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Robert Olstein on Finish Line (FINL)

November 26, 2006 | About:

Finish Line (FINL) is a mall-based retailer offering men’s, women, and children’s brand-name athletic, lifestyle, and outdoor footwear. FINL has done an outstanding job of expanding its franchise over the last ten years despite many fashion trends and cycles. FINL sales for the last 12 months ended August 2006 were $1.3 billion, more than $1 billion higher than in 1996, and earnings power increased from $0.40 per share in 1996 to over $1.25 per share today. Yet, the stock languishes at the same price it was ten year ago. Apathy and negativity, two emotions that can create value, currently surround the company. We would love to tell you that the company is running on all its cylinders but it is not. Same store sales turned negative in the last year, markdowns increased, gross profit margins declined, and Wall Street has run for the hills. FINL recently traded at under $10.00 a share, down from a high of over $22.00 a share in 2005, upon reporting poor third quarter results. As value investors, we always look at stocks that experience price declines similar to FINL and ask the question, “Is this market decline a fair assessment of value, or is the market overly negative?”

One of our main objectives in analyzing companies in which the share price has either declined or failed to respond to positive fundamentals is to determine if the issues facing the company are permanent or temporary. Upon dissecting the financial statements and researching the industry, we found that FINL was running their business at acceptable levels, in the face of out-of-favor fashion trends. The company was still generating excess cash flow and the balance sheet contained $1.00 a share in cash and no debt. Many retailers with less adept management teams who experience negative cash flow and an over-leveraged balance sheet would face permanent damage to their business if faced with the problems FINL is currently experiencing. However, our analysis found that the experienced FINL management team prudently slowed store openings, eliminated unnecessary spending, and reviewed their business objectives for new concepts. The aforementioned actions coupled with conservative accounting practices, high returns on capital, a solid balance sheet in combination with a good strategic plan should allow the company to weather the fashion cycle. We calculate that if FINL can eventually produce the excess cash flow of $1.25 a share we are estimating, the stock’s private market value is materially above current prices. As long-term value investors, we must be patient in our retail investments because the best price paid for a retail company is when fashions are out of favor causing temporary earnings disappointments. We believe earnings should turn in the next two years creating the catalyst to close the current undervaluation in FINL.

Rating: 2.6/5 (29 votes)

Comments

vooch
Vooch - 8 years ago
> Yet, the stock languishes at the same price it was ten year ago.

Read about Buffett's "One Dollar Premise" for reasons to avoid this stock.

In Buffett's quick test, the stock price's increase, should, at the very least, match the amount of retained earnings, dollar for dollar. If the value goes up greater than the retained earnings, so much the better. All in all, Buffett explains, "Within this gigantic auction arena, it is our job to select a business with economic characteristics allowing each dollar of retained earnings to be translated eventually into at least a dollar of market value."

Page 92 "The Warren Buffett Way" - not sure on which edition of the book.

- Vooch

valuefan
Valuefan premium member - 7 years ago
Vooch,

So many of the gurus hold or recently added to FINL. None of them have decreased

their holdings or sold ?

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