The quick version of the
thesis is that FINL is one of the cheapest publicly traded retailers on a
trailing EV/EBITDA multiple (bottom 5% of largest 150 retailers), trades at a
low-teens forward P/E multiple on suppressed margins, has about $1/share in cash,
is being valued at a 30-40% discount to its peers (Foot Locker) despite having
a better track record and is trading well below the private market as well as
replacement value. In addition, sell-side expectations are low, have already
priced in a recession, and analysts have ignored the fact that two new store concepts
are temporarily negatively suppressing margins. Finally, management is
top-notch, founders 11% of the shares, has a long record of consistent growth,
and has historically bought back stock when shares were near a low (In Q2 alone,
the company purchased an additional 2.4% of its shares outstanding).
Due to a combination of
missing a fashion trend in footwear and a weak retail environment, the company
has continually lowered its guidance. The negative sentiment created from these
revisions have weighted upon the stock to the point that the day after the
company announced its most recent revision and discontinued future guidance (a
big statement from a management team that formerly provided guidance for all
four quarters in the coming fiscal year) shares actually closed up 1% (pretty
rare for a retailer these days). Over the last twelve months, shares have
traded between $19.29 and $9.55 and are currently priced around $11.94. It
doesn’t look like retail expectations are going to turn bullish any time soon,
which means that investors might be lucky enough to get another chance to
acquire shares in the $9-11 range.
On September 8, Clinton Group
filed a 13D, after acquiring 5.1% of the shares over the last few months, and
encouraged management to buyback more shares, remove its dual-class structure
so that a takeover would be possible, and to consider strategic alternatives. I
will let VIC members read the filing themselves but the bottom line is that Clinton believes that FINL is worth $17-21 and potentially more to a strategic buyer.
Diluted Shares (05/27): 48.6MM
Q2 Buyback (08/31): 1.2MM shares for
$14.2MM ($12.39/share)
Adjusted Diluted Shares: 47.5MM
Market Value: $567.8MM
($11.96/share)
Adjusted Cash &
Securities: $47.9MM ($1.01/share)
Enterprise Value: $520MM
($10.95/share)
F04 Earnings (Ended 02/04): $47.3MM ($1.00/share)
F05 Earnings (Ended 02/05): $61.3MM ($1.29/share)
F06 Earnings (Ended 02/06): $60.5MM ($1.27/share)
F07 Estimates (Ending 02/07): $36.0MM ($0.76/share)
F08 Estimates (Ending 02/08): $43.2MM ($0.91/share)
F07 Guidance (01/26): $1.35-1.39
F07 Revision (03/23): $1.33-1.37
F07 Revision (05/18): $0.85-0.95
F07 Revision (08/24): $?
MEMO SUMMARY
1 - Valuation
2 - Business Description
3 - Store Differentiation
4 - Growth Potential
5 - Man Alive & Paiva
6 - Unit Economics
7 - Recent Events
8 - Management
9 - HQ Valuation
10 - Financials
1 - VALUATION
Finish Line’s EV is currently
around $520MM ($10.96/share). To try to get the value of the core Finish Line
stores, we need to strip out a few things. The company has a HQ with a
replacement value of $43.5MM ($0.92/share). As of the end of Q2, the company
had 76 Man Alive stores (243,000 square feet) and 6 Pavia stores (24,000 square feet). The company paid $12.3MM
($0.26/share) for the Man Alive chain and has since invested around $16.4MM ($0.35/share)
in fixed assets for new stores. Pavia’s six stores have cost the company around $4.8MM
($0.10/share). In total, the company has paid $33.5MM $(0.71/share) for both of
these new ventures.
If we subtract out the value
of these assets we are left with in an implied EV of $443MM ($9.33/share) for
the remaining Finish Line stores. At the end of Q2, these stores represented
3,761,000 square feet. At their replacement value of $100/sqft, they would be
worth $376.1MM ($7.92/share). That leaves us with $66.9MM ($1.41/share) which
we can look at two ways. The first is that the company has $173.2MM ($3.65/share)
in net working capital, so you are getting a 61% discount on this value. The
second way is that you are paying an additional $18/sqft for the stores for a
total of $118/sqft, comfortably below the $147/sqft that it would cost Finish
Line to replace these assets.
Downside Scenario Value
So let’s completely ignore
Man Alive, Pavia, and the HQ. If things get really bad, I would expect
the 3,761,000 square feet of Finish Line stores to generate $300/sqft in sales
and only report a 4% operating margin. Looking back over the last 14 years, the
company’s worst two years were 2001, when operating margins were 2.4% on
inflation-adjusted sales of $293/sqft and 2002, when operating margins were
3.7% on inflation-adjusted sales of $288/sqft. The company has continued to
improve working capital turns and operational efficiency over the last five
years so to extrapolate a 4% EBIT and $300/sqft environment indefinitely would
suggest a pretty horrific long-term view for FINL. After-tax, this would imply earnings of $7.50/sqft which is equivalent
to something a little over $28.2MM ($0.59/share).
D&A will be $35-40MM this
year while maintenance capital expenditures have been between $12-14MM in each
of the last three years (I get this number by subtracting out the capex for new
store growth from total capex). This discrepancy should be an additional source
of cash flow for investors. Assuming a $20MM spread, this is an additional
$0.42/share in FCF. I anticipate that the discrepancy between these two
numbers will persist for 3-5 more years for two reasons. The first is that
almost half of the company’s stores are less than three years old and the
second is that the company depreciates its assets over 5-6 years while the
economic life is closer to 8-10.
Finally, let’s assume
management keeps its $47.9MM ($1.01/share) of cash on its balance sheet and
earns a 5% before-tax return. That’s worth another $0.03/share. In total, I get
$1.04/share in FCF. Given the pessimism embedded in these assumptions,
an 8.7% FCF yield on trough earnings when ignoring the other
assets does not seem too bad at all. Furthermore, this scenario is fairly close
to what sell-side analysts are assuming for the foreseeable future. For
example, Merrill Lynch is assuming a 3.7% operating margin in fiscal 2008.
Base-Case Scenario Value
My base-case valuation is a
little bit more realistic. Over the last 14 years, operating margins have
averaged 6.9% with a median of 7.5%. In addition, over this same period,
inflation-adjusted sales/sqft has a median of $358 and an average of $361.
Combining a 7.0% operating margin with $350/sqft in sales results in after-tax
income of more than $15/sqft. These assumptions would imply total income of $57.5MM
($1.21/share).
On a historic basis, 7%
certainly seems like a realistic expectation, but it also makes sense on a
relative basis as well. Here is a look at the operating margins of a few
competitors:
|
|
EBIT Margin
|
Company
|
Ticker
|
LTM
|
Forward
|
Hibbett
|
HIBB
|
11.3%
|
8.3%
|
Genesco
|
GCO
|
8.5%
|
8.3%
|
Stride Rite
|
SRR
|
7.7%
|
8.0%
|
DSW
|
DSW
|
7.0%
|
6.8%
|
Foot Locker
|
FL
|
6.6%
|
6.8%
|
Finish Line
|
FINL
|
6.6%
|
4.2%
|
Footstar
|
FTAR.OB
|
6.4%
|
n/a
|
Shoe Carnival
|
SCVL
|
5.2%
|
5.4%
|
Brown Shoe
|
BWS
|
5.0%
|
4.5%
|
Payless
|
PSS
|
5.0%
|
5.7%
|
Shoe Pavilion
|
SHOE
|
4.7%
|
5.1%
|
The Sports Authority
|
|
4.4%
|
n/a
|
Now let’s assume that management
returned the extra $1.01 in cash. In addition, management could decide to sell/lease-back
its HQ for $43.5MM ($0.92/share) at a 7% cap rate, essentially pocketing the
proceeds while only negatively impacting annual EPS by $0.04. Finally, let’s
assume that Pavia and Man Alive might actually be worth the $33.5MM ($0.71/share)
that management has cumulatively paid for them.
The result would be
$2.64/share in value which would bring down our effective price on the Finish
Line stores to $9.32. EPS would be $1.21 less $0.04 in rent expense or $1.17.
Adding back the D&A shield gets us to $1.59 in FCF per share or a 17% FCF yield.
Upside Scenario Value
If you really wanted to look
for further upside, I would point out three things that could drive earnings
past what I laid out in a base-case scenario. The first is that around a year
ago management was targeting 10% EBIT margins by 2008, if things get back on
track and this becomes an accomplishable target in 2009 or 2010, the operating
leverage is substantial. In January of this year, management guided that the
company could generate EPS of $1.37. While this guidance did include $0.06 due
to the fact that 2007 has 53 weeks, “normalized” EPS of $1.31 would have been
the midpoint of that guidance. Since then, the company had deployed more
stores, generated cash, and bought back shares. Second, all of these scenarios
have neglected to give credit for any future growth, a fairly conservative
assumption given the company’s track record. Third, the company should continue
to buy back shares whenever prices trade around the $12 level, and over time,
this should continue to build shareholder value.
Private Market Value
On May 7, 2004, Foot Locker completed its acquisition of Footaction.
At the time of the acquisition, Wells Fargo analyst John Shanley estimated that
the Footaction units would bring Foot Locker an additional $500MM in sales over
the following year. This would imply a valuation for Footaction of 0.45x
projected revenues. Analysts expect FINL to report $1.34B in 2007. Using this private market multiple would
imply an EV of $603.0MM value $12.69/share for Finish Line (this excludes HQ
and cash of worth $1.93). Using this metric, Finish Line appears to be close to
a private market value, however one could easily argue that Finish Line should
trade at a premium since Footaction was purchased out of bankruptcy, was
under-inventoried, and required additional investment to return the stores to a
competitive state of operations.
Let’s look at the acquisition
price another way. Foot Locker’s 2005 10-K reveals that Footaction has 349
stores at an average of 3,000 square feet, which is around two-thirds the size
of an average Finish Line store. Assuming that this square footage has not
changed materially since the purchase, Foot Locker paid $225MM for 1,050,000
square feet or $214/sqft. Finish Line’s CFO, Kevin Wampler, told me that Finish
Line submitted a bid of $195MM for the company but that they had expected to
pay around $225MM because turning around Footaction would require around $30MM
of store closure costs. I think it is fair to assume that Foot Locker might
also have had to pay these as closure costs after it acquired Footaction.
Adding $30MM or $29 per square foot results in an effective purchase price of
$255MM or $243/sqft. If this valuation is applied to the total square footage
of Finish Line stores, or 3.761MM, it would imply a valuation of $866MM
($18.24/share), excluding the value of Man Alive, Pavia, the HQ, and the net cash balance.
Replacement Value
As of Q2, and after adjusting
for the buyback, Finish Line had a book value of 418.7MM or $8.82 a share.
However, a few numbers from the company’s 10-K reveals what it would cost
$674.6MM ($14.21/share) to replace the company’s asset base.
|
Finish Line
|
Man Alive
|
Pavia
|
Total
|
Square Feet
|
3,761
|
243
|
24
|
4,028
|
Cost/Sqft
|
$100
|
$120
|
$200
|
$102
|
Replacement
|
376,100
|
29,160
|
4,800
|
410,060
|
|
|
|
|
|
|
|
Fixed-Assets
|
|
410,060
|
|
|
NWC
|
|
173,151
|
|
|
HQ
|
|
43,500
|
|
|
Cash
|
|
47,900
|
|
|
Market Value
|
|
674,611
|
|
|
Per Share
|
|
$14.21
|
Relative Value
Rather than lay out the
relative valuation gap in detail (its pretty obvious) I thought that it would
be more helpful if I offered a few reasons why FINL might deserve a premium multiple to FL.
·
A lot of FL's
scale benefits are lost on weaker performing businesses and multiple segments
·
FINL trades at a lower forward P/E, and is even more
attractive after adjusting for cash
·
Gross margins for
both businesses are 30% and the 10-year range has been 25.4-31.7% at FINL versus 24.6-32.2% at FL
·
FINL has grown revenues consistently in the double digit
range, and prior to last year the lowest quarter year over year was 4.7% in Q3
2003 versus FL, whose revenues appear to have declined from 1996 through 2001
and have since been climbing back at an annual rate of 3-5%
·
EBITDA margins for
both companies were recently around 10% but the 10-year-range is 4.9-11.0% for FINL versus 4.2-10.3% for FL
·
FINL's share count has consistently decreased from 53MMM to 48MM since 1998 while FL's share count has consistently increased
from 135MM to 156MM
·
Over the last 10
years, days inventory has consistently increased for FL from 68 to 81 while it
has fallen for FINL from 115 to 89
·
Last year FINL has around 45 days payable versus 33 for FL,
FL has increased from 20 to 30 over the last decade but
its interesting that FINL gets seemingly better terms
·
Last year FINL's ROE is 17.2% versus 15.1% for FL, and I believe the ROIC
opportunities for FINL are still higher than those available to FL
2 - BUSINESS DESCRIPTION
Finish Line currently
operates 672 Finish Line, 76 Man Alive, and 6 Paiva stores. Around 38 of the
Finish Line stores average more than 10,000 square feet and are stocked with
1,000 to 1,300 styles and 20,000 to 30,000 shoes. Each of the remaining 636
standard Finish Line stores carries more than 10,000 shoes. Typically, these
stores will show between 600 and 800 different kinds of athletic footwear,
including basketball, running, walking, gym, aerobics, hiking, cross-training
and skate shoes, cleats, casual shoes, and sandals. Brands carried by Finish
Line include Nike, adidas, Reebok, New Balance, And 1, Oakley, Puma, Airwalk,
Converse, Fila, Lugz, Saucony, Timberland and Vans. Finish Line predominantly
sells Nike products, in 2005 for example, the company purchased 58% of its
product from Nike while its next top four suppliers totaled only 23% of annual
purchases. Given the heavy exposure to Nike, it should be no surprise that over
long periods of time, FINL essentially trades like a levered NIKE: finance.yahoo.com/q/bc?s=NKE&t=my&l=off&z=l&q=l&c=finl
While 80% of Finish Line’s sales
come from shoes, the remaining 20% comes from apparel and accessories. This
includes products from Nike, Oakley, adidas, Fossil, Jansport, professional and
collegiate licensed products, t-shirts, shorts, caps, and outerwear. The
apparel mix is roughly 35% private-label, 30% licensed, and 35% branded
products.
Finish Line’s sales tend to
be less seasonal than the majority of retailers with about 23% of annual sales
in Q1 (Spring), 27.5% in Q2 (Back to School), 20% in Q3 (Fall), and 30% in Q4
(Christmas). While the bulk of profits are generated in Q4 and Q2, the company
has typically been profitable in all four quarters. From 1993 through 2005,
sales per average square foot have ranged between $256 (2000) and $354 (2006).
Management claims that some stores generate $500 to $700 in sales per square
foot.
From 1995 through 2006, rent
expense has ranged between $20 and $24 per average square foot. The company
does have a liability balance for deferred landlord credits which represents
lower rents during the early years in a lease than would be recognized if the
lease were to be accrued for on a straight line basis. I inquired about
deferred landlord credits and was told by management that if Finish Line
elected not to grow, the company’s cost structure would not be materially
different ten years from now than it is today.
Finish Line offers a number
of exclusive products from its manufacturers as well as its own private label
line “FINL 365.” In 2005, Finish Line received 40,000-50,000
hits per day on its website and had increased the mailing frequency of its
catalog from four to seven times a year and tripled the circulation.
3 - STORE DIFFERENTIATION
Finish Line has around 7% of
the U.S. athletic footwear market while its largest
competitor, Foot Locker, has a 19% share. The Foot Locker concept (excluding
Kids Footlocker and Lady Foot Locker) has approximately 1,398 domestic shoe
stores consisting of 5.6MM square feet of floor space. In comparison, the Finish
Line concept has only 672 stores consisting of 3.8MM square feet of domestic
floor space. The main differentiator between Finish Line and its competitors is
the size of its store. The average Finish Line store is around 5,641 square
feet (70% selling space), slightly larger than the 4,000 square feet for an
average U.S. Foot Locker. This additional size enables a typical Finish Line
store to carry 600-800 styles versus only 300-400 for a typical U.S. Foot
Locker. Finish Line uses its large size competitively to try out and carry more
brands. In 2005, Finish Line rolled out the Phat Farm brand and in 2006 rolled
out Penguin, Lacoste, and has a mall exclusive with Sean John footwear. The
company is planning on rolling out some new displays to increase apparel
density and offer even more product per square foot.
According to Finish Line’s
founder and CEO, Alan Cohen, "We've been going against Foot
Locker all the years we've been in business. We conceptually have a store
that's better. It's much friendlier to the consumers. They like our
store." His point is reiterated in exit polls, where the number one reason
people say they shop at Finish Line is selection. In fact, Finish Line appears
to be in a niche amongst mall-based retailers that enables it to compete
against Wal-Mart, Target, Dick’s, and other big-box chains. For some shopper
demographics, size is a disadvantage. In the late 90’s Foot Locker experimented
with a large footprint concept that combined many of their brands into a single
location. The experiment was a failure and Foot Locker has been abandoned this
concept in favor of smaller, single-themed stores. I believe that Finish Line’s
typical male demographic is between 15 and 30 years old and on a recent
conference call Cohen said, “It’s no secret our customer from the female
perspective in the Finish Line store is probably 13 or 14 to 22.”
In the past, vendors have
given preferential treatment to Finish Line over Foot Locker due to fears that
Foot Locker is becoming the Wal*Mart of the shoe industry. In some sense,
Finish Line is in a sheltered position because its vendors want it to continue
to succeed so that they can have a reliable second customer in the marketplace.
4 - GROWTH POTENTIAL
Looking at the square footage
data below, it is clear that pressure from the Internet and big-box retailers
has taken capacity from the athletic footwear retail industry over the last
decade.
Year
|
1997
|
1998
|
1999
|
2000
|
2001
|
2002
|
2003
|
2004
|
Foot Locker
|
3,839
|
3,767
|
3,419
|
3,372
|
3,442
|
3,497
|
3,447
|
3,442
|
Lady Foot Locker
|
814
|
844
|
820
|
839
|
816
|
781
|
723
|
816
|
Kids Foot Locker
|
260
|
384
|
570
|
574
|
567
|
547
|
514
|
567
|
Champs
|
2,408
|
2,628
|
2,387
|
2,373
|
2,280
|
2,292
|
2,244
|
2,280
|
Footaction
|
4,120
|
2,517
|
2,484
|
2,521
|
2,384
|
2,146
|
2,035
|
1,531
|
Just For Feet
|
1,435
|
3,388
|
2,413
|
1,593
|
1,540
|
1,645
|
1,540
|
-
|
Sneaker Stadium
|
684
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Athletes Foot
|
1,049
|
959
|
1,200
|
1,185
|
1,274
|
1,160
|
1,135
|
1,135
|
Finish Line
|
1,085
|
2,095
|
2,480
|
2,674
|
2,717
|
2,858
|
3,094
|
3,389
|
Total
|
15,694
|
16,582
|
15,773
|
15,131
|
15,020
|
14,926
|
14,732
|
13,160
|
Yet despite the persistence
of the decline in industry square footage, Finish Line is the single industry
participant that has been able to grow its domestic store base profitably. The
company has grown sales by 15% a year and square footage by 12% a year since calendar
1997.
Wampler said that Finish Line
could have 850 mall-based stores and that the internal goal is 1,000 to 1,100
stores in the U.S. In Morgan Stanley’s report on June 21, 2005, analyst Joseph Yurman stated that, “We estimate that
the company’s store base has penetrated only 18% of the Top 100 U.S. malls, as
defined by number of 15-24-year-olds within three miles.”
In addition, at some point in
the future I anticipate the company will expand internationally. Foot Locker
has 723 stores internationally at 1,500 square feet for a total of more than
one million square feet. I have been told that these stores perform better than
the domestic ones.
5 - MAN ALIVE
& PAIVA
In January 2005, Finish Line
purchased The Hang Up Shoppes which owned 37 Man Alive stores for $12.3MM plus
a maximum earn out of $6MM for performance over the next three years. Assuming
that half of the earn out is eventually paid, each Man Alive store was valued
at $400,000. The stores average 2,831 square feet and carry hip-hop brands
including ARME, Phat Farm, Rocawear, Sean John, Makeveli, and FUBU. Finish Line
stated that it believes that it can increase footwear from 5% to 20% of sales
and that it expects to grow this business to 300-400 stores. In 2005, Man Alive
generated $30MM in sales and the acquisition was slightly accretive to EPS.
Since purchasing the chain, the company has added 39 new stores. The 76 stores
currently occupy 243,000 square feet.
In April 2006, Finish Line
opened its first high-end athletic specialty store called Paiva. The store carries
70% apparel and 30% footwear and targets women between 25 to 40 years old who
exercise at least once a week and have a household income of more than $80,000.
The 6 current Paiva prototype stores are an average of 4,000 square feet,
roughly twice the size of Lady Foot Locker. For reference, there are 554 Lady
Foot Locker stores at 1,700 square feet each for a total of 942,000 square
feet. Finish Line hired Jeff Pofsky, who was a senior women’s apparel buyer at
Target, to manage the rollout. It should be noted that Nike formerly had a
store called “The Goddess” in which they tried to sell exclusively Nike product
to women. The stores were successful but at some point it became apparent to
Nike that the concept would have to sell more than just Nike product to
flourish. Nike then asked Finish Line to partner with them and launch a revised
concept under a new name.
6 - UNIT ECONOMICS
|
Per Store
|
|
Per Sqft
|
|
Finish Line
|
Man Alive
|
Pavia
|
|
Finish Line
|
Man Alive
|
Pavia
|
|
|
|
|
|
|
|
|
Sqft / Store
|
|
|
|
|
4,750
|
3,500
|
4,000
|
Fixed Investment
|
475,000
|
420,000
|
800,000
|
|
$100
|
$120
|
$200
|
Inventory
|
350,000
|
160,000
|
250,000
|
|
$74
|
$46
|
$63
|
Accts. Payable
|
(125,000)
|
(60,000)
|
(85,000)
|
|
($26)
|
($17)
|
($21)
|
Total Costs
|
700,000
|
520,000
|
965,000
|
|
$147
|
$149
|
$241
|
A new Finish Line store takes
three to five years to reach maturity. Typically, a new store will comp around
10% in the first year, 7% in the second year, and 5% in the third year. The
target revenue for a store during its first year is $315 a square which should
ramp up to $350 a square foot. The company’s typical target ROI is 15%.
Traditionally, management has bought back shares when they could “purchase”
their own stores at an implied valuation at or below what it would cost to
build a new store.
|
Sqft
|
Store ($MM)
|
Margin
|
New Store Sales
|
$316
|
1,500
|
100%
|
COGS
|
($221)
|
(1,050)
|
(70%)
|
Gross Profit
|
$95
|
450
|
30%
|
Advertising
|
($6)
|
(30)
|
(2%)
|
Rent
|
($22)
|
(105)
|
(7%)
|
Overhead
|
($13)
|
(60)
|
(4%)
|
Employees (2-3)
|
($28)
|
(135)
|
(9%)
|
New Store EBIT
|
$25
|
120
|
8%
|
|
|
|
|
Mature Store Sales
|
$350
|
1,663
|
|
Incremental Sales
|
$34
|
163
|
|
Incremental Margin
|
$10
|
49
|
|
|
|
|
|
Mature Store EBIT
|
|
169
|
|
Taxes @ 37.5%
|
|
(63)
|
|
Net Income
|
|
105
|
|
7 - RECENT EVENTS
According to Cohen, 2007 is
the "most aggressive expansion plan in our history." This statement
alone might give us a clue to as to why the company seemed to have taken its
eye off of the merchandising ball. This year, the women's business has been
struggling due to the inability to carry "low-profile women
athletics" or "fusion" which as I understand it can best be
defined as colorful Pumas and other women's footwear that is thin, low to the
ground soles in casual styles.
Last year FINL reported $345/sqft which was roughly $163 Men, $63 Women, $50 Kids,
$41 apparel, and $28 accessories. The roughly $25/sqft loss in sales suggests
that this merchandising mishap resulted in $15/sqft to be lost in the women's business
and because fewer women were shopping in the stores, the company also lost $10/sqft
in the kids business.
Management pointed this out
on their call in March, so they were clearly aware of the problem. Unfortunately,
FINL had been trying to get this product into the stores
but with a 9 month buying cycle, 20 days in the distribution center, and 90-100
days in the stores, the product could not get into the stores fast enough to
keep up with the trend. While merchandising mishaps take time, there is
certainly a reason to believe that there is a light at the end of this tunnel. Comps
were down 8% in March, down 6% in April, down 8% in May, down 6.3% in June,
down 6.9% in July, but were only down 1.3% in August. Furthermore, ASPs have only
been down modestly throughout the year and were flat year-over-year in Q2, an
improvement in the trend that had been occurring over the last four quarters.
Inventories are still a little high, and thus there analysts are justifiably
concerned that some discounting will take place through November, as the
company brings its inventory back in line.
8 - MANAGEMENT
Note: The
following is an abbreviated compilation of several articles and website.
Born and raised in Indianapolis, Finish Line’s CEO Alan H. Cohen says he got his lust for business from his father,
Hyman. Hyman was a local businessman and a partner in several companies who had
went back to law school while in his mid-40s when Cohen was still in high
school. Cohen says that his father's initiative has had a strong impact on him.
After graduating with a marketing degree from Indiana University, Cohen followed in his father’s legal footsteps.
"I just didn't think I wanted to go to work as a salesperson," he
said.
Cohen began attending law
school at nights and working at the Marion County Juvenile Court during the
day. As a boy, he worker as a paper carrier, delivering The Indianapolis Star
to homes. Then he went to work at as a caddy at a nearby golf club. Cohen ended
up paying his way through law school and went to work at the Indianapolis law firm of Steckbeck Moore Cohen O'Dell, where his
father was a partner.
When he wasn't trying cases,
Cohen played basketball, and it was through sports that he got the notion to
take the plunge into retail. One day, Cohen was playing at the Jewish Community
Center, talking to friend John Domont about how difficult it was to find good
athletic shoes in the city. "We talked about how we should open up a store
that sells only athletic footwear, sneakers," Cohen said. "We thought
it was a great idea. We thought it was a new idea."
After a little research, they
found it wasn't. There was a franchise called the Athlete's Foot that simply
hadn't made its way to Indiana
yet. In 1976, Cohen, Domont and Cohen's childhood friend, David Klapper, bought
the franchising rights in the state of Indiana for $20,000 and opened their
first store on Monument Circle. Klapper, the only one of the three with any
retail experience, ran the day-to-day operation. Cohen continued practicing law
but spent his lunch hours and weekends at the 700-square-foot store selling
shoes. "The best way to understand the product is to sell it," he
said.
Cohen still remembers how
thrilling and tortuous it was to put up the initial $20,000, half of which was
borrowed, to become a one-third owner in the Indiana franchise. Cohen had no intention of ever leaving law
but the venture offered him an opportunity to invest in a promising business
with his friends. Over the next five years, the company grew from one to 10
stores.
In 1981, while still running
the Athlete's Foot franchise, the partners opened their first Finish Line store
in the Speedway Shopping
Center. The
store was an off-price discount retailer that sold, in addition to footwear, a
small mix of athletic apparel, including socks, warm-ups and T-shirts. "We
knew we wanted Finish Line to do something a little different (from Athlete's
Foot)," Cohen said. "One thing we always knew for sure was, first and
foremost, we were always going to be a shoe store." At the same time
Finish Line made its debut, Cohen and Klapper picked up two additional key
partners: Larry Sablosky, whose family owned Sablosky's Department stores, and
Dave Fagin, who was already a Puma footwear salesman for Cohen.
In 1982, Cohen officially
left the legal world to head his burgeoning footwear company full time as CEO. "He is without a doubt the fairest, most honest man I
know," said Klapper, still a senior VP at the company and a member of its
board of directors. "With Alan, it's not what is good for a large
shareholder or a particular department, it's what is good for everyone."
For four years Cohen operated both the Finish Line and the concepts but
franchise rules prevented him from expanding outside the state. Having
negotiated the original franchise agreement himself, Cohen knew that The
Athlete's Foot corporation could not stop him from expanding his athletic-apparel
empire beyond Indiana's borders if it carried a different name. By 1986,
more than 30 Finish Line stores had opened nationwide and the franchise
agreement with Athlete's Foot expired. When it did, the 12 Athlete’s Foot
franchises were converted to Finish Line stores. "I never had any
intention or knowledge when we opened the first store that it would grow to
this," Cohen said. "It was just going to be a passive investment for
me."
Finish Line continued to
grow, and every time the company borrowed money to expand, the owners had to
use their homes as collateral, and that got to be a drag. "Indiana
National Bank would lend us the money, but they'd always want personal
guarantees," Cohen recalls. "There had to be a better way to finance
growth." So in 1992, with 100 Finish Line stores operating and $100MM in
sales, the company decided to go public. "It was about the best thing we
ever did as far as growing the company," Cohen said. "I don't think
we really hit the radar charts until we went public." The 1992 IPO and two
subsequent offerings generated the money to expand nationally.
The stock initially traded
for more than $20 per share, perhaps enjoying greater-than-normal acceptance
due to the hype surrounding the 1992 Olympics, but eventually the stock price
slipped to $12 per share, then $9, and then $6. "It stayed there for about
two years," noted Dave Lebedeff, a securities analyst with NatCity
Investments Inc. in Indianapolis. Finish Line was making plenty of money, he adds, but
the stock languished for months on end. Finally, though, it "shot out of
the cannon again."
The company then had a period
of strong growth adding its 300th store in 1997 and generating $500MM in sales
in 1998 (fiscal 1999). In 1999, the company launched its website and opened its
400th store. Then in 2001, the once red-hot licensed apparel business fell off.
Finish Line sales fell, too, and the company announced in March 2001 that it
would close 17 poorly performing stores. In June of that same year, as the
company waded its way through its new positioning plan, selling off aged
inventory and closing stores, it felt a financial pinch, a 67% decline in
earnings. EPS were $0.05 for the quarter ended June 2, 2001, compared with $0.15 per share in 2000.
"Finish Line has had issues,"
said Dorothy Lakner, specialty retailing analyst for CIBC World Markets in New York. "Its biggest problem has been the apparel
business. That has really been the drag in the business." Cohen is the
first to admit he and his partners have made mistakes. Maybe the apparel line
was expanded too broadly over the years, but, he contends, they have always
bounced back. But with the new strategy to narrow the apparel line and broaden
the footwear, things turned around.
The business recovered and in
August 2003, Finish Line opened its 500th store. Then in March 2005, the
company opened its 600th store and fiscal 2005 sales surpassed $1B.
Cohen said it's easy to put
his heart and soul into the company he grew from the ground up. It does not
leave a lot of time to pick up new hobbies or go shopping at a mall, unless he
is checking out the footwear at other athletics stores. But that's OK, Cohen
said, because it's what he has committed his life to. "My time is here. As
long as I'm going to be CEO, that's where I will be."
“Start with a good concept,”
says Cohen, who also won the Entrepreneur of the Year Award in 1991.
"That's obviously what we had in 1976, being in a business at the
beginning of its growth." He also lists good partners, good associates, a
shared dream, solid financing and being prepared to change to meet customer
needs as the other key ingredients of success.
9 - HQ VALUATION
10-K Disclosure
“In November 1991, the Company moved into its existing
corporate headquarters and distribution center located on 16 acres in Indianapolis, Indiana. The
facility, which is owned by the Company, was designed and constructed to the
Company’s specifications and includes automated conveyor and storage rack
systems, a high speed shipping sorter and a tilt-tray sortation system designed
to reduce labor costs, increase efficiency in processing merchandise and
enhance space productivity. In 1992, the Company purchased an additional 17
adjacent acres, which brought the total size of the headquarters property to 33
acres. In April 2003, the Company began construction on a 375,000 square foot
addition to the office and distribution center in Indianapolis, Indiana. In May
2004, the distribution center portion of the construction was completed and put
into service. The new office space was completed in May 2005. The prior office
space is currently being renovated and is expected to be completed by the end
of fiscal 2007. The expansion brings the facility to 142,000 square feet of
office space and 535,000 square feet of warehouse space. In March 2005, the
Company purchased an additional 21 adjacent acres, which includes a 112,000
square foot building, thus bringing the total size of the headquarters property
to 54 acres.”
Timeline
·
11/91: 16 acres,
HQ, and distribution center
·
1992: Purchased 17 more acres (46,000 sqft office
and 256,000 sqft warehouse)
·
09/02: Tornado
·
04/03: Began
375,000 sqft addition
·
05/04: Finished
distribution center
·
05/05: Finished
office (142,000 sqft office and 535,000 sqft warehouse)
·
03/05: Purchased
21 more acres and a building (112,000 sqft)
·
12/07: Expected
completion of expansion
Valuation
The land has a book value:
$1.6MM. Between 02/05 and 05/05, land increased by $1.242MM when the company
purchased of 21 acres in order to expand its HQ. This valuation of
$60,000/acre, would imply a total land value of $3.2MM.
For the building, $92.15/sqft
of office space and $50.93/sqft of warehouse space yields a value of $40.3MM.
These numbers represent the cost of construction in Indianapolis according to the 2005 RSMeans Building Construction
Cost Data Book (
www.stlrcga.org/x546.xml).
·
Office: 142,000 *
$92.15 = $13.1MM
·
Warehouse:
535,000 * $50.93 = $27.2MM
·
Total Building: 677,000 * $59.58 = $40.3M
10 - FINANCIALS
|
|
Diluted
|
|
Net
|
|
Year
|
Price
|
Shares
|
MV
|
Debt
|
EV
|
1993
|
$4.75
|
37,948
|
180,253
|
(1,196)
|
179,057
|
1994
|
$2.03
|
41,268
|
83,877
|
(3,668)
|
80,209
|
1995
|
$1.60
|
41,260
|
65,810
|
(978)
|
64,832
|
1996
|
$2.19
|
41,424
|
90,615
|
7,814
|
98,429
|
1997
|
$10.75
|
47,522
|
510,862
|
(82,834)
|
428,028
|
1998
|
$8.19
|
52,634
|
431,072
|
(53,809)
|
377,263
|
1999
|
$6.03
|
51,666
|
311,546
|
(40,924)
|
270,622
|
2000
|
$5.87
|
50,078
|
293,958
|
(24,481)
|
269,477
|
2001
|
$3.44
|
49,326
|
169,681
|
(51,935)
|
117,746
|
2002
|
$8.13
|
49,366
|
401,099
|
(77,853)
|
323,246
|
2003
|
$6.21
|
48,443
|
300,831
|
(73,905)
|
226,926
|
2004
|
$17.31
|
48,272
|
835,347
|
(95,852)
|
739,495
|
2005
|
$20.24
|
49,377
|
999,390
|
(113,166)
|
886,224
|
2006
|
$17.15
|
49,381
|
846,884
|
(96,563)
|
750,321
|
LTM
|
$11.96
|
47,478
|
567,838
|
(47,900)
|
519,938
|
|
|
Square Footage
|
|
|
Year
|
Stores
|
Ending
|
Growth
|
Average
|
EV/Store
|
EV/Sqft
|
1993
|
130
|
436
|
|
392
|
1,377,362
|
$411
|
1994
|
164
|
566
|
29.8%
|
501
|
489,081
|
$142
|
1995
|
190
|
692
|
22.3%
|
629
|
341,219
|
$94
|
1996
|
220
|
870
|
25.8%
|
781
|
447,405
|
$113
|
1997
|
251
|
1,088
|
25.1%
|
979
|
1,705,289
|
$393
|
1998
|
302
|
1,587
|
45.8%
|
1,337
|
1,249,217
|
$238
|
1999
|
358
|
2,095
|
32.1%
|
1,841
|
755,927
|
$129
|
2000
|
409
|
2,479
|
18.3%
|
2,287
|
658,868
|
$109
|
2001
|
436
|
2,654
|
7.1%
|
2,566
|
270,061
|
$44
|
2002
|
449
|
2,694
|
1.5%
|
2,674
|
719,924
|
$120
|
2003
|
477
|
2,839
|
5.4%
|
2,767
|
475,736
|
$80
|
2004
|
531
|
3,081
|
8.5%
|
2,960
|
1,392,646
|
$240
|
2005
|
635
|
3,519
|
14.2%
|
3,300
|
1,395,629
|
$252
|
2006
|
709
|
3,865
|
9.8%
|
3,692
|
1,058,281
|
$194
|
LTM
|
731
|
3,965
|
8.5%
|
3,810
|
711,269
|
$131
|
|
|
|
|
|
|
|
|
|
Year
|
Sales
|
Growth
|
EBITDA
|
Margin
|
EBIT
|
Margin
|
Inventory
|
1993
|
129,547
|
|
|
|
15,156
|
11.7%
|
39,871
|
1994
|
157,011
|
21.2%
|
|
|
12,842
|
8.2%
|
45,930
|
1995
|
191,623
|
22.0%
|
17,237
|
9.0%
|
14,349
|
7.5%
|
55,498
|
1996
|
240,155
|
25.3%
|
20,971
|
8.7%
|
16,989
|
7.1%
|
76,088
|
1997
|
332,002
|
38.2%
|
35,546
|
10.7%
|
30,533
|
9.2%
|
81,991
|
1998
|
438,911
|
32.2%
|
48,158
|
11.0%
|
40,799
|
9.3%
|
130,150
|
1999
|
522,623
|
19.1%
|
42,933
|
8.2%
|
31,946
|
6.1%
|
135,303
|
2000
|
585,963
|
12.1%
|
37,554
|
6.4%
|
23,185
|
4.0%
|
148,979
|
2001
|
663,906
|
13.3%
|
32,222
|
4.9%
|
15,831
|
2.4%
|
145,503
|
2002
|
701,426
|
5.7%
|
42,150
|
6.0%
|
25,832
|
3.7%
|
141,878
|
2003
|
757,159
|
7.9%
|
54,403
|
7.2%
|
32,048
|
4.2%
|
158,780
|
2004
|
985,891
|
30.2%
|
98,220
|
10.0%
|
74,488
|
7.6%
|
192,599
|
2005
|
1,166,767
|
18.3%
|
124,002
|
10.6%
|
96,833
|
8.3%
|
241,242
|
2006
|
1,306,045
|
11.9%
|
132,061
|
10.1%
|
97,428
|
7.5%
|
268,590
|
LTM
|
1,303,824
|
8.6%
|
120,339
|
9.2%
|
83,871
|
6.4%
|
298,438
|
Median
|
|
19.1%
|
|
8.9%
|
|
7.5%
|
|
Average
|
|
19.8%
|
|
8.6%
|
|
6.9%
|
|
|
Inflation
|
|
Inflation Adjusted per Sqft
|
Year
|
Rate
|
Multiple
|
|
Sales
|
EBITDA
|
EV
|
Inventory
|
1993
|
3.03%
|
1.387
|
|
$458
|
|
$570
|
$127
|
1994
|
2.96%
|
1.347
|
|
$422
|
|
$191
|
$109
|
1995
|
2.61%
|
1.308
|
|
$399
|
$36
|
$123
|
$105
|
1996
|
2.81%
|
1.275
|
|
$392
|
$34
|
$144
|
$111
|
1997
|
2.93%
|
1.240
|
|
$420
|
$45
|
$488
|
$93
|
1998
|
2.34%
|
1.204
|
|
$395
|
$43
|
$286
|
$99
|
1999
|
1.55%
|
1.177
|
|
$334
|
$27
|
$152
|
$76
|
2000
|
2.19%
|
1.159
|
|
$297
|
$19
|
$126
|
$70
|
2001
|
3.38%
|
1.134
|
|
$293
|
$14
|
$50
|
$62
|
2002
|
2.83%
|
1.097
|
|
$288
|
$17
|
$132
|
$58
|
2003
|
1.59%
|
1.067
|
|
$292
|
$21
|
$85
|
$60
|
2004
|
2.27%
|
1.050
|
|
$350
|
$35
|
$252
|
$66
|
2005
|
2.68%
|
1.027
|
|
$363
|
$39
|
$259
|
$70
|
2006
|
3.39%
|
1.000
|
|
$354
|
$36
|
$194
|
$69
|
Median
|
|
|
|
$358
|
$35
|
$171
|
$73
|
Average
|
|
|
|
$361
|
$31
|
$218
|
$84
|
|
|
|
|
|
|
|
|
|
|