These 2 Companies Make for a Great Fit

These 2 Companies Make for a Great Fit

When Finish Line and Macy's announced last year that they were teaming up, some were skeptical about how quickly Finish Line stores could get rolled out into select Macy's locations. Well, things are going better than expected for both companies. Currently, Macy's has about 100 Finish Line stores within a Macy's, and the company plans to have a total of 450 by this time next year. On this month's earnings call, CFO Karen Hoguet said

Finish Line is doing extraordinarily well. We feel very good about Finish Line, as well as the other businesses.

The path Macy's is embarking upon with Finish Line is the newest trend in retail: the shop-within-a-shop concept. The strategy is to take the space within a large department store and create sub-shops that make shoppers feel like they entered another store. These new in-stores will carry athletic shoes as well as sports apparel and accessories. Finish Line will ensure that Macy's has the newest styles and best brands for its locations and online at Macy'

Macy's will only receive a licensing fee from the Finish Line stores; Finish Line will book the sales and profits. Macy's goal is to get more customers into its stores, particularly a younger demographic that is looking to buy athletic shoes. By having to walk through a Macy's store to get to Finish Line, Macy's hope is for customers to make other purchases along the way. Finish Line gets access to the female demographic that primarily shops at Macy's and not at a Finish Line store. The partnership exposes each company to a new set of customers.

One of the key reasons why Macy's partnered with Finish Line is because Finish Line prides itself on its shopping experience. The company's employees are called sneakerologists. They are considered product specialists and understand all facets of the athletic shoe business. These specialists will be trained for each Macy's location so customers can now get expert advice. CFO Karen Hoguet further added on the earnings call

Our mission is to provide great assortments of wanted products to our customers any way we can. And if we can't do it ourselves, we love finding partners like Sunglass Hut or Finish Line to work with to bring the best that we can to Macy's and to Bloomingdale's.

Finish Line and its competition
When all of the Finish Line stores are rolled out within Macy's, those stores are expected to add $250 million to $350 million in new sales for Finish Line. This puts sales growth for Finish Line next year at 11%, compared to its chief competitor Foot Locker , which is forecasting 4.5% revenue growth.

While Finish Line is focused on its expansion within Macy's, Foot Locker has its eyes on the international market, particularly Germany and Europe. In July, Foot Locker completed the acquisition of Runners Point Group in Germany. Runners Point Group operates more than 200 athletic retail stores, primarily in Germany. Runners Point Group had sales last year of around $254 million. This acquisition increases Foot Locker's footprint in Europe to over 800 stores with combined revenues of more than $1.25 billion.

Foot Locker is the largest athletic shoe retailer with an international presence. Consider that Foot Locker's European business will now be about the same size as Finish Line's U.S. business. With the strong demand seen globally for athletic shoes, I see Foot Locker being a prime beneficiary of growth outside the U.S.

Macy's and its competition
One of Macy's chief competitors is J.C. Penney . Former CEO Ron Johnson was a big fan of the store-within-a-store concept, but it didn't work for J.C. Penney in that it drove away its old customers and failed to attract new customers. The end result for J.C. Penney was a decline in sales and an increase in losses. Not a good combination for a retailer.

The focus going forward for J.C. Penney is threefold. One, the company needs to stop the boardroom dissension and present a united front. With the company's largest shareholder, Bill Ackman, resigning, hopefully that will quiet the drama. Second, the company needs a permanent retail-minded CEO. The company brought back former CEO Myron Ullman to right the ship, but a permanent CEO to guide the company into the future needs to be brought on.

Bill Ackman has publicly stated that he would like Foot Locker CEO Ken Hicks to come on board. That would be good news for J.C. Penney, but bad news for Foot Locker if they lost him as their CEO. Third, the company needs to stop bleeding money. An equity raise or the sale of assets to raise cash is what's needed most. Some have speculated that a deep-pocketed private equity firm could look at purchasing or investing in J.C. Penney.

Foolish assessment
I think Finish Line and Macy's make a great fit together. Both companies have a similar focus on providing a great customer experience. The partnership is complementary and gives each company what it's looking for. Both look cheap as well, with Finish Line having a forward P/E of 12, and Macy's at 12.

Foot Locker's presence in Europe is almost the same size as Finish Line's in the U.S. There's a lot of potential for Foot Locker there, and the demand for athletic shoes and apparel is strong across the globe. Foot Locker looks cheap as well, with a forward P/E of 11.

I advise investors in J.C. Penney to stay away. The situation at J.C. Penney is changing on a daily basis. The company's shares are reacting to the latest news headline. Trading the news is never a good idea, and the long-term picture for J.C. Penney remains unclear.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only those most forward-looking and capable companies will survive, and they'll handsomely reward those investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in The Motley Fool's special report. Uncovering these top picks is free today; just click here to read more.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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