Finish Line (Nasdaq: FINL) has had a rocky road lately, with declining same-store sales and a roughly 30% drop in share price in the last year. So investors can't be blamed for rejoicing when a potential ray of light appears in the form of a hedge fund called Clinton Group, which owns about 5% of the company. Clinton is pushing for Finish Line management to create shareholder value via going private or selling the company, and/or buying back presumably undervalued stock. Before we examine what this could mean for shareholders, let's review this quarter's results.
Net income decreased 47% year over year to $9.9 million, while sales were down about 1% to $338.6 million over the same time. Management blames this on lower-than-expected sales in the critical back-to-school sales period, and higher-than-expected promotional activity. Not surprisingly, inventories were up 15% over last year's number, to about $323 million. All in all, it was an ugly quarter in a key selling period. Still, with book value around $9 a share and the stock only trading around $12.50, surely there must be value for shareholders here?
Clinton Group thinks so. It compares Finish Line's valuation ratios (book value, revenue, and EBITDA multiples) to competitor Foot Locker (NYSE: FL), thus placing Finish Line's share value in the $16-$19 range. The valuation multiples on recent leveraged buyouts with Michaels (NYSE: MIK) and Petco (NYSE: PETC) also support similar numbers. Clinton Group also mentioned that it believes Finish Line may be an even better candidate for a leveraged buyout, given its "relatively lower valuation, strong cash flow generation, potential for a margin recovery story, and diversified growth prospects."
Of the options Clinton offered, the hedge fund seems most enamored of a management-led buyout. In this case, shareholders should consider the deal -- after all, an immediate and substantial premium to the current price is certainly easier than enduring years of a lengthy, uncertain turnaround.
The board of directors, which owes its fiduciary responsibility to shareholders, would hopefully insist on a fair price, letting management deal with the challenges of a turnaround in private. In addition, with numerous private equity firms making deals left and right, if the price is too low, someone will up the ante. Sounds to me like shareholders potentially have an early Christmas present to anticipate.
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