Weekly News....6/24/05

Tuesday, November 1, 2005 -

Weekly News....6/24/05

JUNE 24, 2005 -- Fairview Explains Opposition To Saucony Buyout

Fairview Capital Investment Management, LLC, beneficial owner of 2.6% of the aggregate shares outstanding of Saucony, intends to vote against the proposal to sell Saucony to Stride Rite because the $23 per share sale price is inadequate.

The company said, "Our reasons are as follows:

"1. Saucony shareholders will receive zero control premium and none of the projected cost-saving synergies. Stride Rite's 12% share price increase upon announcement of the deal supports this assessment. Based on the midpoints of Saucony's 2005 guidance and Stride Rite's expected synergies, Stride Rite is paying just 10x net income (cash-adjusted) and 5.5x EBITDA. Excluding synergies, the $23 offer price implies valuation multiples of 14x net income (cash-adjusted) and 7.5x EBITDA, which we view as an appropriate stand-alone trading valuation. The inclusion of a 25% control premium and one-half of the synergies would imply a fair acquisition price of approximately $33.

"2. The strategic review process did not include a special committee of independent directors. Saucony's significant insider ownership and dual-class share structure create numerous potential conflicts of interest. Without the supervision of an independent committee, this process may have favored the interests of management over those of public shareholders.

"3. Saucony rejected a $25 cash offer in April when the Stride Rite bid at that time was $23. According to the preliminary proxy, the Board rejected the higher offer 'because, among other things, the other bidder's bid imposed a requirement that our management rollover and subject to continued vesting a portion of their options and potentially other equity.' We believe the higher offer may have been more favorable for public shareholders.

"4. John Fisher and Charles Gottesman will receive $5.3 million of 'executive benefits' payments, which will effectively pay them $26 for each of their shares.

"5. Management's preference for a cash transaction may have deterred some public company bidders. We believe Saucony may have been able to achieve a higher price if it entertained stock offers from Stride Rite or other bidders.

"6. Management's growth objective may have discouraged some bidders who might have been willing to pay more for Saucony but who would not commit to investing heavily in the business after the acquisition. Management has been explicit in its press releases and conference calls that it placed a high priority on finding a buyer that would invest in the business to accelerate growth. In a cash transaction, the buyer's post-acquisition intentions have no bearing on the value to selling shareholders.

"7. Saucony may not have considered the value of remaining independent. The preliminary proxy briefly mentions the evaluation of a leveraged recapitalization, but does not say whether this analysis was ever completed. We believe that, for example, were Saucony to borrow $45 million (2.5x EBITDA) and distribute this along with its cash on hand at June 30, it could fund an $11.50 dividend. We estimate that such a transaction would reduce Saucony's projected 2005 diluted earnings per Class B share to approximately $1.00, assuming a full-year impact for such a transaction. Using a 14x multiple, we believe such a transaction would deliver the equivalent of approximately $25.50 of value to holders of Class B shares, while allowing shareholders to retain ownership and benefit from future value creation.

8. Chestnut Securities, the financial advisor engaged by Saucony's management, apparently has not completed a transaction of this nature in its ten-year existence. The only evidence we can find of Chestnut's investment banking activity is a few small venture capital deals.

9. Chestnut's fairness opinion undervalues Saucony. In its comparable company trading values analysis, Chestnut applies a 19.7% discount to Saucony's valuation based on historical trading patterns. We believe this is inappropriate because the conditions that led to the discount in the past (Saucony's turnaround in 2001 and 2002 and its dual-class share structure) are not relevant to an acquisition valuation today. In the discounted cash flow analysis, we believe the 15% to 19% range of discount rates used by Chestnut is much too high and is out of line with current capital markets conditions. Finally, Chestnut's valuation analysis does not consider the value of the cost-saving synergies that Stride Rite expects to achieve, and that we believe should be shared with Saucony shareholders."

The statements were not intended to be a solicitation of any proxy. Such statements are only an announcement of how Fairview Capital Investment Management intends to vote with respect to the transaction discussed herein and the reasons therefor.

Through client accounts for which it serves as investment adviser, Fairview Capital beneficially owns 34,100 shares of Saucony's Class A Common Stock and 142,862 shares of its Class B Common Stock.

Stride Rite Gives Fisher $337,500 Consulting Contract

In its proxy statement soliciting votes for the acquisition of Saucony by Stride Rite, Saucony revealed that CEO John Fisher entered into a consulting agreement with Stride Rite. Fisher will provide general consulting services, assist in the integration of the company with Stride Rite, introduce Stride Rite to key business partners of our company, and make himself reasonably available to consult on other specific projects as reasonably requested by the chairman and chief executive officer of Stride Rite. The term of the consulting agreement is one year, beginning at the effective time of the merger and ending on the first anniversary of that date. Fisher will perform his consulting services for the one-year term and will be paid for those services as follows:

* For the first three months, Fisher will perform his services on a full-time basis and will receive $45,000 per month;

* For the second three months, Fisher will perform his services on a 75% part-time basis and will receive $33,750 per month;

* For the third three months, he will perform his services on a 50% part-time basis and will receive $22,500 per month; and

* For the last three months, Fisher will perform his services on a 25% part-time basis and will receive $11,250 per month.

Element Skateboards

Fleet Feet Sports Comped +10.6% In 1Q

Fleet Feet Sports reported 1q sales of a record $11 million. This was an increase of 17% over 1Q04. The growth was driven by strong comp-store sales increases. They were up 10.6% and a positive 13.3% on a trailing 12-month basis. Comps by month were: January +9.3%; February +14.1%; and March +8.7%. Sales by month were: January +15.8%; February +20.7%; and March +14.8%.

The Finish Line Looking Internally For Growth

The Finish Line CEO Alan Cohen admitted during the company's 1Q conference call that significant comp-store gains aren't as easy in the past, especially with Foot Locker getting back in Nike's good graces. He noted that while comps improved only 2%, Finish Line was able to produce EPS at the top end of its guidance. He said this was indicative of Finish Line having a plan in place to increase market and share operating efficiencies, while continuing to provide shareholder value.

1Q net income was $12.7 million, or 26¢ per diluted share vs $10.4 million or 21¢ per diluted share reported in 1Q04. Net sales increased 12.9% to $291.3 million. Comp-store net sales increased 2% on top of a 14% increase reported for 1Q04.

Merchandise inventories on a consolidated basis (including Man Alive) were $259.8 million at May 28, 2005. Finish Line merchandise inventories were $255.6 million compared to $221.6 million at May 29, 2004. On a per-square-foot basis, Finish Line store merchandise inventories increased approximately 3%.

Cohen said that going forward Finish Line will focus on: Customer segmentation at store level; new product opportunities that will differentiate the chain; disciplined inventory management; continued store growth to increase market share; and an expense management strategy.

Cohen said the company has been tracking traffic at a number of its doors to measure conversion rates. There are systems which will help Finish Line to vary its offerings so that the most relevant product is at each of its doors. More relevant assortments, Cohen hopes, will help increase sales and conversion rates. This can be accomplished, he added, without "throwing an army" of new merchandisers on the payroll.

The systems might uncover opportunities for some of the lower tier brands. Finish Line might find demand for some brands in localities, rather than nationally.

This past 1Q saw gross margins improve 30% to 30.1%, There was an 80-bp improvement in product margins and a 10-bp decline in shrink. This was offset by a 60-bp increase in occupancy costs. This was attributed to the 99 new stores opened since 1Q04. They tend to have higher occupancy costs and take three to five years to reach profitability.

Footwear sales were led by the running silhouette. Naturally, Shox dominated the category, but the company noted that it has become easier to sell $100-and-up footwear from more suppliers than Nike. Basketball shoes are real disappointment for Finish Line and others. Cohen did say that the sole exception was Jordan and this included more than retro and game shoes. Athletic casual and kids also performed well. Finish Line said that Reebok has opened the chain for its music-inspired footwear. Boots are an issue outside the urban market.

Finish Line still feels the effect of the decline in fashion-based licensed apparel. Private label continued to improve. The exclusive Maddie collection from Nike has been the best branded performer. (There is some speculation in the trade that the success the company has had with Maddie may lead to a women's format of the chain.)

Success in apparel will depend on growing private label and branded apparel and accessories carrying higher average selling prices.

The company opened a prototype Man Alive door in Richmond. While it sees opportunities in selling more footwear in Man Alive, it will remain an urban apparel chain. Cohen said he expects to offer some of his key footwear brands in the acquisition. Finish Line will open 15 of the Man Alive stores this year.

Finish Line Launching Shox TV Campaign

The Finish Line launched a new TV campaign in conjunction with Nike and agency Wieden+Kennedy. The three 0:15 spots called "Motivation" feature the new Nike Shox Cog running shoes. These new ads will air primarily on national cable television including ESPN, ESPN 2, ESPN News, MTV, MTV 2, Comedy Central, Spike, BET, G4, and Adult Swim on Cartoon Network. The Nike Shox Cog ads will also appear online via Yahoo! Music, ESPN Motion, Gamespot, MTV and Maxim. The "Motivation" spots feature three colors of the Nike Shox Cog, and the spots will run as bookends when they air on national TV.

"Motivation" depicts three runners on separate treadmills with various scenarios projecting behind them. The background scenarios include a male runner on a treadmill with an ostrich chasing him, a female runner with ghost eyes chasing her and another male runner with aliens coming after him.

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January 30, 2005
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