The Finish Line, Inc. History

Address:

3308 North Mitthoeffer Road
Indianapolis, Indiana 46236
U.S.A.

Telephone: (317) 899-1022
Fax: (317) 899-0237

Public Company
Incorporated: 1976
Employees: 12,066
Sales: $985.9 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: FINL
NAIC: 448210 Shoe Stores; 448150 Clothing Accessories Stores; 451110 Sporting Goods Stores

Company Perspectives:

Finish Line will provide the best selection of sport inspired footwear, apparel and accessories to fit the fast culture of action addicted individuals.

Key Dates:

1976:: David Klapper and Alan Cohen open an Athlete's Foot franchise.
1981:: Klapper and Cohen form The Finish Line.
1986:: After their franchise agreement with The Athlete's Foot expires, Klapper and Cohen convert all their Athlete's Foot stores to Finish Line stores.
1992:: The Finish Line completes its initial public offering of stock.
1995:: The company opens its 200th store.
1999:: The Finish Line records its first online sale.
2003:: Following a spat between Nike and Foot Locker, Finish Line receives a greater allocation of top-selling Nike footwear, boosting the company's business.

Company History:

The Finish Line, Inc., is an athletic specialty retailer, carrying men's, women's, and children's brand name footwear, apparel, and accessories. The company operates roughly 550 primarily mall-based stores in 46 states. The average size of a Finish Line store is more than 5,000 square feet, which is substantially larger than its competitors and which allows for a broader and deeper merchandise mix. Sales of footwear bring in approximately 70 percent of the company's total revenue, with apparel and accessories making up the remainder. Brand names carried by the company's stores include Nike, adidas, Reebok, K-Swiss, Phat Farm, New Balance, Timberland, Asics, and Saucony.

Franchise Beginnings: 1976-86

The Finish Line's founders, David Klapper and Alan Cohen, first became involved in athletic retailing in 1976 when they opened an Athlete's Foot franchise on Monument Circle in downtown Indianapolis. The Athlete's Foot was a Pittsburgh-based athletic footwear retailer that had begun franchising in 1972. By 1976, when Klapper and Cohen signed their ten-year franchise agreement, there were almost 100 Athlete's Foot stores located in malls throughout the country. Although athletic wear was not a major retail force at the time, Cohen and Klapper, longtime friends and fervent athletes, both believed in the potential of the nascent market.

Under the terms of the franchise arrangement, the duo had a ten-year license with the Athlete's Foot for the state of Indiana. Within four to five years, Klapper and Cohen had added nine more stores, located in the state's larger malls, to their operation. It was at that point they decided it was time for a change. As franchisees, Cohen and Klapper were constrained by the dictates of the Athlete's Foot on every front--from product mix to store size to merchandise presentation. The partners, however, believed that the athletic specialty business was taking a new shape, and they wanted the latitude to respond to the changing market. They decided to start their own company--the Finish Line.

To begin the new venture, Cohen and Klapper brought in two more full partners: Larry Sablonsky and David Fagin. Sablonsky, who was also from Indiana, had a department store background, and Fagin had previously been a sales rep for an athletic wear manufacturer. From its first days, the Finish Line was conceptually different from the Athlete's Foot. Whereas the standard Athlete's Foot store was fairly small--between 1,500 and 2,000 square feet--and located in an enclosed mall, the early Finish Line stores were located in strip malls and outlet centers and, at 3,000 to 4,000 square feet, were substantially larger than the norm. While the smaller Athlete's Foot stores had focused almost exclusively on athletic shoes, the Finish Line's extra space allowed for a much broader mix of merchandise, specifically sports apparel and accessories. This broader product mix let Finish Line target a broader market, offering shoes and apparel for the whole family, whereas athletic retailing had catered traditionally to young males aged 12 to 24.

Another difference between the Finish Line and the Athlete's Foot was the type of merchandise they carried. The Athlete's Foot focused on new, high-profile merchandise from big-name athletic vendors. As an unproven entity, the Finish Line could not always stock the latest, hottest products carried by its competitor and instead often carried value or closeout merchandise. Although begun out of necessity, this merchandise mix proved to be serendipitous, as it mirrored a trend toward closeout and outlet shopping that was just then taking shape in the United States.

Although the partners continued to operate their existing ten Athlete's Foot stores through the term of their ten-year agreement, the lion's share of their energies were focused on growing their Finish Line chain. By 1986, when Klapper and Cohen's franchise with the Athlete's Foot expired, they already had established between 25 and 30 Finish Line stores. The stores were concentrated in areas where the outlet shopping craze was most deeply rooted, such as North Carolina, Texas, and upstate New York.

Gathering Speed: 1987-93

With the expiration of the Athlete's Foot franchise agreement, the partners had to decide whether to renew the contract or to convert their existing Athlete's Foot stores into Finish Line stores. They opted for the latter. Applying what they had learned from operating the two types of stores, the foursome determined to combine the best of both concepts for future expansion. They believed that the Athlete's Foot's strongest points were its high-profile products and its mall-based location strategy. The Finish Line's strengths lay in its larger store size and its combination of new and value merchandise. Blending the concepts, Klapper, Cohen, Sablosky, and Fagin decided to take their stores back into the malls, but to make them much larger and to carry a wider variety of merchandise, including both the latest, high-profile products and discounted, value items. Little by little, the company began closing its strip and outlet mall stores, becoming ever more entrenched in enclosed malls.

Meanwhile, the U.S. market for athletic footwear was booming. From 1982 through 1991, retail sales of athletic footwear had climbed from $3.88 billion to $10.73 billion. Much of this growth was directly attributable to an Oregon-based athletic shoe manufacturer named after a Greek goddess--Nike, Inc. Throughout the 1980s, the popular Nike shoes--characterized by the signature "swoosh"--took the nation by storm, showing up on the feet of every age group. When its footwear proved so wildly popular, Nike built a line of apparel and accessories that met with a similar consumer response. Soon, Nike was the Finish Line's largest vendor.

By 1991, there were 105 Finish Line stores operating primarily in Midwest and Southeast states. In June of the following year, with 120 stores up and running and sales at $98 million, the four partners took the company public. Then, using the capital generated by the initial public offering and a concept that was proving highly successful, the company expanded rapidly for the next several years. With the steady addition of more stores, revenues rose predictably each year, climbing to $129.5 million in 1993 and $157 million in 1994.

Bigger Is Better: 1994-96

By the end of fiscal 1994, Finish Line had 164 stores located in 22 states stretching from New York to Texas. Not only was the company growing the number of its stores--it was also growing its store size. Of the 30 new stores opened in the company's fiscal 1995 (February 1994 to February 1995), the average size was 4,100 square feet. This brought the overall average store size up to 3,641 square feet, a 5.6 percent increase from the previous year's average. "Our stores are getting bigger, a strategy we believe will allow us to maintain a competitive edge against our mall competition, and better position us to compete against large box athletic retailers located outside of malls," wrote Alan Cohen in the company's 1995 annual report. These larger stores were laid out with a "track" around the perimeter, which served to draw customers through the various categories of shoes. Apparel and accessories were displayed inside the track.

The company also rolled out three new large-format stores for testing. Sprawling over 7,000 to 9,500 square feet, the monster stores were divided into separate departments for men's, women's, children's, licensed product, and activewear. The flashy new stores also incorporated new color schemes, lighting, signage, and video and audio screens. Aside from the three new formats, all Finish Line stores were formatted as either "rack" or "backroom" stores. The 33 rack stores, which ranged in size from 3,000 to 5,500 square feet, were the older store designs, with stock stored on the sales floor in original boxes. The more common backroom format had a sales floor with display and try-on areas and an adjacent stockroom used to store inventory. The stores became known for their trademark "wall of shoes," a large, often curving wall display holding hundreds of shoe styles.

Cohen's team followed through on the larger store strategy in fiscal 1996 and 1997, opening 69 stores over the course of the two years, with an average square footage of almost 5,000. At the end of fiscal 1997, the company's 251 stores had an overall average size of 4,336 square feet, as compared with 1994's average of 3,449 square feet. In addition to the overall jump up in size, the company unveiled a "large format" store in fiscal 1996, which dwarfed virtually all of its other stores. Located in downtown Indianapolis, the 20,000-square-foot behemoth was stocked with approximately 1,300 styles and 30,000 pairs of athletic shoes, as well as large lines of apparel and accessories. The store was an immediate success, reaffirming the partners' belief in their superstore concept. Based on the encouraging performance of the Indianapolis store, the company began to plan for a 1997 opening of three more large-format outlets--in Buffalo, New York; Denver, Colorado; and Memphis, Tennessee.

Because the larger stores cost $1.7 million, as opposed to the $375,000 needed to build an average-sized store, the company needed extra capital. It raised it in a 1996 secondary stock offering, selling 1.3 million newly created shares and grossing more than $35 million. In addition, Cohen, Klapper, Sablosky, and Fagin together sold 1.3 million shares of their own stock.

For categorization purposes, the company began to characterize its stores by size. Stores smaller than 10,000 square feet, which included the majority of locations, were classified as "traditional format" stores. These stores generally carried 600 to 700 shoe styles. "Medium format" stores were those ranging from 10,000 to 15,000 square feet, stocked with approximately 1,000 shoe styles. Stores that were larger than 15,000 square feet were designated as "large format" stores.

Size and quantity were not the only points of focus for the Finish Line during the mid-1990s. The company also was working to improve efficiency in its warehousing and distribution systems. In 1995, the Indianapolis distribution center was expanded to more than double its previous size. Shortly thereafter, new management software was implemented in the center to allow for more accurate tracking of inventory.

Market Downturn: 1997-99

For most sports retailers, the second half of 1997 and all of 1998 were somewhat less than ideal. Sales growth of both athletic footwear and apparel slowed industry wide, resulting in overstocked inventories and collapsing profits for both retailers and wholesalers. Many of the Finish Line's mall retail competitors lost ground. Even the superpower Nike, which by that time accounted for more than 60 percent of the Finish Line's merchandise, had disappointing numbers.

The Finish Line initially fared better than most of its competitors, closing its fiscal year in February 1998 with a 32 percent increase in total sales and a 42 percent increase in net income. While the Woolworth Corp., the operator of the Foot Locker, Lady Foot Locker, and Champs retail chains, posted a 4 percent drop in same-store sales, the Finish Line reported a six percent gain. The company's management believed that their larger store sizes allowed them to prosper while other athletic retailers hit the skids. Whatever the reason, investors responded favorably, and the company's stock price skyrocketed--climbing more than 100 percent between February and July 1998.

The company maintained its momentum through the spring of 1998 but stumbled during the summer months and was unable to recover. Same-store sales declined throughout the remainder of the year, as did net income. Finish Line's CEO Alan Cohen pointed to a sharp drop off in apparel and accessories sales as the culprit. "During this period, apparel fashion trends appear to have moved away from the athletic brands to other contemporary brands, which is evident by the recent sales strength of many non-athletic specialty retailers," he said in a September 29, 1998 press release. With approximately one-third of Finish Line's total sales coming from apparel and accessories, the company was harder hit by this particular decline than some of its competitors, who carried only 12 to 20 percent apparel and accessories.

Despite disappointing sales, the company continued to expand, opening 59 new stores in the fiscal year ending February 27, 1999, and remodeling or expanding 26 existing stores. At fiscal year-end, there were 358 Finish Line stores--a 19 percent increase over the previous year's total. In addition, the company's total retail square footage jumped up 32 percent to 2,095,000 square feet, as opposed to fiscal 1998's 1,587,000 square feet.

Despite its slump, the Finish Line entered 1999 determined to move ahead with expansion plans, which were to include opening between 40 and 60 new stores and remodeling another 20. The company planned to continue with its strategy of opening larger stores and carrying broader and deeper product lines than most athletic specialty retailers. This, management believed, would allow them to continue reaching a broader demographic market and to maintain operating margins that were larger than traditional stores. Although apparel sales were in a slump, management expected them to rebound. "We feel apparel is in a down cycle. It will not remain down forever," stated Steven Schneider, the company's vice-president of finance, citing the cyclical nature of sports clothing retailing.

Finish Line Surges Ahead in the Early 21st Century

The decline in apparel sales, which plummeted when consumers--teens mostly--no longer found licensed-sports apparel fashionable, hobbled Finish Line at the end of the decade. Several days before the end of 1999, the company's stock dipped below $5 a share, triggering concern at company headquarters. Schneider was right, however. The downturn did not last forever. When Finish Line mounted a comeback, its return was marked by resounding success.

A change in fashion trends was credited partly with Finish Line's resurgence. Teens began clamoring for retro apparel that featured out-of-business sports franchises, a trend that sent consumers back to sports apparel retailers such as Finish Line for fashionable apparel. The company's strong showing during the early years of the decade stemmed largely from another factor, however. Finish Line benefited significantly from a feud between its largest competitor, Foot Locker, and Nike. In 2002, Foot Locker informed Nike that it wanted to reduce orders on some of the sporting-goods manufacturer's products, a demand that angered Nike. Nike responded by not making available its most high-end tier of footwear to Foot Locker, a retaliatory blow that worked in Finish Line's favor. Finish Line received a greater allocation of Nike's shoes, giving the retailer a substantial boost to its business. In a September 15, 2003, interview with Indianapolis Business Journal, an analyst from Oppenheimer described Finish Line's good fortune. "Having Nike's key products, when Foot Locker does not, has enabled Finish Line to become the place to go in shopping malls for shoppers who want the latest styles of premier products."

As the relationship between Nike and Foot Locker soured, Cohen used the opportunity to improve his relationships with his other suppliers. Finish Line had quickly become the destination of choice for a substantial percentage of shoppers, giving the company the strength to expand its business with vendors such as K-Swiss, Reebok, and adidas. "We got aggressive with a lot of our vendors," Cohen explained in an October 19, 2003 interview with Investor's Business Daily. "We told them we wanted to do more business with them--and that the Nike situation showed that if they come to us with the right programs and products, we could do great things."

By the fall of 2003, Finish Line's stock value had increased remarkably from the company's low point at the end of the 1990s. Shares that had traded for less than $5 were trading for more than $30, giving the company's management cause for celebration. Cohen and his team worked to use the company's well-regarded reputation to expand the chain further. In early 2004, the company attempted to purchase stores from Footstar Inc., which filed for bankruptcy protection in March 2004. Foot Locker bid $160 million for 353 of Footstar's Footaction stores, and Finish Line countered by offering to pay $195 million for 192 Footaction outlets. Foot Locker increased its bid to $225 million in April 2004, eventually gaining control over the Footaction stores, but the rivalry between the two retailers did not end there.

Foot Locker was roughly six times larger than Finish Line, but it was evident that the much larger company feared the advances of its smaller pursuer. In May 2004, Finish Line filed a lawsuit against Foot Locker, alleging that the rival company was trying to convince Finish Line executives to join Foot Locker with the intention of gaining confidential information from the executives and harm Finish Line. While the battle between the two retailers dragged on, Finish Line management did its best to push forward with expansion plans and further intensify the rivalry between the two companies. In fiscal 2004, Finish Line opened 58 new stores, giving the company a total of 545 stores by April 2004. The total represented a more than five-fold increase from the store count a dozen years earlier, when the company converted to public ownership. In fiscal 2005, Finish Line intended to open approximately 60 stores in both new and existing markets. As the company moved forward with its expansion plans, its increasingly combative relationship with Foot Locker promised to provide drama in the months ahead. The stakes were high, and Finish Line was not content to let Foot Locker reign as the industry's dominant retailer forever.

Principal Subsidiaries: Spike's Holding, Inc.; Finish Line Transportation Company, Inc.

Principal Competitors: Foot Locker, Inc.; The Sports Authority, Inc.; The Athlete's Foot Group Inc.; Wal-Mart Stores, Inc.; Dick's Sporting Goods, Inc.

The Finish Line, Inc. History

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