Finish Line to Focus More on Efficiencies as Comps and Top-Line Growth Moderate…

The Finish Line may have seen their best quarters of top-line growth behind them now as the athletic specialty retailer starts to settle into the reality of more moderate comparable store sales gains and focus on operational efficiencies as the main driver for continued earnings growth. Still, net income growth far outpaced sales growth for the first quarter ended May 28 , which included the addition of 38 Man Alive stores.

Comps were up just 2% for the period as a 3% comp sales decline in apparel & accessories cut into the 3% comp sales gain in footwear for the quarter. The average selling price for footwear rose 8%.

FINL got their biggest gains from the children’s and women’s business in the first quarter, while weakness in the licensed apparel category ate into gains in branded apparel and the total results for the retailer.

Alan Cohen, chairman and CEO, said that sales were “led by premium product including new technologies and marquee shoes.” Product margins improved 80 basis points for the quarter, helping push GM up 30 basis points for the period. A 60 basis point hit from occupancy costs cut into the improvement, due primarily to the higher occupancy cost with the 99 stores opened in the last 15 months. Cohen said stores take three to five years to reach their sales peak.

Kid’s footwear was up in double-digits for the quarter and women’s had a mid-single-digit gain. The men’s business was flat. Running was cited as the strongest category, and the athletic casual category was also cited as a key contributor. FINL said that fashion footwear from Nike and adidas “continued to be a driver” for footwear sales growth for Q1. They also pointed to continued growth in classics from K-Swiss, adidas, New Balance, and Reebok. They consistently called out Asics, New Balance, Converse, and Puma as key brands. Basketball did not perform well with the exception of the Jordan brand.

In apparel, positive results in the branded business, highlighted by the exclusive Maddie girl’s line from Nike, and “significant gains” in private label, were not enough to offset the declines in the licensed business.

Internet sales grew more than 40% for the quarter, helping establish the Direct-to-Consumer piece as the fastest-growing segment at The Finish Line.

During the company's conference call with analysts on Friday, management appeared to be much more reserved and even resolved to their current position in the mall, apparently coming to terms with the fact that Nike is back in business with Foot Locker for the long haul. Mr. Cohen even stated as much, proclaiming that “Foot Locker is back” and that “Footaction is certainly back in the marketplace too” after being nearly non-existent a year ago. The situation has clearly shifted, leaving Mr. Cohen to state that FINL can “hold our own.”

Management is apparently settling into a much more deliberate management of the business. Cohen said they “weren’t necessarily focusing on the expense items” when comps and top-line sales were growing like they were until this last quarter.

Part of the new strategy will entail segmentation down to the store level, which is really just putting the right product at the right place at the right time. They are segmenting the stores by consumer profile, which is expected to allow for “continued escalation for niche brands such as Asics, Puma, and Converse in the appropriate store base” for back-to-school and holiday.

Based on the success of integrated footwear, apparel, and accessories presentations such as Nike’s Maddie program and the Club Life program, Finish Line sees rolling out more integrated programs from Nike, adidas, and Puma for both men and women.

At Man Alive, FINL expects to keep the primary focus on apparel, which currently makes up 90% to 95% of the merchandise mix. Cohen said he might see that moving to 20% to 25% footwear “very easily”, but stressed that the format will remain apparel-centric.

Merchandise inventories at quarter-end were also up on the inclusion of Man Alive, but were still up 15.3% for the Finish Line stores. Finish Line store count was up 14%. Comp inventories were up approximately 3% versus the same time last year, in line with guidance.

The retailer opened 28 new Finish Line stores in the first quarter. They also remodeled seven stores and closed one store, for a total of 625 doors at quarter-end, or a net gain of 75 stores versus last year at the same time. Square footage increased 12% to 3.55 million square feet. FINL also opened one Man Alive store for a total of 38 stores.

For the year, FINL expects to open 70 new Finish Line stores and 10 to 15 Man Alive stores. They also expect to remodel a total of 25 Finish Line stores and close three to five stores throughout the year.