investment in 2.5 years—$177 million. That amount includes Hat World’s $12 million in cash. Almost $100 million of that is carried as goodwill on the company’s books.
Still, David Campbell, retail analyst with Davenport & Co., says Genesco didn’t overpay, given the growth of Hat World and the premium paid for acquisitions. The price was 8.6 times last year’s earnings before interest expense and taxes. In April, the first month under its new corporate parent, Hat World’s same-store sales rose 20%.
Pennington says Hat World will add about 10 or 15 cents to this year’s bottom line.
Hat World’s management and buying operations will remain in Indianapolis, “because we know how delicate that chemistry is,” Pennington says, but some of the support operations like leasing and construction may see some “integration” with Genesco’s Nashville headquarters.
In keeping with the “growth” theme, Hat World will open about 50 new stores this year, all under the “Lids” name. (Lids is one of three Hat World brands, each functionally identical.)
So, Hat World isn’t a leap off the cliff for Genesco, but one more step away from shoe manufacturing into fashion retailing. The shoe company’s growth rate has flattened over the past couple of years, with collateral damage to the stock price. If baseball caps provide Genesco with the earnings boost that Skeechers sneakers once did, management will be happy to doff their hats in gratitude.
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