Finish Line (NASDAQ:FINL) is a company in need of a new action team. Alan Cohen is co-founder, Chairman, and CEO. All companies reach a certain point where the founder needs to step aside to allow the business to be run by a more capable and more nimble operator. That time has arrived for Finish Line.
Mr. Cohen is unlikely to leave entirely since co-founder and as a holder, so if he cares about outside shareholders and cares about his own wealth he will decided to retain the Chairman role and turn the keys over to someone else.
This poorly crafted leveraged buyout of Genesco (NYSE: GCO) was the last big disappointment and the company was going to over-leverage itself if that came about. Finish Line is using the “material adverse effect” argument because Genesco’s results failed to achieve target, although a slowing consumer spending environment may not be considered “material” enough in a current court case. The fact that Finish Line said the company is now not generating enough cash flow is something it should have considered before it wanted to leverage its books up in what ended up becoming a bidding war.
We even evaluated Finish Line as a potential buyout candidate of its own back in 2006 (prior to Special Situation Newsletter) but decided to close that off the list for a small gain. It was a good thing we had a change of heart there. We questioned whether or not management would actually ever sell in the first place, but we didn’t expect a leveraged buyout for a more diversified play.
This stock recently traded at 12.75-times FEB-2008 earnings and only at about 8-times the FEB-2009 estimate, although it is quite likely that these estimates do not reflect a slower consumer spending environment. Earnings estimates have been trimmed lower over the last 60 days. It also doesn’t really consider a potential ongoing case with an even larger potential verdict against the company, although that outcome won’t be known for a while. Our thesis for Alan Cohen is not subject to the verdict whether it wins or loses against Genesco.
The company has been a habitual spotty earnings performer. At the end of a day when you are merely a retailer that caters to sport shoes and apparel that has to be continually replaced, how many excuses are there for a loss of more than two-thirds of your stock value. The major growth days as far as numbers of new stor opportunities are somewhat behind the company, although some of that may be because there are more than enough sporting shoes and apparel stores around in major cities. This maturity is another reason the company needs some fresh blood to help navigate through choppier waters than when this was a major growth story.
Shares are up from recent lows even after it warned of a loss, but with a history of spotty earnings performance compared to estimates it is just more of the same. Shareholders are also confused by the dual class structure of the stock with there being more than 8-times the A-shares as B-shares and the B-shares have a ten-to-one ratio for voting.
With the structure of those B-Shares affecting the vote, Mr. Cohen doesn’t have to listen to shareholders and doesn’t have to do the right thing. In fact, he could hang on for another decade if he wants to regardless of share performance. An activist investor would be a big help to Finish Line, but any activist would know that their entire efforts would likely be falling on deaf ears.
Jon C. Ogg
December 12, 2007
Jon Ogg can be reached at firstname.lastname@example.org; he does not own securities in the companies he covers.