Finish Line FINL
September 12, 2006 - 11:23am EST by
sandman898
2006 2007
Price: 11.94 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 568 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

Sign up for free guest access to view investment idea with a 45 days delay.

  • Retail
  • Depressed Earnings
  • replacement value
  • Insider Ownership
  • Activists involved

Description

The quick version of the thesis is that FINL is one of the cheapest publicly traded retailers on a trailing EV/EBITDA multiple (bottom 5% of largest 150 retailers), trades at a low-teens forward P/E multiple on suppressed margins, has about $1/share in cash, is being valued at a 30-40% discount to its peers (Foot Locker) despite having a better track record and is trading well below the private market as well as replacement value. In addition, sell-side expectations are low, have already priced in a recession, and analysts have ignored the fact that two new store concepts are temporarily negatively suppressing margins. Finally, management is top-notch, founders 11% of the shares, has a long record of consistent growth, and has historically bought back stock when shares were near a low (In Q2 alone, the company purchased an additional 2.4% of its shares outstanding).

Due to a combination of missing a fashion trend in footwear and a weak retail environment, the company has continually lowered its guidance. The negative sentiment created from these revisions have weighted upon the stock to the point that the day after the company announced its most recent revision and discontinued future guidance (a big statement from a management team that formerly provided guidance for all four quarters in the coming fiscal year) shares actually closed up 1% (pretty rare for a retailer these days). Over the last twelve months, shares have traded between $19.29 and $9.55 and are currently priced around $11.94. It doesn’t look like retail expectations are going to turn bullish any time soon, which means that investors might be lucky enough to get another chance to acquire shares in the $9-11 range.
 
On September 8, Clinton Group filed a 13D, after acquiring 5.1% of the shares over the last few months, and encouraged management to buyback more shares, remove its dual-class structure so that a takeover would be possible, and to consider strategic alternatives. I will let VIC members read the filing themselves but the bottom line is that Clinton believes that FINL is worth $17-21 and potentially more to a strategic buyer.
 
Diluted Shares (05/27):                          48.6MM
Q2 Buyback (08/31):                            1.2MM shares for $14.2MM ($12.39/share)
Adjusted Diluted Shares:                       47.5MM
 
Market Value:                                       $567.8MM ($11.96/share)
Adjusted Cash & Securities:                 $47.9MM ($1.01/share)
Enterprise Value:                                  $520MM ($10.95/share)
 
F04 Earnings (Ended 02/04):               $47.3MM ($1.00/share)
F05 Earnings (Ended 02/05):               $61.3MM ($1.29/share)
F06 Earnings (Ended 02/06):               $60.5MM ($1.27/share)
F07 Estimates (Ending 02/07):            $36.0MM ($0.76/share)
F08 Estimates (Ending 02/08):            $43.2MM ($0.91/share)
 
F07 Guidance (01/26):                          $1.35-1.39
F07 Revision (03/23):                           $1.33-1.37
F07 Revision (05/18):                           $0.85-0.95
F07 Revision (08/24):                           $?
 
MEMO SUMMARY
 
1 - Valuation
2 - Business Description
3 - Store Differentiation
4 - Growth Potential
5 - Man Alive & Paiva
6 - Unit Economics
7 - Recent Events
8 - Management
9 - HQ Valuation
10 - Financials
 
1 - VALUATION
 
Finish Line’s EV is currently around $520MM ($10.96/share). To try to get the value of the core Finish Line stores, we need to strip out a few things. The company has a HQ with a replacement value of $43.5MM ($0.92/share). As of the end of Q2, the company had 76 Man Alive stores (243,000 square feet) and 6 Pavia stores (24,000 square feet). The company paid $12.3MM ($0.26/share) for the Man Alive chain and has since invested around $16.4MM ($0.35/share) in fixed assets for new stores. Pavia’s six stores have cost the company around $4.8MM ($0.10/share). In total, the company has paid $33.5MM $(0.71/share) for both of these new ventures.
 
If we subtract out the value of these assets we are left with in an implied EV of $443MM ($9.33/share) for the remaining Finish Line stores. At the end of Q2, these stores represented 3,761,000 square feet. At their replacement value of $100/sqft, they would be worth $376.1MM ($7.92/share). That leaves us with $66.9MM ($1.41/share) which we can look at two ways. The first is that the company has $173.2MM ($3.65/share) in net working capital, so you are getting a 61% discount on this value. The second way is that you are paying an additional $18/sqft for the stores for a total of $118/sqft, comfortably below the $147/sqft that it would cost Finish Line to replace these assets.
 
Downside Scenario Value
 
So let’s completely ignore Man Alive, Pavia, and the HQ. If things get really bad, I would expect the 3,761,000 square feet of Finish Line stores to generate $300/sqft in sales and only report a 4% operating margin. Looking back over the last 14 years, the company’s worst two years were 2001, when operating margins were 2.4% on inflation-adjusted sales of $293/sqft and 2002, when operating margins were 3.7% on inflation-adjusted sales of $288/sqft. The company has continued to improve working capital turns and operational efficiency over the last five years so to extrapolate a 4% EBIT and $300/sqft environment indefinitely would suggest a pretty horrific long-term view for FINL. After-tax, this would imply earnings of $7.50/sqft which is equivalent to something a little over $28.2MM ($0.59/share).
 
D&A will be $35-40MM this year while maintenance capital expenditures have been between $12-14MM in each of the last three years (I get this number by subtracting out the capex for new store growth from total capex). This discrepancy should be an additional source of cash flow for investors. Assuming a $20MM spread, this is an additional $0.42/share in FCF. I anticipate that the discrepancy between these two numbers will persist for 3-5 more years for two reasons. The first is that almost half of the company’s stores are less than three years old and the second is that the company depreciates its assets over 5-6 years while the economic life is closer to 8-10.
 
Finally, let’s assume management keeps its $47.9MM ($1.01/share) of cash on its balance sheet and earns a 5% before-tax return. That’s worth another $0.03/share. In total, I get $1.04/share in FCF. Given the pessimism embedded in these assumptions, an 8.7% FCF yield on trough earnings when ignoring the other assets does not seem too bad at all. Furthermore, this scenario is fairly close to what sell-side analysts are assuming for the foreseeable future. For example, Merrill Lynch is assuming a 3.7% operating margin in fiscal 2008.
 
Base-Case Scenario Value
 
My base-case valuation is a little bit more realistic. Over the last 14 years, operating margins have averaged 6.9% with a median of 7.5%. In addition, over this same period, inflation-adjusted sales/sqft has a median of $358 and an average of $361. Combining a 7.0% operating margin with $350/sqft in sales results in after-tax income of more than $15/sqft. These assumptions would imply total income of $57.5MM ($1.21/share).
 
On a historic basis, 7% certainly seems like a realistic expectation, but it also makes sense on a relative basis as well. Here is a look at the operating margins of a few competitors: 
 
 
 
EBIT Margin
Company
Ticker
LTM
Forward
Hibbett
HIBB
11.3%
8.3%
Genesco
GCO
8.5%
8.3%
Stride Rite
SRR
7.7%
8.0%
DSW
DSW
7.0%
6.8%
Foot Locker
FL
6.6%
6.8%
Finish Line
FINL
6.6%
4.2%
Footstar
FTAR.OB
6.4%
n/a
Shoe Carnival
SCVL
5.2%
5.4%
Brown Shoe
BWS
5.0%
4.5%
Payless
PSS
5.0%
5.7%
Shoe Pavilion
SHOE
4.7%
5.1%
The Sports Authority
 
4.4%
n/a
 
Now let’s assume that management returned the extra $1.01 in cash. In addition, management could decide to sell/lease-back its HQ for $43.5MM ($0.92/share) at a 7% cap rate, essentially pocketing the proceeds while only negatively impacting annual EPS by $0.04. Finally, let’s assume that Pavia and Man Alive might actually be worth the $33.5MM ($0.71/share) that management has cumulatively paid for them. 
 
The result would be $2.64/share in value which would bring down our effective price on the Finish Line stores to $9.32. EPS would be $1.21 less $0.04 in rent expense or $1.17. Adding back the D&A shield gets us to $1.59 in FCF per share or a 17% FCF yield.
 
Upside Scenario Value
 
If you really wanted to look for further upside, I would point out three things that could drive earnings past what I laid out in a base-case scenario. The first is that around a year ago management was targeting 10% EBIT margins by 2008, if things get back on track and this becomes an accomplishable target in 2009 or 2010, the operating leverage is substantial. In January of this year, management guided that the company could generate EPS of $1.37. While this guidance did include $0.06 due to the fact that 2007 has 53 weeks, “normalized” EPS of $1.31 would have been the midpoint of that guidance. Since then, the company had deployed more stores, generated cash, and bought back shares. Second, all of these scenarios have neglected to give credit for any future growth, a fairly conservative assumption given the company’s track record. Third, the company should continue to buy back shares whenever prices trade around the $12 level, and over time, this should continue to build shareholder value.
 
Private Market Value
 
On May 7, 2004, Foot Locker completed its acquisition of Footaction. At the time of the acquisition, Wells Fargo analyst John Shanley estimated that the Footaction units would bring Foot Locker an additional $500MM in sales over the following year. This would imply a valuation for Footaction of 0.45x projected revenues. Analysts expect FINL to report $1.34B in 2007. Using this private market multiple would imply an EV of $603.0MM value $12.69/share for Finish Line (this excludes HQ and cash of worth $1.93). Using this metric, Finish Line appears to be close to a private market value, however one could easily argue that Finish Line should trade at a premium since Footaction was purchased out of bankruptcy, was under-inventoried, and required additional investment to return the stores to a competitive state of operations.
 
Let’s look at the acquisition price another way. Foot Locker’s 2005 10-K reveals that Footaction has 349 stores at an average of 3,000 square feet, which is around two-thirds the size of an average Finish Line store. Assuming that this square footage has not changed materially since the purchase, Foot Locker paid $225MM for 1,050,000 square feet or $214/sqft. Finish Line’s CFO, Kevin Wampler, told me that Finish Line submitted a bid of $195MM for the company but that they had expected to pay around $225MM because turning around Footaction would require around $30MM of store closure costs. I think it is fair to assume that Foot Locker might also have had to pay these as closure costs after it acquired Footaction. Adding $30MM or $29 per square foot results in an effective purchase price of $255MM or $243/sqft. If this valuation is applied to the total square footage of Finish Line stores, or 3.761MM, it would imply a valuation of $866MM ($18.24/share), excluding the value of Man Alive, Pavia, the HQ, and the net cash balance.
 
Replacement Value
 
As of Q2, and after adjusting for the buyback, Finish Line had a book value of 418.7MM or $8.82 a share. However, a few numbers from the company’s 10-K reveals what it would cost $674.6MM ($14.21/share) to replace the company’s asset base.
 
 
Finish Line
Man Alive
Pavia
Total
Square Feet
3,761
243
24
4,028
Cost/Sqft
$100
$120
$200
$102
Replacement
376,100
29,160
4,800
410,060
 
 
 
 
 
 
 
Fixed-Assets
 
410,060
 
 
NWC
 
173,151
 
 
HQ
 
43,500
 
 
Cash
 
47,900
 
 
Market Value
 
674,611
 
 
Per Share
 
$14.21
 
Relative Value
 
Rather than lay out the relative valuation gap in detail (its pretty obvious) I thought that it would be more helpful if I offered a few reasons why FINL might deserve a premium multiple to FL.
 
·         A lot of FL's scale benefits are lost on weaker performing businesses and multiple segments
·         FINL trades at a lower forward P/E, and is even more attractive after adjusting for cash
·         Gross margins for both businesses are 30% and the 10-year range has been 25.4-31.7% at FINL versus 24.6-32.2% at FL
·         FINL has grown revenues consistently in the double digit range, and prior to last year the lowest quarter year over year was 4.7% in Q3 2003 versus FL, whose revenues appear to have declined from 1996 through 2001 and have since been climbing back at an annual rate of 3-5%
·         EBITDA margins for both companies were recently around 10% but the 10-year-range is 4.9-11.0% for FINL versus 4.2-10.3% for FL
·         FINL's share count has consistently decreased from 53MMM to 48MM since 1998 while FL's share count has consistently increased from 135MM to 156MM
·         Over the last 10 years, days inventory has consistently increased for FL from 68 to 81 while it has fallen for FINL from 115 to 89
·         Last year FINL has around 45 days payable versus 33 for FL, FL has increased from 20 to 30 over the last decade but its interesting that FINL gets seemingly better terms
·         Last year FINL's ROE is 17.2% versus 15.1% for FL, and I believe the ROIC opportunities for FINL are still higher than those available to FL
 
2 - BUSINESS DESCRIPTION
 
Finish Line currently operates 672 Finish Line, 76 Man Alive, and 6 Paiva stores. Around 38 of the Finish Line stores average more than 10,000 square feet and are stocked with 1,000 to 1,300 styles and 20,000 to 30,000 shoes. Each of the remaining 636 standard Finish Line stores carries more than 10,000 shoes. Typically, these stores will show between 600 and 800 different kinds of athletic footwear, including basketball, running, walking, gym, aerobics, hiking, cross-training and skate shoes, cleats, casual shoes, and sandals. Brands carried by Finish Line include Nike, adidas, Reebok, New Balance, And 1, Oakley, Puma, Airwalk, Converse, Fila, Lugz, Saucony, Timberland and Vans. Finish Line predominantly sells Nike products, in 2005 for example, the company purchased 58% of its product from Nike while its next top four suppliers totaled only 23% of annual purchases. Given the heavy exposure to Nike, it should be no surprise that over long periods of time, FINL essentially trades like a levered NIKE: finance.yahoo.com/q/bc?s=NKE&t=my&l=off&z=l&q=l&c=finl
 
While 80% of Finish Line’s sales come from shoes, the remaining 20% comes from apparel and accessories. This includes products from Nike, Oakley, adidas, Fossil, Jansport, professional and collegiate licensed products, t-shirts, shorts, caps, and outerwear. The apparel mix is roughly 35% private-label, 30% licensed, and 35% branded products.
 
Finish Line’s sales tend to be less seasonal than the majority of retailers with about 23% of annual sales in Q1 (Spring), 27.5% in Q2 (Back to School), 20% in Q3 (Fall), and 30% in Q4 (Christmas). While the bulk of profits are generated in Q4 and Q2, the company has typically been profitable in all four quarters. From 1993 through 2005, sales per average square foot have ranged between $256 (2000) and $354 (2006). Management claims that some stores generate $500 to $700 in sales per square foot.
 
From 1995 through 2006, rent expense has ranged between $20 and $24 per average square foot. The company does have a liability balance for deferred landlord credits which represents lower rents during the early years in a lease than would be recognized if the lease were to be accrued for on a straight line basis. I inquired about deferred landlord credits and was told by management that if Finish Line elected not to grow, the company’s cost structure would not be materially different ten years from now than it is today. 
 
Finish Line offers a number of exclusive products from its manufacturers as well as its own private label line “FINL 365.” In 2005, Finish Line received 40,000-50,000 hits per day on its website and had increased the mailing frequency of its catalog from four to seven times a year and tripled the circulation.
 
3 - STORE DIFFERENTIATION
 
Finish Line has around 7% of the U.S. athletic footwear market while its largest competitor, Foot Locker, has a 19% share. The Foot Locker concept (excluding Kids Footlocker and Lady Foot Locker) has approximately 1,398 domestic shoe stores consisting of 5.6MM square feet of floor space. In comparison, the Finish Line concept has only 672 stores consisting of 3.8MM square feet of domestic floor space. The main differentiator between Finish Line and its competitors is the size of its store. The average Finish Line store is around 5,641 square feet (70% selling space), slightly larger than the 4,000 square feet for an average U.S. Foot Locker. This additional size enables a typical Finish Line store to carry 600-800 styles versus only 300-400 for a typical U.S. Foot Locker. Finish Line uses its large size competitively to try out and carry more brands. In 2005, Finish Line rolled out the Phat Farm brand and in 2006 rolled out Penguin, Lacoste, and has a mall exclusive with Sean John footwear. The company is planning on rolling out some new displays to increase apparel density and offer even more product per square foot. 
 
According to Finish Line’s founder and CEO, Alan Cohen, "We've been going against Foot Locker all the years we've been in business. We conceptually have a store that's better. It's much friendlier to the consumers. They like our store." His point is reiterated in exit polls, where the number one reason people say they shop at Finish Line is selection. In fact, Finish Line appears to be in a niche amongst mall-based retailers that enables it to compete against Wal-Mart, Target, Dick’s, and other big-box chains. For some shopper demographics, size is a disadvantage. In the late 90’s Foot Locker experimented with a large footprint concept that combined many of their brands into a single location. The experiment was a failure and Foot Locker has been abandoned this concept in favor of smaller, single-themed stores. I believe that Finish Line’s typical male demographic is between 15 and 30 years old and on a recent conference call Cohen said, “It’s no secret our customer from the female perspective in the Finish Line store is probably 13 or 14 to 22.”
 
In the past, vendors have given preferential treatment to Finish Line over Foot Locker due to fears that Foot Locker is becoming the Wal*Mart of the shoe industry. In some sense, Finish Line is in a sheltered position because its vendors want it to continue to succeed so that they can have a reliable second customer in the marketplace.
 
4 - GROWTH POTENTIAL
 
Looking at the square footage data below, it is clear that pressure from the Internet and big-box retailers has taken capacity from the athletic footwear retail industry over the last decade.
 
Year
1997
1998
1999
2000
2001
2002
2003
2004
Foot Locker
3,839
3,767
3,419
3,372
3,442
3,497
3,447
3,442
Lady Foot Locker
814
844
820
839
816
781
723
816
Kids Foot Locker
260
384
570
574
567
547
514
567
Champs
2,408
2,628
2,387
2,373
2,280
2,292
2,244
2,280
Footaction
4,120
2,517
2,484
2,521
2,384
2,146
2,035
1,531
Just For Feet
1,435
3,388
2,413
1,593
1,540
1,645
1,540
-
Sneaker Stadium
684
-
-
-
-
-
-
-
Athletes Foot
1,049
959
1,200
1,185
1,274
1,160
1,135
1,135
Finish Line
1,085
2,095
2,480
2,674
2,717
2,858
3,094
3,389
Total
15,694
16,582
15,773
15,131
15,020
14,926
14,732
13,160
 
Yet despite the persistence of the decline in industry square footage, Finish Line is the single industry participant that has been able to grow its domestic store base profitably. The company has grown sales by 15% a year and square footage by 12% a year since calendar 1997.
 
Wampler said that Finish Line could have 850 mall-based stores and that the internal goal is 1,000 to 1,100 stores in the U.S. In Morgan Stanley’s report on June 21, 2005, analyst Joseph Yurman stated that, “We estimate that the company’s store base has penetrated only 18% of the Top 100 U.S. malls, as defined by number of 15-24-year-olds within three miles.”
 
In addition, at some point in the future I anticipate the company will expand internationally. Foot Locker has 723 stores internationally at 1,500 square feet for a total of more than one million square feet. I have been told that these stores perform better than the domestic ones.
 
5 - MAN ALIVE & PAIVA
 
In January 2005, Finish Line purchased The Hang Up Shoppes which owned 37 Man Alive stores for $12.3MM plus a maximum earn out of $6MM for performance over the next three years. Assuming that half of the earn out is eventually paid, each Man Alive store was valued at $400,000. The stores average 2,831 square feet and carry hip-hop brands including ARME, Phat Farm, Rocawear, Sean John, Makeveli, and FUBU. Finish Line stated that it believes that it can increase footwear from 5% to 20% of sales and that it expects to grow this business to 300-400 stores. In 2005, Man Alive generated $30MM in sales and the acquisition was slightly accretive to EPS. Since purchasing the chain, the company has added 39 new stores. The 76 stores currently occupy 243,000 square feet.
 
In April 2006, Finish Line opened its first high-end athletic specialty store called Paiva. The store carries 70% apparel and 30% footwear and targets women between 25 to 40 years old who exercise at least once a week and have a household income of more than $80,000. The 6 current Paiva prototype stores are an average of 4,000 square feet, roughly twice the size of Lady Foot Locker. For reference, there are 554 Lady Foot Locker stores at 1,700 square feet each for a total of 942,000 square feet. Finish Line hired Jeff Pofsky, who was a senior women’s apparel buyer at Target, to manage the rollout. It should be noted that Nike formerly had a store called “The Goddess” in which they tried to sell exclusively Nike product to women. The stores were successful but at some point it became apparent to Nike that the concept would have to sell more than just Nike product to flourish. Nike then asked Finish Line to partner with them and launch a revised concept under a new name.
 
6 - UNIT ECONOMICS
 
 
Per Store
 
Per Sqft
 
Finish Line
Man Alive
Pavia
 
Finish Line
Man Alive
Pavia
 
 
 
 
 
 
 
 
Sqft / Store
 
 
 
 
4,750
3,500
4,000
Fixed Investment
475,000
420,000
800,000
 
$100
$120
$200
Inventory
350,000
160,000
250,000
 
$74
$46
$63
Accts. Payable
(125,000)
(60,000)
(85,000)
 
($26)
($17)
($21)
Total Costs
700,000
520,000
965,000
 
$147
$149
$241
 
A new Finish Line store takes three to five years to reach maturity. Typically, a new store will comp around 10% in the first year, 7% in the second year, and 5% in the third year. The target revenue for a store during its first year is $315 a square which should ramp up to $350 a square foot. The company’s typical target ROI is 15%. Traditionally, management has bought back shares when they could “purchase” their own stores at an implied valuation at or below what it would cost to build a new store.   
 
 
Sqft
Store ($MM)
Margin
New Store Sales
$316
1,500
100%
COGS
($221)
(1,050)
(70%)
Gross Profit
$95
450
30%
Advertising
($6)
(30)
(2%)
Rent
($22)
(105)
(7%)
Overhead
($13)
(60)
(4%)
Employees (2-3)
($28)
(135)
(9%)
New Store EBIT
$25
120
8%
 
 
 
 
Mature Store Sales
$350
1,663
 
Incremental Sales
$34
163
 
Incremental Margin
$10
49
 
 
 
 
 
Mature Store EBIT
 
169
 
Taxes @ 37.5%
 
(63)
 
Net Income
 
105
 
 
7 - RECENT EVENTS
 
According to Cohen, 2007 is the "most aggressive expansion plan in our history." This statement alone might give us a clue to as to why the company seemed to have taken its eye off of the merchandising ball. This year, the women's business has been struggling due to the inability to carry "low-profile women athletics" or "fusion" which as I understand it can best be defined as colorful Pumas and other women's footwear that is thin, low to the ground soles in casual styles.
 
Last year FINL reported $345/sqft which was roughly $163 Men, $63 Women, $50 Kids, $41 apparel, and $28 accessories. The roughly $25/sqft loss in sales suggests that this merchandising mishap resulted in $15/sqft to be lost in the women's business and because fewer women were shopping in the stores, the company also lost $10/sqft in the kids business.
 
Management pointed this out on their call in March, so they were clearly aware of the problem. Unfortunately, FINL had been trying to get this product into the stores but with a 9 month buying cycle, 20 days in the distribution center, and 90-100 days in the stores, the product could not get into the stores fast enough to keep up with the trend. While merchandising mishaps take time, there is certainly a reason to believe that there is a light at the end of this tunnel. Comps were down 8% in March, down 6% in April, down 8% in May, down 6.3% in June, down 6.9% in July, but were only down 1.3% in August. Furthermore, ASPs have only been down modestly throughout the year and were flat year-over-year in Q2, an improvement in the trend that had been occurring over the last four quarters. Inventories are still a little high, and thus there analysts are justifiably concerned that some discounting will take place through November, as the company brings its inventory back in line.
 
8 - MANAGEMENT
 
Note:  The following is an abbreviated compilation of several articles and website.
 
Born and raised in Indianapolis, Finish Line’s CEO Alan H. Cohen says he got his lust for business from his father, Hyman. Hyman was a local businessman and a partner in several companies who had went back to law school while in his mid-40s when Cohen was still in high school. Cohen says that his father's initiative has had a strong impact on him. After graduating with a marketing degree from Indiana University, Cohen followed in his father’s legal footsteps. "I just didn't think I wanted to go to work as a salesperson," he said.
 
Cohen began attending law school at nights and working at the Marion County Juvenile Court during the day. As a boy, he worker as a paper carrier, delivering The Indianapolis Star to homes. Then he went to work at as a caddy at a nearby golf club. Cohen ended up paying his way through law school and went to work at the Indianapolis law firm of Steckbeck Moore Cohen O'Dell, where his father was a partner.
 
When he wasn't trying cases, Cohen played basketball, and it was through sports that he got the notion to take the plunge into retail. One day, Cohen was playing at the Jewish Community Center, talking to friend John Domont about how difficult it was to find good athletic shoes in the city. "We talked about how we should open up a store that sells only athletic footwear, sneakers," Cohen said. "We thought it was a great idea. We thought it was a new idea."
 
After a little research, they found it wasn't. There was a franchise called the Athlete's Foot that simply hadn't made its way to Indiana yet. In 1976, Cohen, Domont and Cohen's childhood friend, David Klapper, bought the franchising rights in the state of Indiana for $20,000 and opened their first store on Monument Circle. Klapper, the only one of the three with any retail experience, ran the day-to-day operation. Cohen continued practicing law but spent his lunch hours and weekends at the 700-square-foot store selling shoes. "The best way to understand the product is to sell it," he said.
 
Cohen still remembers how thrilling and tortuous it was to put up the initial $20,000, half of which was borrowed, to become a one-third owner in the Indiana franchise. Cohen had no intention of ever leaving law but the venture offered him an opportunity to invest in a promising business with his friends. Over the next five years, the company grew from one to 10 stores.
 
In 1981, while still running the Athlete's Foot franchise, the partners opened their first Finish Line store in the Speedway Shopping Center. The store was an off-price discount retailer that sold, in addition to footwear, a small mix of athletic apparel, including socks, warm-ups and T-shirts. "We knew we wanted Finish Line to do something a little different (from Athlete's Foot)," Cohen said. "One thing we always knew for sure was, first and foremost, we were always going to be a shoe store." At the same time Finish Line made its debut, Cohen and Klapper picked up two additional key partners: Larry Sablosky, whose family owned Sablosky's Department stores, and Dave Fagin, who was already a Puma footwear salesman for Cohen.
 
In 1982, Cohen officially left the legal world to head his burgeoning footwear company full time as CEO. "He is without a doubt the fairest, most honest man I know," said Klapper, still a senior VP at the company and a member of its board of directors. "With Alan, it's not what is good for a large shareholder or a particular department, it's what is good for everyone." For four years Cohen operated both the Finish Line and the concepts but franchise rules prevented him from expanding outside the state. Having negotiated the original franchise agreement himself, Cohen knew that The Athlete's Foot corporation could not stop him from expanding his athletic-apparel empire beyond Indiana's borders if it carried a different name. By 1986, more than 30 Finish Line stores had opened nationwide and the franchise agreement with Athlete's Foot expired. When it did, the 12 Athlete’s Foot franchises were converted to Finish Line stores. "I never had any intention or knowledge when we opened the first store that it would grow to this," Cohen said. "It was just going to be a passive investment for me."
 
Finish Line continued to grow, and every time the company borrowed money to expand, the owners had to use their homes as collateral, and that got to be a drag. "Indiana National Bank would lend us the money, but they'd always want personal guarantees," Cohen recalls. "There had to be a better way to finance growth." So in 1992, with 100 Finish Line stores operating and $100MM in sales, the company decided to go public. "It was about the best thing we ever did as far as growing the company," Cohen said. "I don't think we really hit the radar charts until we went public." The 1992 IPO and two subsequent offerings generated the money to expand nationally.
 
The stock initially traded for more than $20 per share, perhaps enjoying greater-than-normal acceptance due to the hype surrounding the 1992 Olympics, but eventually the stock price slipped to $12 per share, then $9, and then $6. "It stayed there for about two years," noted Dave Lebedeff, a securities analyst with NatCity Investments Inc. in Indianapolis. Finish Line was making plenty of money, he adds, but the stock languished for months on end. Finally, though, it "shot out of the cannon again."
 
The company then had a period of strong growth adding its 300th store in 1997 and generating $500MM in sales in 1998 (fiscal 1999). In 1999, the company launched its website and opened its 400th store. Then in 2001, the once red-hot licensed apparel business fell off. Finish Line sales fell, too, and the company announced in March 2001 that it would close 17 poorly performing stores. In June of that same year, as the company waded its way through its new positioning plan, selling off aged inventory and closing stores, it felt a financial pinch, a 67% decline in earnings. EPS were $0.05 for the quarter ended June 2, 2001, compared with $0.15 per share in 2000.
 
"Finish Line has had issues," said Dorothy Lakner, specialty retailing analyst for CIBC World Markets in New York. "Its biggest problem has been the apparel business. That has really been the drag in the business." Cohen is the first to admit he and his partners have made mistakes. Maybe the apparel line was expanded too broadly over the years, but, he contends, they have always bounced back. But with the new strategy to narrow the apparel line and broaden the footwear, things turned around.
 
The business recovered and in August 2003, Finish Line opened its 500th store. Then in March 2005, the company opened its 600th store and fiscal 2005 sales surpassed $1B.
 
Cohen said it's easy to put his heart and soul into the company he grew from the ground up. It does not leave a lot of time to pick up new hobbies or go shopping at a mall, unless he is checking out the footwear at other athletics stores. But that's OK, Cohen said, because it's what he has committed his life to. "My time is here. As long as I'm going to be CEO, that's where I will be."
 
“Start with a good concept,” says Cohen, who also won the Entrepreneur of the Year Award in 1991. "That's obviously what we had in 1976, being in a business at the beginning of its growth." He also lists good partners, good associates, a shared dream, solid financing and being prepared to change to meet customer needs as the other key ingredients of success.
 
9 - HQ VALUATION
 
10-K Disclosure
 
“In November 1991, the Company moved into its existing corporate headquarters and distribution center located on 16 acres in Indianapolis, Indiana. The facility, which is owned by the Company, was designed and constructed to the Company’s specifications and includes automated conveyor and storage rack systems, a high speed shipping sorter and a tilt-tray sortation system designed to reduce labor costs, increase efficiency in processing merchandise and enhance space productivity. In 1992, the Company purchased an additional 17 adjacent acres, which brought the total size of the headquarters property to 33 acres. In April 2003, the Company began construction on a 375,000 square foot addition to the office and distribution center in Indianapolis, Indiana. In May 2004, the distribution center portion of the construction was completed and put into service. The new office space was completed in May 2005. The prior office space is currently being renovated and is expected to be completed by the end of fiscal 2007. The expansion brings the facility to 142,000 square feet of office space and 535,000 square feet of warehouse space. In March 2005, the Company purchased an additional 21 adjacent acres, which includes a 112,000 square foot building, thus bringing the total size of the headquarters property to 54 acres.”
 
Timeline
 
·         11/91: 16 acres, HQ, and distribution center
·         1992:  Purchased 17 more acres (46,000 sqft office and 256,000 sqft warehouse)
·         09/02: Tornado
·         04/03: Began 375,000 sqft addition
·         05/04: Finished distribution center
·         05/05: Finished office (142,000 sqft office and 535,000 sqft warehouse)
·         03/05: Purchased 21 more acres and a building (112,000 sqft)
·         12/07: Expected completion of expansion
 
Valuation
 
The land has a book value: $1.6MM. Between 02/05 and 05/05, land increased by $1.242MM when the company purchased of 21 acres in order to expand its HQ. This valuation of $60,000/acre, would imply a total land value of $3.2MM.
 
For the building, $92.15/sqft of office space and $50.93/sqft of warehouse space yields a value of $40.3MM. These numbers represent the cost of construction in Indianapolis according to the 2005 RSMeans Building Construction Cost Data Book (www.stlrcga.org/x546.xml).
 
·         Office: 142,000 * $92.15 = $13.1MM
·         Warehouse: 535,000 * $50.93 = $27.2MM
·         Total Building: 677,000 * $59.58 = $40.3M
 
10 - FINANCIALS
 
 
 
Diluted
 
Net
 
Year
Price
Shares
MV
Debt
EV
1993
$4.75
37,948
180,253
(1,196)
179,057
1994
$2.03
41,268
83,877
(3,668)
80,209
1995
$1.60
41,260
65,810
(978)
64,832
1996
$2.19
41,424
90,615
7,814
98,429
1997
$10.75
47,522
510,862
(82,834)
428,028
1998
$8.19
52,634
431,072
(53,809)
377,263
1999
$6.03
51,666
311,546
(40,924)
270,622
2000
$5.87
50,078
293,958
(24,481)
269,477
2001
$3.44
49,326
169,681
(51,935)
117,746
2002
$8.13
49,366
401,099
(77,853)
323,246
2003
$6.21
48,443
300,831
(73,905)
226,926
2004
$17.31
48,272
835,347
(95,852)
739,495
2005
$20.24
49,377
999,390
(113,166)
886,224
2006
$17.15
49,381
846,884
(96,563)
750,321
LTM
$11.96
47,478
567,838
(47,900)
519,938
 
 
 
Square Footage
 
 
Year
Stores
Ending
Growth
Average
EV/Store
EV/Sqft
1993
130
436
 
392
1,377,362
$411
1994
164
566
29.8%
501
489,081
$142
1995
190
692
22.3%
629
341,219
$94
1996
220
870
25.8%
781
447,405
$113
1997
251
1,088
25.1%
979
1,705,289
$393
1998
302
1,587
45.8%
1,337
1,249,217
$238
1999
358
2,095
32.1%
1,841
755,927
$129
2000
409
2,479
18.3%
2,287
658,868
$109
2001
436
2,654
7.1%
2,566
270,061
$44
2002
449
2,694
1.5%
2,674
719,924
$120
2003
477
2,839
5.4%
2,767
475,736
$80
2004
531
3,081
8.5%
2,960
1,392,646
$240
2005
635
3,519
14.2%
3,300
1,395,629
$252
2006
709
3,865
9.8%
3,692
1,058,281
$194
LTM
731
3,965
8.5%
3,810
711,269
$131









 
Year
Sales
Growth
EBITDA
Margin
EBIT
Margin
Inventory
1993
129,547
 
 
 
15,156
11.7%
39,871
1994
157,011
21.2%
 
 
12,842
8.2%
45,930
1995
191,623
22.0%
17,237
9.0%
14,349
7.5%
55,498
1996
240,155
25.3%
20,971
8.7%
16,989
7.1%
76,088
1997
332,002
38.2%
35,546
10.7%
30,533
9.2%
81,991
1998
438,911
32.2%
48,158
11.0%
40,799
9.3%
130,150
1999
522,623
19.1%
42,933
8.2%
31,946
6.1%
135,303
2000
585,963
12.1%
37,554
6.4%
23,185
4.0%
148,979
2001
663,906
13.3%
32,222
4.9%
15,831
2.4%
145,503
2002
701,426
5.7%
42,150
6.0%
25,832
3.7%
141,878
2003
757,159
7.9%
54,403
7.2%
32,048
4.2%
158,780
2004
985,891
30.2%
98,220
10.0%
74,488
7.6%
192,599
2005
1,166,767
18.3%
124,002
10.6%
96,833
8.3%
241,242
2006
1,306,045
11.9%
132,061
10.1%
97,428
7.5%
268,590
LTM
1,303,824
8.6%
120,339
9.2%
83,871
6.4%
298,438
Median
 
19.1%
 
8.9%
 
7.5%
 
Average
 
19.8%
 
8.6%
 
6.9%
 
 
 
Inflation
 
Inflation Adjusted per Sqft
Year
Rate
Multiple
 
Sales
EBITDA
EV
Inventory
1993
3.03%
1.387
 
$458
 
$570
$127
1994
2.96%
1.347
 
$422
 
$191
$109
1995
2.61%
1.308
 
$399
$36
$123
$105
1996
2.81%
1.275
 
$392
$34
$144
$111
1997
2.93%
1.240
 
$420
$45
$488
$93
1998
2.34%
1.204
 
$395
$43
$286
$99
1999
1.55%
1.177
 
$334
$27
$152
$76
2000
2.19%
1.159
 
$297
$19
$126
$70
2001
3.38%
1.134
 
$293
$14
$50
$62
2002
2.83%
1.097
 
$288
$17
$132
$58
2003
1.59%
1.067
 
$292
$21
$85
$60
2004
2.27%
1.050
 
$350
$35
$252
$66
2005
2.68%
1.027
 
$363
$39
$259
$70
2006
3.39%
1.000
 
$354
$36
$194
$69
Median
 
 
 
$358
$35
$171
$73
Average
 
 
 
$361
$31
$218
$84










 

Catalyst

Potential MBO/LBO or sale to strategic buyer
Early 2007 turnaround in performance
    sort by    
      Back to top