Finish Line a Slave to Fashion in the First Quarter…

The first quarter results at The Finish Line, Inc. surprised few last week since the retailer’s formal report comes on the heels of a warning issued five weeks ago (SEW_0621) and a quarter-end sales report three weeks ago (SEW_0623) that saw first quarter comp store sales do an about-face versus the comparable period last year. Still, there was little in the earnings report issued last week or the subsequent conference call with analysts that gives the market much idea of any reversal of fortunes in the near future, other than hopes that some Nike marquee product could do better this year than last.

The women’s business continues to be the biggest challenge for The Finish Line since that consumer has clearly made a fundamental shift away from the Shox fashion play to the low-profile fashion athletic silhouettes. While FINL is making moves to get fully ramped up in this product by Holiday, the team readily admits that this consumer has far more options to buy this product in the mall, including department stores. At its peak, women’s represented about 23% of the business, but has slipped to about 20%, still a bit better than the 17% to 18% it represented before the retailer started to build that base.

On the men’s side, management sees the issue as more of a competitive issue, acknowledging that Nike’s expanded distribution of marquee product into the various Foot Locker nameplates, and a stronger Footaction business, is having an impact on that business as well.

The 6.3% comp sales decline in footwear for the period was driven by double-digit declines in the women’s and kid’s businesses. Management said the women’s decline was the result of weakness in performance footwear (re: Shox), while the kid’s declines were attributable to the girl’s business. Management also noted that the fashion move from performance products to fashion athletic has put pressure on overall average selling prices at Finish Line, which were down 3% for the period.

Men’s performance was also described as “soft,” but there were “very positive gains” in men’s casual. Management called out adidas, Puma, Converse, and Asics as key contributors.

In apparel, the 3.6% decline in comps was said to be due in part to difficult comparisons related to NBA product sales in Q1 last year. Private label apparel continues to grow as a percent of sales and was said to be the only segment of growth in apparel. Private label made up almost 40% of FINL’s apparel sales in the quarter, with branded representing 45% and licensed the remaining 15% of apparel sales. Accessories comped down overall, but FINL said that the headwear business continues to see “significant increases.”

These realities have the retailer putting more energy into its Man Alive and Paiva formats as a way to expand into new products that may not work in a pure athletic environment. FINL added 14 Man Alive stores during the quarter, the same number as they did for the core Finish Line business, and opened the first four Paiva stores.

The Man Alive stores comped up 0.6% for the quarter ended May 27 after a rough March that saw comps decline 6.3%. April comps were up 7.4%, and May was up 5.6% on a comp store basis. Management said women’s made up 40% of the apparel sold in the store in Q1 and that overall footwear doubled to “close to 9%” of sales at Man Alive, even without any Nike in the mix. They believe they can get footwear to 20% of sales here, a feat that would be made easier with Nike, but a metric they still feel they can achieve without it.

FINL is finding more new brands that are working in the Man Alive format that they feel could work for the Finish Line urban stores as well, so Man Alive may be working as a laboratory of sorts.

At Finish Line, June has apparently started out much the way the first quarter ended in May, with comps trending down in high-singles. Management pointed to the timing of a Jordan launch last year that happened earlier in the month as a key driver in the comp sales decline, but also sees hope in the Jordan Clear launch this past weekend to take up some of the slack. FINL is also expecting to pick up some comp momentum with Shox product later in the second quarter, product that is expected to be stronger than the Shox Cog from last year.

Concerns over a 6% increase in inventory at the end of May were said to be due primarily to women’s, but they expect to get a handle on it through cancellations and returned goods. June margins were said to be “slightly up” from last year so the issue is apparently not driving an increased promotional cadence.

The gross margin decline in Q1 was due primarily to the de-leveraging of occupancy costs, which rose 160 points for the period. The hit was offset a bit by a 20 basis point improvement in product margins that got a lift from the softgoods side of the business.

FINL maintained its lowered guidance for the balance of the year, estimating that Q2 diluted EPS will be in the 8 cents to 10 cents per share range on a 7% to 9% decline in comps for the period. Full year diluted EPS is seen in the range of 84 cents to 95 cents per share on a 4% to 6% comp store sales decline and total sales ranging between $1.37 billion and $1.41 billion.

>>> The market has to keep an eye on the fashion athletic business as more retailers start to talk about over distribution in the marketplace. Could be late to the party here…

>>> Is the formula in the mall changing? FINL is not the only retailer looking at new concepts that allow them to expand beyond pure athletics. Is this the wave of the future…