Shares of Finish Line bounced back slightly on Friday after the company reported second-quarter results that were ugly but on plan with a downwardly-revised forecast given in late August.
Encouragingly, a few hot styles are selling well and increased allocations of them in the future are expected to drive some improvement in its fiscal second half. “There were a number of bright spots from our assortments that have us cautiously optimistic about our future,” said Sam Sato, CEO, on a conference call with analysts.
On Friday, shares of Finish Line rose 51 cents, or 5.5 percent, to $9.73, With the shares also boosted lately by speculation over a possible takeover by Sports Direct, shares are nearly back to the $10.42 level they were trading at before its August-28 pre-announcement.
Shares, however, are still well off from the $18.81 level they began at the start of the year as well as its all-time high of $31.90 reached in 2014 as the company has issued a string of earnings shortfalls.
Sato also cautioned that the company expects “sales and margin trends to remain difficult throughout the remainder of the year”and noted that the industry overall was still learning to adapt to changing buying behaviors around sneakers.
As reported on August 28, Finish Line now expects:
- Fiscal year ending March 3, 2018: Adjusted EPS in the range of 50 to 60 cents, down from adjusted EPS of $1.06 the prior year. The previous guidance range had been $1.12 to $1.23. Finish Line comps are expected to decline 3 to 5 percent versus previous guidance calling for an increase in the low-single-digits.
- Third quarter ending November 25, 2017: An adjusted loss per share in the range of 32 to 40 cents, compared with an adjusted loss of 24 cents for the same period last year. Finish Line comps are projected to decrease 3 to 5 percent.
- Fourth quarter ending March 3, 2018: EPS is projected to arrive in the range of 50 to 58 cents, which compares to 50 cents in the year-ago fourth quarter. An extra week in quarter versus the prior year is expected to add approximately 6 cents to the 2018 fourth quarter.
In the second quarter ended August 26, earnings on an adjusted basis tumbled 79.6 percent to $4.8 million, or 12 cents a share. On August 28, Finish Line said it expected EPS in the range of 8 to 12 cents. At the time, Wall Street on average had expected earnings of 38 cents.
Adjusted earnings primarily exclude the impact of store-impairment charges. Net earnings were down 85.7 percent to $3.3 million, or 8 cents a share.
Consolidated sales in the quarter were $469.4 million, a decrease of 3.3 percent. At the Finish Line banner, comps slid 4.5 percent. When it issued its first-quarter results in June, the company was expecting a decrease in the low-single digits range. One bright spot continues to be its Macy’s in-store shops, which showed a comp gain of 5.6 percent in the latest quarter.
Companywide gross margins eroded 390 basis points to 27.8 percent due to lower product margins on less full-price selling and higher markdowns in response to the highly-promotional selling climate and slow-moving stock. Occupancy decreased 60 basis points.
SG&A expense increased 200 basis points to 26 percent of sales as cost savings and disciplined expense management was not enough to offset the deleverage from the sales drop. Inventories were down 7 percent on a consolidated basis.
On the call, Sato said the overall marketplace for athletic footwear “became much more promotional” in July and August to put pressure on sales and margins in the latest period. At the Finish Line, same-store sales were down 0.6 percent in June, 9.0 percent in July and 4.2 percent in August.
Footwear comps at the Finish Line banner were down in the mid-single digits in the quarter. Men’s was down low-single digits, women’s off mid-single digits and kids showed a decline in the high-single digits. By category, running comps were up mid-single digits but basketball was down mid-single digits and lifestyle declined mid-teens.
The underperformance in footwear was due to a “slowdown in more mature platforms,” but Sato mostly focused on better-selling styles. Nike VaporMax was described as a “standout” with “very strong” weekly sell-throughs. In Adidas, NMD, Alphabounce, Ultra Boost, Swift Run and Finish Line’s mall-exclusive Pure Boost “were on fire” in the quarter. Retro running styles such as Huarache and Huarache Ultra from Nike grew in men’s. Sato noted that these gains were offset by “changing sales trends within some of our more mature running franchises.”
In basketball, demand for Nike signature products including Kyrie, Paul George, Lebron and Kevin Durant were likewise “offset by declines in the remaining elements of our basketball offerings, including slower sell through of certain Jordan retros.”
In lifestyle, sales of newer models from Adidas Originals, led by EQT, Tubular Shadow and Explorer, as well as retro styles from New Balance and Puma helped to partially offset softness in other areas.
Kids saw solid demand for several casual running and performance products similar to its adult business but was likewise hurt by softening trends in more established platforms and the market currently lacking adult takedowns on many emerging styles.
In soft goods, same-store sales were down low-double digits with apparel declining high-single digits. Gross margins “improved meaningfully” as a greater emphasis on key items that complement its sneaker offerings fueled sell-throughs for wind wear, leggings and tank tops. Added Sato, “Over time we are confident this strategy will result in a smaller but much, more profitable soft goods business.”
Soft goods only accounted for 6 percent of sales companywide in the period.
Sato said that given the challenging climate expected for the rest of its fiscal year, a priority for the Finish Line banner will be on expense and inventory management although the chain continues to take several steps to increase traffic and conversion.
To improve conversion on mobile devices, the focus will remain on enhancing speed, search customization and smooth checkout. New features include the ability for customers to easily track packages, including when it arrives at their doorstep. Later this year, customers will be able to initiate a return directly from the website. On the Finish Line app, in-store beacon and geo fencing technology is being added to enable tailored offers to customers in-store based on their preferences.
Efforts to improve the in-store experience are focused on rolling out technologies featured in its new store design. The tech features include the RFID-driven Sneaker Feed digital display that allows customers to scan a shoe to see content such as consumer ratings, video inspiration, product details and socially-integrated images that show how the shoe should be styled. Said Sato, “This exciting feature can add to a customer’s confidence in their purchase while making the entire shopping experience more interactive.”
Another key feature in the redesigned stores is the Shoe View Mirror that lets customers try on footwear and see how it looks super-imposed in environments such as the streets of New York City or on a basketball court. The images can be shared with friends on social media. Said Sato, “No longer is the store environment only about the transaction. It’s about being memorable and shareable.”
Another 10 stores were remodeled to the new format in the second quarter, including flagships in Chicago and New York, and 10 to 15 are set for remodels in its second half. In sum, about 90 of its 569 locations will be remodeled to the new format by holiday and they’ve been providing a mid-single digit comp lift.
In marketing, a success has been its “Shoes So Fresh” campaign that saw over 20 million YouTube views for its back-to-school execution. A focus specifically on female consumers well as with three of its key influencer partnerships helped drive brand awareness, ad recall and brand interest. The program will continue over the holiday period.
On the product front, the focus remains on capitalizing on the styles currently working in stores. In running, the back half is expected to see expanded allocations of VaporMax, the introduction of the VaporMax Moc and VaporMax CS, and the release of a VaporMax for kids. Huarache and Huarache Ultra from Nike are expected to fuel “solid results” in retro running and Sato said he is “excited” of Nike’s React technology that arrives in the spring.
Adidas’ momentum in running is expected to continue to by supported by the same models that did well in the second quarter.
In basketball, signature product is expected to be led by the new Lebron shoe in addition to new models and colorways from Kyrie, Paul George and Curry. Nike’s Air Force One tied to the kickoff of the NBA season is expected to be “a strong driver as well.”
Sato particularly talked up Nike’s introduction of the NikeConnect jerseys as part of its NBA uniform launch that enables fans to gain access on their smartphone to athlete information and exclusive offers. Said the CEO, “We have high expectations that the launch later this month will be an ignition point for the Nike brand as we move into this holiday shopping season.”
Influencer and brand partnerships such as the one that supported the launch of VaporMax will continue to be a priority. Campaigns are being scheduled around the start of the NBA season. Finish Line also formed a partnership with platinum hip-hop group Migos to serve as brand ambassador and they’ll be featured in upcoming holiday executions.
At Macy’s, the 5.6 percent comp gain in the second quarter reflected investments to expand and reposition in-store shops that are driving a “meaningful lift” in sales and profits. Eighteen shops were repositioned in the quarter, including Macy’s Herald Square that now also includes a stand-alone women’s shop. Kids grew 39 percent in the quarter due to continued expansion. Kids is in 286 doors and represented 19 percent of its Macy’s business in the quarter, up from 14.5 percent in the same period a year ago. It has 378 branded shops.
Finish Line’s sales through Macys.com grew 17 percent – accounting for 24 percent of its Macy’s sales versus 22 percent a year ago. The online business is benefitting from expanded online assortments and increasing store fulfillment. Sato said Macy’s remains on track to hit the high end of its long-term goal of annual sales of $350 million in fiscal 18, ahead of plan.
In the Q&A session, Sato noted that a big part of the problem at the Finish Line banner is that the “the whole marketplace…has gotten a lot more promotional” in a slow-selling retail environment. When new product arrives, markdowns are required to clear slow-sellers on shelves.
But the misses can be largely traced to trends evolving “much faster and much more often than what we’ve ever seen before.”
And while he’s “really excited with the strategies that we have in place relative to how we’re connecting and engaging with the consumer real-time and on their terms,” the trends are still changing too fast given that the majority of product still takes nine months from design to selling floor.
Sato added that more product is coming in on a six-month timeframe but more investments and innovation in speed-to-market will be required. Sato stated, “That’s going to be critical in the future for this industry to continue to grow not just in terms of our business but in terms of our relevance and connection to the consumer.”
Finish Line officials declined to comment further on the company’s adoption of a shareholder right plan that was also mentioned in the August-28 release. The adoption came after Sports Direct since that start of the year had acquired a 7.9 percent direct stake in Finish Line as well as a 29.6 percent total economic interest, with the balance held through contracts for difference (CFDs).
Some have speculated that Sports Direct, having acquired Eastern Mountain Sports and Bob’s Stores in bankruptcy proceedings to mark its entry into U.S. retailing, may explore acquisition talks with Finish Line.
On the call, Ed Wilhelm, CFO, said the shareholder rights plan “is designed to ensure that the company is able to appropriately consider whether proposals, if any, are in the best interests of all of our shareholders” and that Finish Line would be making no further comments.
Photo courtesy Finish Line
