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BEHIND THE NEWS: Finish Line's stock surge salves investors' wounds

July 7, 2008

Finish Line Inc. always has been a volatile stock. Jump in at the right time and make a bundle. Pick the wrong time and take a bath.

To be sure, investors who had the foresight to invest during Finish Line's darkest days early this year-when it seemed inevitable that the company would have to close on the $1.5 billion acquisition of Tennessee-based Genesco Inc.-fall in the former category. Since hitting an all-time low of $1.48 a share Jan. 10, the stock has risen sixfold in value.

But the run might not be over yet. Analysts in recent weeks have turned almost universally upbeat about the company's prospects-fueled, in part, by surprisingly strong fiscal first-quarter results released June 26.

"Finish Line is off to the races again," Bernard Sosnick, an analyst with Gilford Securities, wrote in a June 27 report.

With the economy slumping, investors have every reason to be leery of retail stocks. After all, it doesn't take an economist to know that $4-a-gallon gas takes a bite out of the disposable income consumers might otherwise plop down for a $100 pair of Nike sneakers.

And the 700-store Finish Line chain is in a notoriously fickle field. Apparel lines, especially, slide in and out of fashion.

As CEO Alan Cohen acknowledged in a June 27 conference call with analysts, "We've struggled now for ... two to three years with the apparel end of the business. Really, what's happened is there are no drivers. There is nothing that is that relevant or that important to our consumers that we can carry in our stores that will differentiate us and be meaningful to the consumer."

Even so, the company impressed analysts by tightly controlling apparel inventory in the fiscal first quarter, which ended May 31, and by eking out a chainwide same-store sales increase of 1.6 percent.

Profit from continuing operations was $868,000, or 2 cents per share-far better than the 5-cent-per-share loss forecast by analysts.

Fueling analyst optimism was a strong start to the summer. With all but the last few days of June factored in, same-store sales for the month were running 10 percent ahead of a year earlier.

Then there's the upcoming Summer Olympics-an event that typically juices sales for all athletic specialty stores. This year's games are set to begin Aug. 8 in Beijing.

"There is building evidence that part of the performance athletic footwear segment (particularly marquee basketball and running) may be entering a period of resurgence in popularity after a couple of years of a general downturn," B Riley analyst Jeffrey Van Sinderen wrote in a report.

Sinderen has a $9.50 price target on the stock, up about 7 percent from where it now trades. Gilford's Sosnick strikes a more bullish tone, saying the stock price might rise into the teens.

Cohen passes on bonus

Is Finish Line CEO Alan Cohen punishing himself for pursuing an acquisition that nearly sunk his company?

The chain's recently filed proxy statement shows that in March he turned down $219,400 in bonuses the board's compensation committee had awarded him.

The proxy does not state a reason, and a company spokeswoman declined to elaborate on why he took a pass.

But it wasn't the best of years for Cohen, 61, who helped found the company 32 years ago.

Soon after he negotiated the highly leveraged Genesco purchase last June, the economy soured and credit markets slid into disarray. Fearing the deal would send Finish Line into bankruptcy, Cohen backtracked. To extricate itself from the deal, Finish Line agreed to pay Genesco $39 million in cash, along with more than 6.5 million shares of the company.

Even after forgoing the bonuses, however, Cohen did all right last year. Salary and other compensation topped $1.24 million.

Genesco bounces back

Finish Line had agreed to buy Genesco for $54.50 a share-a price more than 40 percent higher than where it now trades.

Still, the outlook recently has brightened for the Tennessee company, which operates Journeys, Hat World and other mall chains. Like Finish Line, Genesco surprised investors with surprisingly robust fiscal first-quarter results.

The upbeat May 29 report has ignited the stock-which now fetches about $30, nearly double its March low.
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