By Charlie Lunan

The Finish Line (NASDAQ:FINL) plans to remodel 50 to 60 stores this year using a new store design that will debut in July, the CEO of its parent company said June 24.

“We are on schedule to debut our new store design next month predominantly in several Chicago area locations with plans to update a significant portion of our store fleet over the next three years including 50 to 60 this year,” said Sam Sato, CEO of The Finish Line Inc. “The plan is to close another 20 this year and up to 150 underperforming stores in total.”

The Finish Line is among dozens of mall retailers pruning their retail fleets in response to a shift in consumer spending toward online retailers that appeared to accelerate drastically during last year’s holiday shopping period. The Finish Line closed six and opened one Finish Line location during the fiscal first quarter ended May 30 to end the period with 586 locations.

Exceeding Expectations
Sato disclosed the plan Friday after The Finish Line reported quarterly sales and earnings that exceeded Wall Street estimates. The Indianapolis-based company reported consolidated net sales reach $453.5 million in its fiscal first quarter ended May 30, up 2.3 percent from the year earlier quarter. The gain came despite a 126,356 square feet, or 3.1 percent, decrease in total retail space.

The company reported comparable-store sales at its flagship Finish Line banner store grew 1.5 percent thanks in part to a program that enables store associates to search its entire inventory to locate out-of-stock items and have them shipped directly to the customer, officials said. Sales through the program increased 8 percent. Average dollars per transaction increased 3 percent, while mobile traffic increased 21 percent year-over-year and accounted for 62 percent of total digital traffic. The chain also grew its loyalty program adding 720,000 new members during the quarter for a total of 10.5 million.

At The Finish Line’s specialty run chain Jack Rabbit, sales fell 2.2 percent to $23.5 million as the closing of five stores more than offset strong gains in online sales that resulted in low-single-digit comp growth. Inventory, meanwhile, rose in the double-digit percentage range.

Jack Rabbit’s fleet of 71 stores operate under multiple banners, including JackRabbit, Run On!, Blue Mile, Boulder Running Company, Roncker’s Running Spot, Running Fit, VA Runner, Capital RunWalk, Richmond RoadRunner, Garry Gribble’s Running Sports, Run Colorado, Raleigh Running Outfitters, Striders and Indiana Running Company.

“There is a lot of work ahead of us to improve profitability before we consider re-accelerating our expansion of this concept,” said Sato.

The Finish Line saw the greatest growth at its Macy’s business, where sales grew 22.8 percent on the same number of locations thanks in part to a growing assortment of kid’s shoes. As of the end of the quarter, The Finish Line offered kid’s shoes in 165 of its 392 Macy’s shops.

Explosive Growth With Adidas, Curry 2
Running and basketball shoes sales comped up low-single digits from a year earlier. In men’s running, growth was led by Nike’s Huarache, Max Air and Presto and newer versions of Nike Free.

“At the same time, we continue to experience explosive growth in our Adidas business,” Sato observed. “This is true across casual and performance led by Superstars, Stan Smith, NMD and Ultra Boost.

Growth in men’s basketball sales was driven by sales of Curry 2 from Under Armour, while retro and retro-inspired product once again dominated the Brand Jordan business.

Casual styles, including Pegasus, Roshe, Juvenate and Huarache from Nike, Chuck Taylors by Converse and Adidas Superstars and Stan Smith, continued to resonate well with The Finish Line’s female customers.

“We are also seeing great excitement in our Puma business fueled by classics along with hot new styles Fierce and Fenty by Rihanna,” Sato said.

Kids footwear increased mid-single digits driven by Jordan Retro and sportswear and Adidas originals. “Like men’s, kid sales of Under Armour’s Curry basketball shoes were also explosive,” Sato said.

Soft goods comped down double digits in the quarter, driven by softness in apparel and accessories, which comprised about 10 percent of Finish Line brand sales in the quarter.

Excess Inventory Weighing On Margins
Sato said the company continues to recover from a botched implementation of a new warehouse and fulfillment system that resulted in a $33 million write off and contributed to a 90 percent plunge in fourth quarter earnings. Direct-to-consumer fulfillment rates in the first 24 hours hit 90 percent, up from 80 percent in the fourth quarter as inventory accuracy and out-of-stock rates have continued to improve. Fulfillment in the first 48 hours, cancellation rates and click-to-door delivery times are now surpassing previous high-water marks as the company started to realize the benefits of its new warehouse and order management system.

Still, gross margin slipped 50 basis points to 30.8 percent as The Finish Line and Jack Rabbit continued to work off inventory stranded during the fulfillment fiasco. SG&A expenses, meanwhile, grew to 27.5 percent of net sales, up 120 basis points from a year earlier. Operating margins fell to 3.3 percent from 5 percent.

Net income came in at $9.6 million, or 23 cents a share, down from $13.8 million, or 30 cents a share in the year-earlier period, but beat Wall Street expectations of 22 cents.

Discounting Ahead For Jack Rabbit and The Finish Line
The Finish Line ended the period with consolidated merchandise inventories of $352.3 million, up 9 percent from a year earlier. Inventories were up low-single digits at The Finish Line, an improvement from the mid-single-digit rate reported in the fourth quarter. While inventory also grew at a double-digit percentage rate at Macy’s, that pace was still below sales growth in the channel.

“We still have work to do to bring inventory in line with sales growth at both The Finish Line and JackRabbit which will create similar margin headwinds for us in Q2,” noted Ed Wilhelm, the company’s executive vice president and CFO. “The assortments continue to improve as we’re getting more of the retro styles and the casual styles into the mix. That’s going to continue to get better for us into Q2 and then certainly as we get to the back half of the year. So we remain bullish as we get to the back half of the year around our ability to show product margin improvement and also SG&A leverage.”

The retailer affirmed its guidance for the fiscal year ending February 25, 2017, which calls for comparable-store sales to increase in the 3 to 5 percent range and earnings per share to be between $1.50 and $1.56.

“As we approach the summer Olympics in August new innovations in running, such as Nike’s Zoom and Lunar platforms, will fuel consumer excitement,” Sato said, “which we expect will translate into accelerated sell-throughs for the category as the year progresses.”