Footwear giant tries to diversify

The Baltimore Sun

What do you think of my shares of Finish Line Inc.? Will the company's recent acquisition help or hinder it?

- F.M., via the Internet

Success doesn't always breed success.

The giant footwear retailer was successful recently in outmaneuvering rival Foot Locker Inc. to strike a deal to purchase Genesco Inc. for $1.5 billion. This deal, slated to close in the fall, would make its product mix more diversified and upscale, something Foot Locker also was trying to accomplish.

Finish Line operates more than 800 Finish Line, Man Alive and Paiva stores. Genesco sells shoes, hats and accessories in more than 2,000 retail stores such as Journeys, Johnston & Murphy, Underground Station and Lids.

Besides the challenge of pulling together two businesses, there is the larger question of whether the premium price paid and debt assumed are fully justified. It plans to pay $11 million from cash on hand and obtain up to $1.6 billion in financing to complete the deal.

This puts financial pressure on Finish Line at a time when footwear sales and consumer spending are not robust. It posted a net loss of $3.9 million in its recent fiscal first quarter because of sluggish sales and rising expenses. It has a history of inconsistent earnings.

Finish Line (FINL) shares are down 60 percent this year after last year's 18 percent decline. The company said it won't declare a quarterly cash dividend because of the costs associated with the Genesco purchase.

When the deal closes, Genesco will become a subsidiary of Indianapolis-based Finish Line but keep its headquarters operations in Nashville, Tenn. Genesco twice rejected lower bids from Foot Locker.

The merger does add depth to the management team. Robert J. Dennis, president of Genesco, would become president of the combined company. Alan H. Cohen, chairman, chief executive and co-founder of Finish Line, retains his current positions.

The consensus rating on Finish Line stock is "hold," according to Thomson Financial, with all 11 analysts following it rating it a "hold."

Finish Line operates in a competitive, cyclical and often fickle business. It must not only deal with powerful suppliers such as Nike and Under Armour but also go toe-to-toe with aggressive retailers such as Dick's Sporting Goods and Foot Locker.

Earnings are expected to decline 41 percent in the current fiscal year that ends in February and rise 37 percent the next fiscal year. The five-year annualized growth rate is projected to be 12 percent.

Does Fidelity International Discovery Fund live up to its reputation?

- R.C., via the Internet

It is a broadly diversified foreign fund with a fine long-term track record and reasonable expenses.

Although portfolio manager William Kennedy has been on board less than three years, he has produced strong results and previously excelled at other overseas funds.

The $12 billion Fidelity International Discovery Fund (FIGRX) is up 20 percent in the past 12 months and has a three-year annualized return of 24 percent. Both results rank in the top 15 percent of large foreign growth and income funds.

"I have a 'buy' rating on the fund, and the fact that it is so broad-based means the chance of getting burned in it are very low," said Jack Bowers, editor of the independent Fidelity Monitor newsletter in Rocklin, Calif. "While I'd caution that good times in foreign markets don't last forever, it is one of the better funds for investing internationally."

The portfolio mix of Fidelity International Discovery is close to Morgan Stanley's EAFE (Europe, Australasia and Far East) index. About two-thirds of holdings are in the United Kingdom and western Europe. Japan represents about 16 percent and the rest of Asia 15 percent, with smatterings in North and Latin America.

Foreign markets tend to have more value stocks than growth stocks, Bowers said, so this fund has only 8 percent in technology and 8 percent in health care. That can hold it back in stronger growth markets.

Kennedy, who previously managed Fidelity Pacific Basin and Fidelity Advisor Japan, also was director of Fidelity's Hong Kong office.

One-fourth of Fidelity International Discovery's portfolio is in financial services, with consumer goods and industrial materials some other significant concentrations. Top holdings are Switzerland's Roche Holding Ltd. and Nestle SA; Japan's Toyota Motor Corp. and Canon Inc.; Germany's E.ON AG, Allianz SE and Siemens AG; France's Total SA; the UK's Royal Dutch Shell PLC; and Australia's CSL Ltd.

The "no-load" (no sales charge) fund requires a $2,500 minimum initial investment and has an annual expense ratio of 1.03 percent.

How do I determine how much of my portfolio to put into stocks and bonds?

- G.M., via the Internet

Asset allocation, which diversifies an investor's holdings in various percentages of cash, bonds, stocks, real estate and other investments, takes into account one's time horizon and risk tolerance.

Because stocks are more volatile, a rule of thumb has been to increase bond holdings when approaching retirement. While bonds return less, they are typically more reliable. Some experts say you should subtract your age from 100 to determine the amount of your portfolio in stocks.

But asset allocation is an individual decision based on investment personality and circumstances. Having emergency money is important, and there are many different types of stocks and bonds. That's why some investors prefer asset-allocation mutual funds that make those decisions.

Andrew Leckey writes for Tribune Media Services.

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