Finish Line escapes one crisis, but challenges abound: Indianapolis-based athletic-wear retailer now shifts its attention to reinvigorating sales after prolonged slump

Keywords Economy / Environment

Executives at locally based The Finish Line Inc. felt a weight lifted after escaping a potentially ruinous attempt to acquire Genesco Inc., a company more than twice its size.

But there’s no time for rest: They now must focus on a core business that was floundering even before Finish Line bid $1.5 billion in June 2007 for the Tennessee-based parent company of mall chains Hat World, Lids and Journeys.

Finish Line this month reported its eighth consecutive quarter with declining same-store sales. Net sales fell for the seventh time in nine quarters. And a looming recession could inflict even more pain on athletic retailers.

“It’s tough out there,” said Christopher Svezia, a footwear and athletic retail analyst with New York-based Susquehanna Financial. “Finish Line tiptoes away from this whole situation and now has to find its position in the market. They’ve been under this enormous burden. Now they can focus in on their business-a business that is tough in this environment.”

Finish Line’s agreement to cancel its acquisition also obliterates a cash cushion the company once enjoyed. To opt out of the deal, Finish Line agreed to pay Genesco $39 million in cash, along with more than 6.5 million shares of the company-a stake valued at more than $25 million. Swiss giant UBS, which offered financing for the deal, agreed to pay the balance of a $175 million settlement, which came a day before a trial was scheduled to begin in New York.

The companies had tangled over whether Finish Line and UBS should be forced to close on the deal as sales numbers slid for both retailers. Finish Line accused Genesco of hiding financial data that could have scuttled the deal, while Genesco argued Finish Line was looking for excuses to back out after the economy took a turn for the worse.

In a company statement, Finish Line CEO Alan H. Cohen described the March 4 settlement as “a positive step.”

“With the litigation firmly behind us, we will be able to focus all of our resources and attention on our fiscal 2009 goals and strategic priorities,” he said.

Through a spokeswoman, Cohen declined an interview request.

Wall Streets analysts who follow Finish Line hailed the cancellation of the deal as good news, despite the costs. Investors bid up the company’s shares more than 40 percent, while punishing those of Genesco.

Kate McShane, an analyst with New York-based Citigroup Global Markets, described the agreement as a “Get out of jail (almost) free card” for Finish Line, which operates about 700 Finish Line stores in 47 states and 94 Man Alive locations in 19 states.

“We view the announcement as a strong positive for Finish Line, enabling management to return to the core business,” McShane wrote in a research note.

The company has shown signs of improvement, she wrote, including exclusive products like a new line of Nike crosstrainers. But she said Finish Line stock still warrants a 30 percent discount to its top rival, New York-based Foot Locker.

Among the reasons: Finish Line is much smaller than Foot Locker, which has 3,900 stores; Foot Locker has closed underperforming stores more quickly, including 300 locations in 2007; and further industry consolidation is likely.

McShane predicts Finish Line’s core business will continue to “languish” thanks to “intense competition and an uncertain consumer outlook.”

A lot has changed since Finish Line agreed to buy Genesco. Mall footwear retailers have been hurting for almost a year, and most are closing stores, said Svezia, the Susquehanna analyst.

“Finish Line certainly has its challenges,” he said. He noted that Paiva, a 15-store chain for upscale women the company launched in 2006, failed to take off and was shuttered last summer.

At the same time, he said, “The core business is nearing saturation. There’s a realization within the malls that there is contraction in unit growth.”

Now, at least, the core business will get the full attention of Finish Line’s executives.

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