By  on May 28, 2007

NEW YORK — The announcement of its closure of 57 underperforming Underground Station stores has hardly made Genesco Inc. a less desirable target, nor has its acknowledgement that earnings for the first quarter, ended May 5, will be 9 to 12 cents per diluted share, well below the initial projection of 28 cents per share.

In fact, Genesco continues to be the talk of the M&A world as Foot Locker weighs a possible acquisition, and rumors of interest from private equity firm Kohlberg Kravis Roberts float around the industry.

On Foot Locker’s first-quarter earnings call last Thursday, CEO Matthew Serra reiterated his hopes to acquire Genesco and his possible intent to offer a higher price than the initial $1.2 billion that was rejected by the company last month. “We believe the purchase of Genesco at the right price will provide an adequate return to our shareholder and be accretive to our earnings in the first full year of operations,” he said on the call.

Genesco, whose umbrella of brands includes Johnston & Murphy, Lids and Journeys, is known primarily as a footwear and headwear retailer, but Underground Station, its 190-door urban retail chain, carries a smattering of apparel from labels such as Rocawear, Timberland and Akademiks.

Although the chain attributed just 20 percent of its sales to apparel and accessories at last count, Scott Krasik, senior analyst at C.L. King & Associates, pointed out that management has targeted non-footwear as an area of growth within the struggling Underground Station division. “If Genesco stays independent or goes to a financial buyer that keeps the management team in place, then apparel is a key strategy to turning around the division,” he said.

If Genesco ends up in the hands of a footwear retailer such as Foot Locker, Krasik continued, Underground Station could be in peril, and possibly divested. “Foot Locker has only spoken of Journeys and Hat World, so its unknown whether Foot Locker is even interested in owning Underground Station. Their core competency, up to this point, has not been apparel.”

However, Mick Mankowski, president of the West Coast licensing, merger and acquisition firm SBL, believes that Underground Station could offer a level of diversification for a company like Foot Locker, in both footwear and apparel. “Urban may not be the hot ticket at the moment, but it has a specific market segment that’s not going to go away,” he explained. “For someone like a Foot Locker, the Underground Station stores could allow them to start speaking to different audiences.”

Still, the retail chain has faced significant difficulties in recent months. During Genesco’s fourth-quarter conference call in March, Genesco chairman and CEO Hal Pennington conceded that there were “a number of challenges with Underground Station ... primarily due to the changing dynamics in the urban market.”

Pennington said in a statement that shuttering more than 25 percent of the urban Underground chain will enable the company to “focus on strengthening the remaining stores and improve the prospects for a quicker turnaround in the Underground Station business.”

Genesco expects Underground Station’s same-store sales to drop by 22 percent for the first quarter, which will be discussed on Thursday during a quarterly conference call.

Underground Station is not the only urban retailer closing stores to stay competitive; in February, Pacific Sunwear announced its intent to close 74 of its demo stores—nearly a third of the total doors at its urban/streetwear concept.

Still, Pennington seems to believe the urban retail landscape is one with untapped opportunity, judging by his statement following Genesco’s store-closure announcement: “We remain confident that Underground Station is a viable concept filling an underserved niche in the market.

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