The Finish Line reported a slight decline in fourth quarter earnings on flat comps, in line with guidance. But shares still climbed as results indicated that revenues had stabilized following a surprising third-quarter dud. Management was also enthused about the initial results of its in-store partnership with Macys.

In the fourth quarter ended March 2, earnings slid 18.1 percent to $34.3 million, or 69 cents a share. Excluding a pre-tax impairment charge of $5.6 million, or 7 cents per share, related to investments to build its e-commerce/mobile business as well as long-lived assets for certain stores in the latest period, earnings slid 11.0 percent to $37.3 million, or 76 cents a share. Results were in line with managements guidance range of 74 cents to 78 cents a share provided in early January.

At the time, the company reported break-even Q3 earnings and sales that were well shy the company’s internal targets. Results were impacted by glitches from the launch of a new e-commerce site in mid November as well as a trend shift toward basketball shoes.

The more troubling challenge had been the shift away from running, where Finish Line holds a stronger position than rival Foot Locker. But on conference call with analysts last week, Glenn Lyon, Finish Lines chairman and CEO, said the company did a good job leveraging our merchandise capabilities to capitalize on the strong trends in basketball.

Results were also skewed by an extra week in the year-ago quarter. Excluding a 7 cents a share impact from the extra week, EPS in the latest quarter would have risen 2.7 percent.

Overall, revenues in the latest quarter eased 2.9 percent to $442.7 million. Finish Line comps were up 0.7 percent in the latest period on top of a 10.8 percent increase a year ago.

For the stores, comps slipped 2.4 percent, driven by negative traffic. Digital sales, also included in comps, increased 21 percent. Digital represented 15.1 percent of total sales, compared to 13.7 percent for the same period year ago.

By month, comps grew 7.1 percent in December, fell 11.5 percent in January, and recovered to record flat in February. March comps were up 4 percent month-to-date.

By category, footwear comps were up slightly at 0.2 percent. Basketball footwear comped up 26 percent and marked its ninth straight quarter of double-digit gains. Running comps declined 6 percent. Overall footwear ASPs increased 8 percent.

Lyon said that in addition to the recent shift towards basketball, Finish Lines business was impacted by the much talked about macro headwinds.

Basketball saw continued strength of Brand Jordan, Nike, Adidas, and Reebok. Both retro and non-retro styles performed very well, said Lyon. In running, pockets of strength were seen from Nike Free, and Max 2013, along with Brooks, Asics and Mizuno. The soft goods comp increased 3.7 percent, driven by some strong gains in accessories.

Gross margin rate decreased 210 basis points from a year ago to 35.2 percent. Product margin net of shrink was down 100 basis points due to higher markdowns resulting from the shift from the running category to basketball. Occupancy deleveraged by 110 basis points.

SG&A expense was down 130 basis points as a percent of sales to 20.9 percent due to cost efforts put in place in light of recent sales trends, in addition to lower incentive compensation costs. SG&A also included $750,000, or 20 basis points of expenses, related to its move to open up shops inside Macys.

At The Running Company, its 25-store subsidiary focusing on the run specialty channel, sales were $7.8 million, driven by a low single-digit comp increase. The net loss was in line with managements expectation at $550,000, impacting EPS by 1 cent a share.

For the full year, sales increased 5.4 percent to $1.44 billion, with
Finish Line comps up 5.9 percent and digital ahead 25.1 percent. Basketball footwear comps increased 21 percent. Running comps increased just over 2 percent, coming on top of a three-year stacked comp of 54 percent. Earnings in the year were down 15.7 percent to $71.5 million, or $1.40 a share. Excluding impairment charges, EPS would have been $1.47 a share, down from $1.59 a year ago.

For The Running Company, full-year sales were $27.6 million, with comps increasing in the low teens. The net loss for the year was $1.4 million or 3 cents per share.

Inventory was up 9.1 percent at Finish Line, driven in part some early spring receipts as well as efforts to adjust its product mix.

On the call, Lyon cited a number of accomplishments over the past year. These included reducing its expense structure to better align with current and projected top line trends as well as lifting sales per square foot in its stores to a record $353, up 4 percent from $339 last year, and up 19 percent from $298 three years ago.

Lyon said the year also marked the first phase of a multi-year effort to replace its core systems. When completed, the upgrades will improve inventory management, create distribution and direct-to-consumer fulfillment efficiencies, and provide a more scalable platform to better support additions like The Running Company and its arrangement to operate athletic footwear shops inside Macy’s.

As reported, Finish Line last September reached an agreement to operate athletic footwear shops in 450 Macys locations as leased departments. The rollout will start in April with completion expected by Fall 2014. For the remaining approximately 225 Macys stores that carry footwear, Finish Line will manage the athletic footwear assortment and inventory beginning in April, without the staffing or branding provided in the leased departments. FINl will also provide athletic product for

Lyon noted that the company successfully launched three in-store shops in Macy’s and is really pleased with the initial results. The shops considerably expands our Finish Line brand and broadens our reach, especially reaching the female customer who typically shop at Macys.

Sam Sato, president of the Finish Line Brand, added on the call that this is a learning period for the company before it fully takes over inventory on April 14.

We see this segment of the business as being underserved, said Sato. And clearly, we think there’s a significant opportunity, especially around the female consumer, that the Macy’s company brings into their stores.

Regarding its The Running Company subsidiary, Lyon said the partnership entered earlier in 2012 with Gart Capital to run the daily operations of The Running Company has supported the chains growth. New hires in merchandising, marketing, and store operations are also supporting a venture now well-positioned for accelerated growth.

For the current fiscal year, Finish Line expects comps to up slightly with EPS projected to increase mid-single digit percent over fiscal year 2013.

Finish Lines comps are expected to be slightly positive, with continued pressure in the first half, particularly Q1. This is expected to be driven by a low single-digit decline in its brick-and-mortar stores, with a mid-teen increase in digital. It expects to open 20 to 25 new Finish Line stores, and close 10 to 15.

The Macys partnership is expected generate approximately $130 million to $150 million in sales this fiscal year from both the brick-and-mortar shops and the Macy’s digital business. Macy’s is projected to be modestly accretive for the year.

Sales from The Running Company are expected to be between $45 million to $55 million, driven by a combination of comp store sales growth plus the acquiring and opening of approximately 30 new stores. Running Company to expected to be modestly dilutive for the year.

Consolidated product margin is expected to be flat to down slightly with continued pressure in the first half, particularly Q1. Consolidated occupancy costs are expected to increase double digits for the year, due to new store growth for Finish Line and The Running Company.

Operating expenses are expected to increase due to start-up costs for the Macys business, investments in digital, expansion at The Running Company, and higher incentive compensation costs.

The first quarter is expected to see a double-digit decline in EPS, impacted by significant expenses associated with its Macy’s Partnership. The company will only realize approximately four to six weeks of sales given the mid-to late April launch. The first quarter will also include a charge excluded from guidance tied to startup costs and inventory disposal costs for its Macys partnership.