Robert Olstein on Finish Line (FINL)
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.