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BEHIND THE NEWS: Nike's retail plan casts another cloud over Finish Line

March 5, 2007

I n d i a n a p o l i s - based Finish Line Inc. already had enough challenges, but here's another: Nike Inc., Finish Line's largest supplier, is revving up its own retail ambitions.

Analysts, at least, see the Oregonbased company's move as a competitive threat. For its part, Finish Line notes that Nike plans to open just 100 of its own stores over the next three years, and only 50 would be in the United States, where Finish Line operates its 691 stores.

Finish Line spokeswoman Elise Hasbrook calls Nike a "partner." It's "not a competitive relationship," she said.

Analyst David Turner isn't so sure, and in early February downgraded his ratings on both Finish Line and Foot Locker Inc., its New York-based rival.

"Anecdotal evidence suggests Nike's new initiative leans more toward an aggressive rollout, one that will be perceived more negatively than it currently is by the market," Turner, an analyst with BB&T Capital Markets, wrote in a Feb. 5 report.

That's not the only knock against Finish Line and Foot Locker these days.

Both are wrestling with a big consumer shift away from high-end athletic shoes. The Indianapolis company is racing to adapt, bringing more casual, fashion-oriented shoes into its stores. But the move won't pay off overnight-which helps explain why Finish Line shares are trading at $12.75, off 45 percent from their March 2005 peak. In the nine months ended Nov. 25, sales at Finish Line stores open at least a year slumped 5.9 percent.

Given both the shortand long-term challenges, Turner said in his report, "It is difficult to maintain a remotely bullish investment thesis for the athletic footwear retailers."

Citigroup Global Markets analyst Kate McShane added: "Once the change in product assortment is completed, we are not certain it will put Finish Line in a better competitive position than it was previously, since it is deviating from its core competency, selling performance footwear." Here's the good news: Finish Line has successfully navigated fashion shifts before. The company, which went public in 1992, saw its stock shed 70 percent of its value in the second half of 1998. Then, performance improved, and the stock roared back.

Yet analysts say a repeat performance is no sure bet. For one thing, the shift to casual styles puts Finish Line in direct competition with Tennessee-based Genesco Inc., whose Journeys chain already has a loyal customer base.

As Merrill Lynch analyst Virginia Genereux wrote in a report, "Journeys knows this suburban-type skate-surf customer extremely well, and we wonder if Finish Line is too closely mimicking that buy."

Three-chain strategy

Then there are risks inherent in Finish Line's strategy of trying to expand its two new concepts, Man Alive and Paiva. Finish Line bought locally based Man Alive, a hip-hop apparel chain then with 38 stores, for at least $12 million in January 2005. It's since expanded to 88 stores, and plans at least 15 more this fiscal year. In the quarter ended Nov. 25, sales of stores open at least a year rose 3.1 percent.

Paiva, a high-end apparel and athletic shoe chain for women, is another story. The 1-year-old chain now has 13 locations, and two more will open soon. But Finish Line over the next year plans to suspend new store openings while it fine-tunes the concept, Citigroup's McShane said in a report.

"Management admitted [that] while they are getting positive feedback from customers and landlords, management states it is harder to start a brand from scratch than originally thought," the report said.

Of course, if analysts' concerns about Finish Line are overblown, this might be a great time to buy the stock. Analysts note that the myriad risks already are priced into the shares. And if the recovery doesn't work out, they say, Finish Line's board probably could sell the company to a private equity firm, or perhaps even to Nike, at a premium to where it now trades.

As Morningstar.compoints out in a new report, sometimes going against the crowd is a great way to make money. The research firm includes Finish Line as one of 10 stocks in its 2007 contrarian portfolio.

"Finish Line's 2007 offerings tended to be a bit out of step with current fashion trends," the report notes. "Nevertheless, we believe that the firm has carved out a nice little niche for itself, and its efforts to cater to women should pay off in the future."
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