Finish Line proves again how hard it is to diversify

From the humblest of beginnings, The Finish Line Inc. now boasts 980 locations in U.S. malls and inside Macy’s department stores. It’s a success story that would have seemed unfathomable back in 1976, when three basketball buddies started the business by opening an Athlete’s Foot franchise on then-sleepy Monument Circle.

Perhaps magic like that can only strike once, because the company’s efforts to build other retail concepts in the years since have failed miserably—most recently with Finish Line’s JackRabbit chain of specialty running shoe stores.

“We are at the dawn of what we believe to be a very exciting opportunity in this business,” then-CEO Glenn Lyon declared in 2011 after the company launched the division by buying an 18-store chain for $8.5 million. In the years that followed, it pumped tens of millions of dollars more into acquisitions, ultimately building a chain with 70 stores and more than $90 million in revenue.

But JackRabbit has continued to lose money, and in mid-November, Finish Line officially reversed course and put the chain on the sale block. At the same time, it announced a $44 million noncash impairment charge to write down the value of the business.

That write-down might be just the start, Buckingham Research Group analysts Scott Krasik and Matthew Gulmi said in a report.

Referring to the company by its ticker symbol, they wrote: “We are unsure that FINL will be able to sell JackRabbit given 1) no history of profitability 2) weak secular trends in performance running and 3) a disjointed business model too small to scale but too large to manage.

“The most likely outcome of the process, in our view, will be that FINL will be forced to close most, if not all of its JackRabbit stores and take additional cash charges.”

A Finish Line spokeswoman said the company could not comment because it is in the Securities and Exchange Commission-mandated quiet period leading up to the announcement of its fiscal third-quarter earnings on Dec. 21.

This is the fourth time Finish Line has made a sizable bet on diversification only to be left nursing its wounds.

The first stumble occurred with the 37-store hip-hop outfitter Man Alive, which the company bought for $12 million in 2005. It expanded the store base to nearly 100 outposts before unloading the perennial money-loser in 2009 and taking an $18 million pretax charge.

Next up was Paiva, a fitness and fashion-apparel chain catering to upscale women that the company launched from scratch in April 2006. The concept never gained the expected traction—there even was consumer confusion over how to pronounce the name—and in September 2007 Finish Line pulled the plug on the 15 stores and took a $13 million pretax charge.

In 2007, Finish Line made by far its biggest diversification bet, agreeing to buy Nashville, Tennessee-based Genesco Inc. for $1.5 billion. Genesco, which was more than twice Finish Line’s size, owns a long list of retail chains, including Zionsville-based Lids Sports Group.

Almost as soon as the deal was announced, sales for both companies softened, spawning a dispute over whether Finish Line and its lender, Swiss giant UBS, should be forced to close on the purchase. To opt out of the deal, Finish Line paid Genesco $39 million in cash and handed over stock worth $25 million.

Now that the JackRabbit diversification has gone south as well, analysts are eager to see it disappear so that executives can concentrate on beefing up Finish Line’s brick-and-mortar and e-commerce sales.

There are a lot of positives in the Finish Line pipeline—many of them driven by a new store design. The company began rolling out the format this summer in Chicago and expects to have 50 locations converted by the end of this year.

The new format better showcases top brands, which has allowed Finish Line to get larger allocations of the most popular products, Deutsche Bank analyst Paul Trussell said in a report. He said stores with the new format are seeing weekly sales 50 percent to 100 percent higher than those of unconverted stores.

Same-store sales of Finish Line’s brick-and-mortar stores have been close to flat over the last 10 years while those of archrival Foot Locker climbed in the mid-single digits, Trussell said. So there’s lots of room for improvement.

“FINL is, at its core, a mall-based athletic specialty retailer, not a performance running retailer,” he said in a report. “We believe jettisoning the JackRabbit performance running business would help FINL more clearly define its identity in the marketplace while providing a needed focus on improving the core Finish Line business.”•