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BEHIND THE NEWS: Why Finish Line is betting company on Genesco buyout

July 2, 2007

Here's a paradox: If Finish Line Inc. CEO Alan Cohen hadn't run his company with such a conservative hand through the years, he wouldn't have been in a position to launch the audacious acquisition of Genesco Corp.-a retailer with nearly twice the stock-market value.

The fact that Finish Line carried no debt-a strategy that irked some shareholders as overly cautious-meant the Indianapolis firm had the financial wherewithal to pull off the $1.5 billion buyout.

In a report, BB&T Capital Markets analyst David Turner called Finish Line "the proverbial mouse that roared."

Indeed, at first glance it almost seems as if the 60-year-old Cohen has lost his senses.

Oppenheimer analyst Bernard Sosnick put it best, during a conference call with company management hours after the deal was announced June 18: "Alan, is that really you? The guy who's been so conservative with the balance sheet?"

Here's another paradox: While Finish Line plans to borrow nearly the entire purchase price, thereby becoming one of the nation's most leveraged retailers, in a way it's doing so to reduce risk.

As counterintuitive as that might seem, it isn't to the company's veteran management team. Top brass has done a yeoman's job leading the company since it went public in 1992-in the years since, the shares have quadrupled, even with their recent swoon. But it's been a bumpy ride, with extended stretches where athletic apparel and shoes fell out of fashion.

This is one of those times. Samestore sales at Finish Line locations tumbled 5.9 percent in the latest fiscal year and 4.1 percent in the first fiscal quarter.

The company has few tools to level out the bumps. While it also operates the hip-hop apparel chain Man Alive and the women's athletic retailer Paiva, they remain small compared with the 694-store Finish Line.

Genesco, on the other hand, has a long line of mall chains, which presumably will peak at different times. The biggest is Journeys, which sells skate-and-surfinspired shoes and accessories. Others include the urban retailer Underground Station and Hat World, a chain founded in Lafayette that now has its headquarters in Indianapolis.

"What we are trying to do is create a situation where we have some diversity, and we have the ability to act and react," Cohen said on the conference call.

"If in fact a particular banner is really running strong, or if we think trends are going to get strong, that's certainly a banner that we'd want to put more capital into and maybe grow faster. If a banner is in a soft period because of trends, then we have the ability to slow down the growth of that particular banner without necessarily slowing down the growth of the entire company."

JP Morgan analyst Robert Samuels applauds the approach.

"Companies with diverse brand and retail strategies will be best positioned going forward to weather changes in fashion and consumer preferences," he said in a report.

BB&T's Turner said the acquisition also reduces Finish Line's reliance on a single vendor, Oregon-based Nike Inc., which "has not always been the most willing partner." Fifty-one percent of Finish Line's purchases last year were from Nike.

That's not to say analysts are calling the acquisition a slam-dunk success. All the concerns come back to the hefty debt Finish Line plans to take on. Worst case: If managing the far-flung business proves tougher than expected, and operations slump, Finish Line could slide into bankruptcy court.

The deal "entails huge execution risk," Susquehanna Financial Group analyst John Shanley wrote in a report.

Mall heavyweight

If Finish Line completes the deal, it will overnight become one of the top tenants of locally based Simon Property Group Inc., the nation's biggest mall owner.

By itself, Genesco was Simon's 10thbiggest non-anchor tenant, ranked by rent, according to Simon's regulatory filings. The addition of Finish Line might elevate the combined company into the top five.
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