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Finish Line Inc. (NASDAQ:FINL) is a mall-based specialty retailer which specializes in apparel and footwear. It has three different stores:

Finish Line – sells brand name footwear and soft goods, currently 693 stores
Man Alive – street fashion retailer, currently 87 open stores
Paiva – new store concept for active women, currently 15 open stores

While Man Alive and Paiva are recent growth strategies, the Finish Line stores have been open for business since 1976. Its biggest supplier is Nike (NYSE:NKE), which accounted for over 50% of its total purchases the last 2 years. It has had some recent struggles. For Fiscal year 2007, its earnings were $.68 per diluted share compared to $1.23 per diluted share in Fiscal year 2006. This was due to a 5.7% decline in comparable store net sales.

SG&A increased 10% year over year, that put further pressure on earnings. Sales only increased 2.5% year over year, but 1.87% of that growth was aided by the additional week in the Fiscal 2007 year. That has led to a depressed stock price; it is currently trading around $12 a share.

Industry

Shoe retailers face a lot of competition. One aspect that they cannot compete on is price, as the big retailers like JCPenney (NYSE:JCP) and Walmart (NYSE:WMT) will take market share away in a blink of an eye. Finish Line’s main competitor is Foot Locker (NYSE:FL), and it has had recent struggles of its own. Just earlier this month it issued a downside revision to its 1st quarter outlook. Foot Locker said that its USA stores suffered a big decline, which is the only market where Finish Line operates. There currently seem to be obvious issues in specialty athletic shoe retailers. An obvious question would be: are there major issues in specialty athletic shoe retailers or just a normal business cycle?

Company

The company has invested in an impressive inventory management system that should help it become more efficient. Most of its senior management has been with the company at least a decade, besides the President and the Chief Merchandising Officer. Its two founders are still with the company in senior management positions. Its new Chief Merchandiser Officer, Sam Sato from Nordstrom, is very experienced in this area and management is very excited about having him come aboard. Man Alive comparable store net sales were up 4.4% compared to the 4th quarter of the previous year, which is a bright spot. It's also currently working on a partnership with Nike that should be rolled out later this year.

Valuation

It's currently trading at a trailing price/earnings of 18.09 and a forward price/earnings ratio for Fiscal 2009 of 12.89. The trailing P/E seems a bit high for a company having so many short-term problems. It also pays a dividend of $.10 a year which is a yield of 0.8%. Its Price/Book ratio is 1.28 and Price/Sales is 0.44, which are both great valuations. It has a solid balance sheet with almost $63 million in cash and no debt. Its cash flows from operations are solid, but most of that cash is going towards capital expenditures on new stores, therefore, free cash flow is suspect. Return on Equity has been low, 7.2% last year and 14.1% the year before.

Technicals

Weekly Chart

The picture is not pretty. The long-term trend is down, it’s been in a long-term trading channel since 2005 and still has not broken that trend. There was some strength in FINL at the end of last year, but since 2007 it’s been trending down. It has not found support at the 50 Weekly Moving Average and it is acting as resistance. Short-term, it has been beat down because of the Foot Locker warning.


FINL_05_21_2007_Weekly

Daily Chart

FINL just recently crossed below the three major moving averages. RSI is showing almost oversold levels and MACD is showing negative momentum. Ever since the late November high, there have been lower lows and lower highs. It looks like it will be heading down to its late summer levels of $10-$11 a share.


FINL_05_21_2007_Daily

Personal Experience

I worked at Finish Line as a sales associate a few years ago while I was still in high school. It wasn’t one of my favorite jobs as a teenager. I wanted to work there because I was a Michael Jordan fan and wanted to get to know more about his line of sneakers and sneakers in general. The pay was pretty close to the minimum level. Management concentrated a lot on the apparel. A lot of people visited Finish Line just to see the new authentic jerseys they have in stock. There was also a lot of pressure to sell something with the sneakers, either a pair of socks, shoe cleaner, shoe laces, etc. to average up the items per transaction.

As a customer, I sometimes wander in its stores when I am at the mall. It usually has the newest footwear and apparel in stock. Its prices are definitely higher compared to JCPenney or other major retailers. Prices are similar to Foot Locker. Foot Locker’s and Finish Line’s store setups are generally alike. It's very antsy to try to sell something, as soon as I walk in there, usually there is a Sales Associate next to me immediately.

Conclusion

Finish Line is currently going through some tough times and this will continue for at least the near future. It has made some changes inside the company, that hopefully will start paying dividends in the near future, but the Finish Line stores are struggling and it will take a little bit longer to turn them around. Hopefully, the Nike partnership will quicken the turn around of the Finish Line stores. I would stay away from FINL in the near future. Management said that the second half results of Fiscal Year 2008 are key and they could give some hints to future performance, positive or negative. Waiting until later this year, before making any decisions, would be a prudent move on an investor’s part.

Disclosure: I don't have a position in FINL.

Source: Is A Finish Line Inc. Turnaround Approaching?