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Tickers in this Article: GCO, FINL, FL, NKE, TBL
In July I wrote about Finish Line's (Nasdaq:FINL) return to health after an aborted takeover attempt of foot- and head-wear retailer Genesco (NYSE:GCO). I concluded that Finish Line was better off without the merger, and now I'll discuss why the same is true for Genesco. Sometimes calling off a marriage at the last minute isn't such a bad idea.

A Checkered Past
James Franklin Jarman started the company in 1924, changing the name to General Shoe Company in 1933. In 1959, after many non-footwear acquisitions including Henri Bendel, it changed its name to Genesco, reflecting a company that was more than just shoes. Unfortunately, the move away from footwear diverted its attention, sending the company into financial distress.

Like a yo-yo, Genesco's sales were up and down, hitting the $1 billion mark in 1968. Between then and now, many downsizings have taken place to return it to profitability. In the last five years, revenue has grown from $837 million in 2003 to $1.5 billion in 2008 - only $100 million more than the $1.4 billion it generated in 1972. That's 36 years ago, and with no inflationary adjustment. Genesco hasn't always lived up to its billing.

Just Say No
In my opinion, takeovers or mergers rarely work if there isn't an understanding of the role each party plays in the transaction. Clearly, Genesco felt it was at least an equal to Finish Line, having twice rebuffed Foot Locker (NYSE:FL), its much bigger rival. Finish Line, while much smaller, would be running the combined company. Something had to give. As it turned out, that something was Genesco's finances.

Finish Line pulled the plug on the deal, and soon both parties found themselves in court fighting over whether the deal should proceed. Ultimately, in March, Genesco agreed to a settlement with Finish Line, receiving $175 million in cash and 6.5 million shares. All Genesco shareholders, as of May 30, would receive 0.34 of a share of Finish Line stock. (Learn the five ways mergers and acquisitions can increase a company's value in Mergers Put Money In Shareholders' Pockets.)

On March 4, the day of the settlement announcement, Finish Line shares were trading at $4.28. At September 3 prices of around $11.75, those 6.5 million shares had a $50 million gain in six months, a period that wasn't very friendly to most stocks.

Sales Boosted By Head-Wear
Genesco's second quarter beat analysts' estimates by 350% - 18 cents actual versus 4 cents estimated. Comparing like numbers requires a lot of sorting, but they are there. Charges galore hide a relatively healthy business.

Net sales were up 8% to $353 million from $328 million a year earlier. Same-store sales were up 4%. One of the best results was at the company's Hat World division, which increased sales of 13% on top of 7% same-store sales gains. Further, Hat World's operating income increased more than 54% with a margin over 10%, compared to 8% a year earlier. Hats are hot.

As a result, Genesco raised guidance for the rest of the year. It now expects earnings per share of $2.15 to $2.20, excluding charges. There's a tip of the hat on the news!

Stock Performance
If there's one thing investors like, it's consistency - and there has been very little in Genesco's 84-year history. While sales have grown, earnings have come and gone. Operating earnings grew from $51.6 million in 2003 to $121 million in 2007, dropping to $45.2 million in 2008. Of that drop, $27.6 million relates to the terminated merger agreement. Certainly, operating profits would have been higher without the costs and distraction of the merger, but then shareholders wouldn't be the beneficiaries of Finish Line stock and a $100 million stock repurchase program, both part of the settlement reached in March.

One hundred dollars invested at the end of fiscal 2003 was worth $201.32 at the end of fiscal 2008. This is better than the S&P 500 at $180.04, but worse than the S&P 1500 Footwear Index, which includes companies like Nike (NYSE:NKE) and Timberland (NYSE:TBL). In the past 52 weeks, Genesco's stock is down 16%. However, in August the 50-day moving average rose above the 200-day moving average for the first time since late 2006. That's a good sign. (For more on reading charts, check out Moving Averages: Strategies and Five Chart Patterns You Need to Know.)

Bottom Line
In mid-August, Genesco announced its Johnston & Murphy subsidiary, known for making quality men's shoes, was introducing its first women's line with prices from $150 to $250. Initially available in 28 Johnston & Murphy stores, it will introduce a women's catalog in the fall. Focus is good. Genesco needs to forget about making deals and just go out and operate good retail stores. The stock price will take care of itself.

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