BEHIND THE NEWS GREG ANDREWS gandrews@ibj.com: With Finish Line stumbling, analysts weigh sale, LBO

September 11, 2006

Finish Line Inc.'s fortunes have dimmed so dramatically in recent months that analysts are raising a range of ideas that once seemed farfetched to boost the slumping stock. Among them: taking the company private through a leveraged buyout, or selling it to a larger retailer.

The athletic-shoe industry is abuzz that an LBO for Finish Line's struggling rival, New York-based Foot Locker Inc., is already afoot. That company last month hired a financial adviser, just weeks after Women's Wear Daily reported that private equity firms Kohlberg Kravis Roberts & Co. and Apollo Management were pursuing a leveraged buyout.

Both mall retailers are coping with a sharp fashion shift away from athletic apparel and shoes. Finish Line last month said same-store sales for the quarter ended Aug. 26 slid 6.6 percent. It also announced that, "based on uncertainty in our current business environment," it will no longer make financial projections.

Analysts say the company is responding to the shift by bringing more fashionoriented styles into its stores. However, that's no panacea, "because there's much more competition in this arena" from other mall retailers, CIBC World Markets analyst Dorothy Lakner said in a report.

The difficulties are taking a toll on the company stock, which for years was a star performer. Since peaking at nearly $23 a share in March 2005, Finish Line stock has shed half its value. The stock was trading Sept. 7 at $11.17, giving the company a market value of $531 million.

Amid the tumult, one of Finish Line's top executives, Timothy Geis, 46, quietly stepped down last month as senior vice president and general merchandise manager. Oppenheimer & Co. analyst Bernard Sosnick said in a report that "Finish Line is now looking for a senior merchant with broad fashion experience who might be capable of managing the business better during downturns."

What do Finish Line executives have to say about all this? They're not talking. Through a spokeswoman, CEO Alan Cohen declined to answer questions about strategy or whether he'd consider a sale, citing "competitive and legal reasons."

To be sure, Finish Line, which has been public since 1992, has rebounded from such shifts before. And the company has the financial firepower to weather an extended slowdown in its business. As Hilliard Lyons analyst James Lykins noted in a report, Finish Line is sitting on more than $60 million in cash and liquid investments, and has no debt.

The company's pristine balance sheet would be a big draw to private equity firms, which like to put in as little cash as possible while ratcheting up the debt of the firms they acquire.

And the private-equity buyout game has never been hotter. Buyout funds raised a whopping $131 billion last year, double the total in 2005, and increasingly they're eyeing retail deals.

In January, a group of private equity firms agreed to buy Colorado-based Sports Authority, the nation's biggest sporting goods chain, for $1.3 billion. In May, Boca Raton, Fla.-based Sun Capital Partners agreed to buy Fishers-based Marsh Supermarkets Inc. for $88 million.

Despite the hot market, Finish Line's "earnings deterioration and uncertain fashion outlook for athletic probably dim any near-term LBO prospects," Merrill Lynch analyst Virginia Genereux said in a report. However, she said Cohen might eventually consider merging his company into another retailer.

As one possibility, she cited Tennesseebased Genesco Inc., operator of Journeys and other mall chains. The Genesco name may ring a bell. Two years ago, it scooped up the Indianapolis-based Hat World chain for $165 million.

Ultimately, though, the only sure way to get Finish Line's stock price up is for the company to improve performance.

Analysts say that won't happen overnight.

Sosnick said the slump in athletic apparel and shoes may extend into spring, or beyond. He said the company can blunt the impact by changing its product mix. But because of long lead times for ordering merchandise, Sosnick said, the changes may not show up in a meaningful way until the holiday shopping season.

"We advise investors not to be tempted by seeming value until there is greater clarity about the earnings outlook," Sosnick said in a report.

Not everyone is so bearish, however.

In a July regulatory filing, New Yorkbased mutual fund company Royce & Associates disclosed it has amassed 4.3 million shares, or 10 percent, of Finish Line's Class A shares.

Royce's money managers specialize in investing in small companies they believe are undervalued. Company officials declined to comment on their Finish Line holding, which is worth $47 million.
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