Shares of Finish Line lost $3.13, or 19.5 percent, to $12.93 Friday after the company reported earnings that fell well short of guidance due to markdown pressures.
“The fourth quarter was more challenging than we expected, which resulted in a disappointing finish to the fiscal 2017,” said CEO Sam Sato on a conference call with analysts.
Comps at the Finish Line chain were down 4.7 percent, at the low end of guidance calling for declines in the range of 3 to 5 percent. Earnings were also below guidance due to “significant pressure on product margins.”
Sato said its poor comp performance partly reflects the decision by the IRS to delay income tax returns until later in February, combined with continued efforts to reduce the penetration of its long-underperforming soft goods business. The shortfall reflects a higher percentage of promotional sales than expected.
“Towards the end of the quarter we needed to get more aggressive on pricing as the tax shift had a bigger impact on traffic as we expected, which created a highly competitive selling environment,” said Sato. “At the same time, elements of our offering didn’t resonate with our customers. This was true in both running and basketball, our two largest categories, where full price selling fell short of forecast.”
He added, “We did experience strong sell through of casual athletic product which in total is becoming a bigger percentage of our business. Unfortunately, the category isn’t at a size that can fully offset the weakness elsewhere in our assortments.”
The company reported a loss of $9.5 million, or 23 cents a share, in the quarter ended February 25 against earnings of $4.04 million, or 11 cents, a year ago.
Losses from discounting operations, reflecting the former Jackrabbit run specialty business, amounted to 53 cents a share in the latest period versus 11 cents a year ago. In February, Jackrabbit was acquired by CriticalPoint Capital, a Los Angeles investment firm, for a purchase price of zero.
Excluding losses for discontinued operations as well as other severance-related charges, non-GAAP earnings in the fourth quarter slumped 45.8 percent to $20.4 million, or 50 cents a share. When it reported third-quarter results on December 21, the company said it expected non-GAAP EPS from continuing operations between 68 cents and 73 cents.
Consolidated net sales were $557.5 million, a decrease of 0.4 percent from the prior year period.
The 4.7 percent comp decline was particularly impacted by a 15.5 percent tumble in February. Finish Line said the IRS’ decision to delay income tax refunds compared with last year meant they did not begin to see a meaningful sales lift until February 22. Comps were down 10.1 percent in January and 1.9 percent in December.
Footwear comps were down 1.6 percent with men’s down low single digits, women’s up low double digits and kids’ down high single digits. In terms of men’s and women’s, performance running comps were up double digits, lifestyle was up mid single digits and basketball declined low double digits. Product margins were impacted across the board from less full price selling and higher markdowns.
“We are working closely with our vendor-partners to improve our merchandize offering to better align with customer demand,” said Sato. “To do this as quickly as possible we increased our markdown cadence during January and February to clear through slow selling inventory. While these actions had a significant impact on product margin, it has allowed us to start fiscal 2018 with cleaner inventories and put us in a better position to flow new product into our stores and on to our digital sites.”
Soft goods comps plunged 27 percent in the quarter with both apparel and accessories down double digits. The performance was in line given its goal to narrow and deepen its assortments and reduce soft-goods’ penetration.
Consolidated gross margins decreased 500 basis points to 29.1 percent in the quarter. Product margin net of shrink decreased 450 basis points, well below guidance.
Consolidated SG&A expense was 23.1 percent of sales, down 60 basis points due to cost savings initiatives announced during the third quarter as well as a favorable comparison against last year’s incremental expense related to the supply chain disruption.
For 2016, the net loss was $18.3 million, or 44 cents a share, against net income of $21.9 million, or 48 cents, a year ago. Discontinued losses came to $1.29 a share in the current year versus 16 cents in the prior year. Excluding non-recurring items, earnings were down 24.2 percent to $44 million, or $1.06 a share.
Consolidated net sales for the year were $1.84 billion, an increase of 2.5 percent over the prior year., Finish Line comparable sales inched up 0.3 percent.
Discussing some accomplishments during the year, Sato noted that Finish Line stabilized its supply chain following some disruption in late fiscal 2016. Its warehouse and order management system recently allowed the company to see historic highs in key metrics such as 24-hour fulfillment rates, quick to doorbell delivery time and store deliveries.
“Good initial progress” was also made in streamlining operations to become “more nimble and efficient” as well as reduce its cost structure to align with its current business. The transformation moves are expected to generate approximately $6 million in annualized savings, including a $5 million incremental benefit in fiscal 2018.
In its digital business, a more-advanced commerce platform was installed in October with a goal of improving the ability to handle increased traffic and/or processing. The shift is expected to prove particularly beneficial during product launches and high volume days.
The platform also serves as the foundation of the latest iteration of the Finish Line App, which is launching in the next couple of weeks and features a higher degree of personalization. Q4 digital sales were up 17 percent, driven by a 25 percent increase in mobile traffic. For fiscal 2017 mobile traffic increased 26 percent and now accounts for more than two thirds of our total digital traffic.
“These results powered the increase in digital penetration to approximately 22 percent of overall Finish Line sales in fiscal 2017 up 250 basis points from the prior year,” said Sato. “Looking ahead, we see opportunities to take these numbers higher based on the advanced omnichannel capabilities now in our arsenal. Our focus for fiscal year 2018 is to continue delivering frictionless experiences that lead with mobile.”
At the store level, 42 stores last year were updated with a new store format and Finish Line remains on schedule to “touch the significant portion of the fleet over the next several years.” A total of 24 stores were closed in the last fiscal year, bringing total closures to 78 over the last two years. Another 15 to 20 underperforming stores will close this year.
The Finish Line is also seeing a good response to Epic Finish, the largest integrated brand investment in company history, as well as its Shoes So Fresh effort.
A bright spot is its athletic footwear in-store shops operated inside Macy’s, which delivered a 30 percent increase in annual sales and a 35 percent gain in the fourth quarter. The Macy’s business has been helped by moves to expand or reposition 64 shops last year. Another 40 to 50 will be remodeled or expanded this year, including its shops inside Macy’s Herald Square.
Also helping the Macy’s business is the roll of kids to reach 275 doors at the close of its last fiscal year, up from 150 at the start. Expansion of kids offerings also helped. Kid’s sales grew triple digits in fiscal ’17 and represented approximately 14 percent of the Macy’s business compared with 8 percent in the prior year.
Finally, digital sales under its Macy’s partnership surged 105 percent in the fourth quarter and were up 100 percent for the full year due to expanded online assortments and increased store fulfillments.
Said Sato, “Looking ahead, we now expect our Macy’s business to hit the high end of our long-term goal of annual sales of $350 million in the coming year which is ahead of our original timetable.”
Finally, Sato noted that the divestiture of Jackrabbit “allows us to now focus 100 percent on the core Finish Line retail operations and our increasingly profitable Macy’s business. I’d like to thank the entire team at Jackrabbit for their years of hard work and commitment to serving the customer.”
To revive sales at the Finish Line banner, Sato said the company will “intensify discussions” with its vendor partners to “improve our merchandising efforts to better excite our customer and further distinguish the Finish Line brand in the marketplace as the destination for the latest and greatest sneakers.”
As examples of these efforts, Sato noted that Finish Line has landed Adidas PureBOOST as an exclusive outside of the Adidas direct-to-consumer channel while collaborating with Adidas on digital content featuring Josh Norman of the Washington Redskins. Also with Adidas, it partnered on a #WeAreMore women’s initiative and a women’s-only PureBOOST XPose campaign featuring Ally Love and Chinae Alexander.
With Nike, this month’s celebration of Air Max and the launch of the VaporMax are expected to be generate traffic. Said Sato, “We will utilize exclusive assets in launching the platform during Air Max Day and will elevate the customer experience across every touch point introducing the new VaporMax to our customer in a way like never before.”
Finish Line is also collaborating with Nike on unique launch approaches for many of the new Free product.
With Puma, Finish Line saw “very successful” results last year with the help of the brand’s #WeAreMore initiative. For 2017, key items such as Fierce and the limited Fierce Strap fronted by Kylie Jenner are planned.
Finish Line is also taking strong positions in best sellers such as UltraBOOST Uncaged, NMD, Superstar and Tubular Shadow from Adidas, as well as Nike retro-inspired running styles such as Huarache, Max Air, and Presto. In basketball, hot signature silhouette including new models and color ways from Kyrie, Paul George and Brand Jordan are expected to support gains.
“I am confident that our current product selection is more aligned with what our customers are looking for compared with our positioning in the last few quarters,” said Sato. “However, we know we must continue to step up our efforts with our vendor partners to further set our merchandising offering apart from the rest in the marketplace and drive sustained footwear comparable sales growth.”
On the soft goods side, goals include enhancing its branded offering with a focus on key items while exiting its promotional NCAA licensed fleece programs. Said Sato, “We are confident the strategy will result in a smaller, more profitable soft goods business over time. However, it does create a comp headwind until we anniversary the start of this initiative in Q3.”
For the current fiscal year ending March 3, 2018, comparable sales are projected to increase in the low single digits with EPS arriving in the range of $1.12 to $1.23, representing an increase of approximately 6 percent to 16 percent versus 2016’s non-GAAP EPS.
Photo courtesy Finish Line
