While the selling climate remains highly promotional, Finish Line Inc. said an acceleration in sales in running and basketball helped support a lower-than-expected loss in the third quarter ended November 25, prompting the sneaker chain to raise its guidance for its fiscal year.
Shares of Finish Line rose closed at $13.20, up $1.51, or 12.9 percent, Thursday in over-the-counter trading.
The net loss from continuing operations expanded slightly to $12.9 million, or 32 cents a share, from $10.6 million, or 26 cents, a year ago. Excluding store impairment charges in both periods, the adjusted net loss was $10.3 million, or 26 cents a share against $9.9 million, or 24 cents, in the year-ago period.
When it reported second-quarter results on September 22, Finish Line it expected an adjusted loss in the range of 32 cents to 40 cents per share.
The net loss in the year-ago period came to $40.4 million, or $1.00 a share, after impairment charges of $29.8 million, or 74 cents a share, primarily to write off its Run Specialty Group business.
Finish Line comparable store sales increased 0.8 percent, also better than guidance calling for comps to decrease 3 to 5 percent. By month, comps for Finish Line were down 4 percent in September, but rebounded to show gains of 3 percent in October and 3.9 percent in November.
“Following a challenging September due to the impact of multiple hurricanes, sales trends turned nicely positive in October and accelerated in November,” said Sam Sato, CEO, on a conference call with analysts. “As expected, the selling environment for athletic footwear was promotional during the quarter. In order to be competitive, we did respond to certain pricing actions in the marketplace, but delivered gross margin in line with forecasts. At the same time, we remain highly disciplined in our expense and inventory management.”
Consolidated sales grew 1.8 percent $378.5 million. Its Macy’s business, where it operates athletic footwear in-store shops inside the department store, remained healthy, with sales ahead 2.3 percent.
By category, footwear comps in the quarter were up low single digits with both men’s and kids up mid singles and women’s down high singles. By category, running and basketball comps were up high singles and lifestyle decreased approximately 20 percent.
The gains in running were driven by enhanced allocations in better sellers across men’s and women’s. Said Sato, “Nike VaporMax continued to perform exceptionally well strengthening our market-leading position for this highly popular sneaker. At the same time, multiple models from Adidas remained on fire led by AlphaBOUNCE, UltraBOOST, Swift Run, and our exclusive, PureBOOST. New balance running particularly the brand’s Fresh Foam Cruz shoe contributed to our men’s growth as did retro styles from Nike such as Huarache and Huarache Ultra.”
Basketball “rebounded nicely following a challenging Q2” with the gains fueled by “solid sell-through” of Jordan retro products launched during the quarter combined with the continued strength of Nike signature shoes from LeBron, Kyrie, Paul George and KG. These gains were partially offset by declines in the remaining elements of its basketball offering due largely to the delayed launch of Under Armour’s Curry 4.
In the lifestyle business, sales of newer models from Adidas led by EQT, Tubular Shadow and Xplorer, along with sales of Nike’s Air Force One only partially offset softness in other areas of the lifestyle business.
Finish Line’s kids’ performance was driven by many of the same casual running and performance products showing momentum in adults. This included numerous styles from Adidas, retro running models from Nike, Jordan retros and signature basketball shoes. A kids’ version of Nike’s VaporMax was launched late in the quarter, “which contributed to our success and should be a tailwind for the next several quarters,” said Sato.
Among softgoods categories, comps in total declined 10 percent due in large part to the lapping of difficult comparisons from a year ago when the chain was aggressively exiting slow-moving items.
Sato said its newer strategy of developing a “smaller, more profitable” in softlines is making progress. A focus on key items in apparel that complement its top-selling sneakers helped drive a mid single-digit increase in branded apparel sales. Added Sato. “Importantly, this approach has resulted in much stronger full-priced selling and the significant improvement in gross margins year-over-year.”
Even with the drop in sales, gross profit dollars across soft goods were up, “further underscoring the progress we have made improving the health of the category,” said Sato.
Online, solid digital growth fueled by robust gains in mobile traffic along with higher conversion.
“Consumers have responded favorably to the latest iteration of the Finish Line app launched earlier this year and the subsequent upgrades we recently rolled out,” said Sato. “We now have the ability to create opportunities in the app for customers to be informed of our latest and greatest sneakers, provide access to coveted products, deliver live content and better connect the in-store experience through digital content and push notifications enabled by beacon technology and deliver loyalty rewards.”
Regarding Macy’s, where it operates approximately 950 branded inside Macy’s department stores, the business remains on track to hit the high-end of its long-term goal of annual sales of $350 million in fiscal 2018, ahead of its original timetable.
Sales through the Macy’s partnership increased 2.3 percent, or $76.8 million year-over-year, in the quarter, in line with our projections. The growth rate was expected to moderate in Q3 due to the temporary closure of its Macy’s flagship shops at Herald Square, New York. The location was expanded and remodeled for each of its men’s, women’s and kid shops with its new store design. A fourth shop was also added during the quarter located on Macy’s One Below floor that caters specifically to millennial consumers.
Finish Line’s online business with Macy’s, in which is manages athletic sales, jumped 16 percent during the quarter. Conversion continues to improve through expanded online assortments and increased store fulfillments. Digital sales accounted for 27 percent of overall Macy’s sales, up 300 basis points from last year.
Kids also continued to be a “meaningful growth driver” and is now in over 300 Macy’s doors. Kids sales grew 25 percent in Q3 and represented approximately 18 percent of our total Macy’s business compared to 14 percent a year ago.
Consolidated gross margin decreased 100 basis points from a year ago to 25.7 percent. Product margins eroded 180 basis points due to less full-priced selling and higher markdowns driven by the challenging market conditions. As expected, the product margin decline was “less severe” experienced in the second quarter and was in line with plan. Occupancy as a percent of sales decreased 80 basis points from a year ago.
Consolidated SG&A expense was 30.3 percent of sales, a decrease of 90 basis points from a year ago due to sales leverage and continued disciplined expense management.
Sato said a number of steps to increase traffic and conversion – including bolstering its digital capabilities, building awareness for the Finish Line brand as a destination for sneakers and strengthening its merchandise offer and go-to-market strategies – contributed to the better-than-expected results.
“I am confident that the work we are doing to position the company for long-term growth and enhanced profitability is gaining traction,” said Sato.
Touching on some of those steps, Sato said the company is currently working on additional upgrades to the Finish Line app such as geo-fencing technology that launched tailored offers and in-store opportunities based on customer preferences. Speed has also increased on its websites, reflected in page loads and a simplified checkout process. Post-purchase, customers can now easily track their packages and receive notification of package delivery details as well as initiate a return directly from our website making it easier and faster to return an item.
“Going forward, our focus continues to be on delivering frictionless experiences that lead with mobile,” said Sato. “In support of the customers’ expectations of a personalized, fast and consistent experience anytime and from anywhere, we will create and launch initiatives that deliver on these expectations in the short-term, while building a scalable solution for the ever-changing retail landscape.”
At the store level, the focus remains on emphasizing key style and innovation stories. During the quarter, its latest flagship opening in Los Angeles at the Del Amo Fashion Mall was supported by an LA inspired custom Air Force Ones by local artist Picasso, the Jordan Retro 11 launch and the performance by LA-based hip hop star SuperDuperKyle. Said Sato, “With flagship locations now open in New York, LA and Chicago, the Finish Line brand is poised to continue bringing the category’s most disruptive and digitally connected retail expressions to life.”
In addition to Del Amo Fashion Mall, 10 remodels were completed in the quarter with its new store design, including a full renovation of its Mall of America location. Added Sato, “The sales lift we have experienced from the 40 remodels we have completed this year contributed to a meaningful improvement in third quarter comparable store.”
As part of the store makeovers, RFID digital displays are enabling shoppers to drop a shoe on a shelf and see unique content, such as consumer ratings, video inspiration, product details and socially integrated images that show how the product should styled.
Said Sato, “These exciting features can add to a customer’s confidence in their purchase while making the entire shopping experience more interactive. The continued elevation and development of a connected store experience is a critical factor in driving relevance and engagement with today’s consumer. No longer is the store environment only about the transaction, it’s about being memorable and shareable.”
As part of its investments in brand partnerships, Finish Line partnered with Nike on the launch of the connected NBA jersey in key markets and across Finish Line digital properties. Said Sato, “Our efforts with the Nike brand included a pinnacle retail expression in our flagship doors supported by local events, best-in-class digital storytelling and unique asset creation through Finish Line influencers in Chicago and New York. The launch was an important ignition point for the Nike and NBA partnership. It has set up a solid foundation for consumer connection and retail sales for NBA gear and key signature basketball footwear.”
More recently, Finish Line partnered with Adidas on its latest Shoes So Fresh campaign in mid-November.
Said Sato, “Our collaborative efforts include a series of digital adds designed to drive awareness and consideration for Finish Line as the destination for the latest and greatest sneakers. The new campaign features Viceland star, Eddie Huang from Huang’s World and hip hop star Danny Brown in pursuit of the latest ultra-boost. Though only a few weeks into the highly targeted campaign, we have already driven 7.5 million YouTube views with strong initial engagement results as measured by our Google brand lift study.”
Looking to holiday selling, Sato said the company expects the environment for athletic footwear to remain promotional over the near-term and that’s why management kept its fourth-quarter guidance.
“That said, we continue to see a number of bright spots from our current assortments that have us cautiously optimistic about our prospects for growth as we move into the new fiscal year,” said Sato. “This includes Nike’s incredibly popular VaporMax where our leadership position will continue as we receive expanded allocations on the current model and introduced the new VaporMax Marc and VaporMax CS. We are also well situated to capitalize on the ongoing strength of retro-inspired running styles from Nike. Looking ahead to spring, we are excited about the brand’s new React technology as well as the launch of Shocks Gravity, a new design developed by a special team at Nike working on speed to market initiatives. We are excited to see what both introductions mean to the marketplace in 2018.”
While Adidas is starting to lap more difficult comparisons, momentum is expected to continue as demand for several key models more than offsets a slowdown in some mature lifestyle platforms.
“The near-term outlook for basketball is more mixed,” added Sato. “We are excited about prospects for our signature basketball business. However, our enthusiasm is being tempered by volatility in Jordan retros due to shifts in the launch calendar and a tighter supply of products in the marketplace.”
In terms of go-to-market strategies, Finish Line has an aggressive marketing plan set to drive a steady flow of holiday traffic.
“This is highlighted by a new platform for the holiday season called 30 days afresh. Everyday from Black Friday through Christmas features a fresh sneaker drop with an added retail benefit such as free expedited shipping, in-store sneaker protection or double Winner’s Circle loyalty points,” said Sato. “The daily freshness keeps us relevant and drives shopping urgency throughout the season.”
For its fiscal year ended March 3, 2018, Finish Line now expects EPS in the range of 59 to 67 cents versus the previous guidance range of 50 to 60 cents. In the year-ago period, adjusted earnings were $1.06. Comps at the Finish Line banner are projected to decrease 2 to 3 percent versus a decline of 3 to 5 percent under its former guidance.
For the fourth quarter, a 14-week quarter, the company still expects Finish Line comparable sales to decrease 3 percent to 5 percent and adjusted EPS to be in the range of 50 to 58 cents inclusive of the 6 cents per share contribution from the extra week. That compares with EPS of 50 cents for the fourth quarter ended February 25, 2017, a 13-week quarter.
Sato concluded, “While there is still work to do to the effectiveness lineup for sustained success, I believe our third quarter performance indicates we are on the right track. We will continue to execute the initiatives that are driving traffic to our brand and helping an increased conversion, while tightly controlling expenses and inventories. I am confident that our approach to managing the business strikes the right balance between protecting near-term profitability and strengthening our long-term strategic position.”
Photo courtesy Finish Line
