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Finish Line Isn't Finished

Posted: Jul 03, 2008 15:10 PM by Will Ashworth

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Tickers in this Article: FINL, GCO, FL, UA, NKE

Finish Line (Nasdaq:FINL) had a bad year in 2007. It was so bad that the stock closed the year at $2.42.

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In March of 2005, Finish Line traded for $23, then most investors gave up on the Indianapolis-based chain. Those who didn't, like Schultze Asset Management, made out like bandits. Schultze accumulated a 9.1% stake in the company between January and March of this year, producing an unrealized gain of $19-28 million as the stock has risen to currently sit above $8.50. That's not bad for six months work. Who says Finish Line is finished?

2008 has been Great
Of all the Russell 3000 stocks, Finish Line's first half performance in 2008 was fifth best with a return of 259.5%. Several reasons help explain the jump including improved sales and earnings, settlement of the aborted Genesco (NYSE:GCO) merger, overall strength in the athletic footwear business and a management team focused on its core brand, free of any distractions beyond those day-to-day. Finish Line, America's second largest athletic footwear retailer, got its start way back in 1976 when current CEO, Alan Cohen, and current Executive VP, David Klapper opened an Athlete's Foot franchise in downtown Indianapolis. Perhaps they are in the early stages of a renaissance.

The Street Approves
The numbers for Finish Line haven't looked this good in a long time. It produced a first quarter same-store-sales increase of 1.2% in a dismal retail environment. EPS jumped to 2 cents per share compared to a loss of 8 cents, beating analyst expectations by 140%, and sending the stock up 24% in just one day.

B. Riley & Co. upgraded Finish Line to 'buy' from 'neutral' due to the footwear business stabilizing at the end of fiscal 2008 and comparable store sales actually increasing in the first quarter. With the Olympics approaching, B. Riley expects that same-store sales will continue to rise. If June's comps are any indication, up 10% to June 27, there is reason to be cautiously optimistic in the second quarter. (Learn more about earnings surprises and how they can adjust the price of a stock in Surprising Earnings Results and Earnings Forecasts: A Primer.)

Genesco We Hardly Knew You
In early March, Finish Line settled its legal dispute over the aborted merger with Genesco, paying $39 million as well as issuing 6.5 million shares that will go to Genesco shareholders. While it's an expensive lesson, the deal extricates the company from a situation that could have been financially devastating, not to mention operationally distracting. In this case, addition by subtraction works. Sometimes you just have to take your medicine.

The Olympics Are Coming
Finish Line couldn't ask for better timing. Analysts feel that for the first time in years, the athletic footwear business is actually improving and that’s a good thing with back-to-school sales just around the corner.

Both Foot Locker (NYSE:FL) and Finish Line are seeing strong sales in the premium footwear category. Furthermore, analysts see a move away from cheaper products to more expensive, athletic, and technical products. For example, Under Armour (NYSE:UA) and Nike (NYSE:NKE) are slugging it out in the cross-trainer market after an extended period of weakness. Despite all this good news, it's hard to imagine business booming given the state of the economy.

Where Do We Go After Beijing?
In May, Finish Line opened a new concept store in Phoenix with Nike as a partner. It's called "Finish Line Ltd" and caters to young runners with a strong focus on customer service. Hook them while they're young, and you've got clients for life (It worked for the tobacco industry, right?). It’s a great idea that hopefully will expand to other cities.

Management is looking to increase the average price paid for a pair of shoes while reducing inventories and other costs, resulting in higher gross and operating margins. It turned a $3.7 million operating loss in Q1 2007 into a $1.7 million operating profit in the first quarter of 2008, aided by a 190 basis points increase in gross margins. With a move to smaller stores of 3,500-3,700 square feet from the 5,500 average, it wants to do more with less, saving on real estate costs. The future appears to be a smaller, more nimble company. (Learn more about equity analysis, check out Analyzing Operating Margins.)

Bottom Line
Finish Line isn't out of the woods just yet. It will be several quarters before a pattern emerges, plenty of time for it to self-destruct. Having said that, I do believe that it plays an important role in the success of Nike in the U.S. and if the Oregon boys felt the ship was sinking, they'd have abandoned her a long time ago. No, I think George Schultze played the right cards earlier this year. I'll be paying close attention to his next move. It could determine where this stock is heading in the second half of 2008.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

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