Buckingham Research raised its rating on Finish Line to “Neutral” from “Underperform” in part because of its depressed stock price, healthy balance sheet and expectation that margins should start improving by its back-to-school quarter.
On Wednesday, when the note came out, Finish Line’s shares closed at $10.22, up 19 cents on the day. Buckingham has a price target of $10 on the stock.
“With the stock down 40 percent from its YTD high (S&P -5 percent and XRT -6 percent) with no alarming fundamental or balance sheet risks upcoming in our view, we are moving to the sidelines as we do not see a catalyst to move the stock materially lower over the next 6 – 12 months,” wrote Scott Krasik, lead analyst on the stock at Buckingham. “Moreover, we think, at these lower levels, any takeover premium from Sports Direct’s involvement is now out of the stock price.”
As reported, Sports Direct, the U.K. sporting goods giant, acquired an 8 percent beneficial ownership in Finish Line last year with options to acquire more through derivatives. Some have speculated that Sports Direct had interest in acquiring Finish Line, although it has made brief investments in the past only for share price gains. The speculation came as Sports direct acquired Bob’s Stores and EMS to mark its entry into U.S. retailing.
Buckingham also wrote that Finish Line’s merchandising margins should improve by its second quarter ended August 26 as major launches arrive to offset weakness in some older platforms (Roshe, Free, Lunar, Stan Smith, Superstar) and basketball margins improve.
The investment boutique also noted that Finish Line is debt free and expected to generate healthy free cash flow in its fiscal 2019 year.
Still, Buckingham wrote that Finish Line is a “clear #2 in athletic specialty with the future for brick and mortar retail at risk,” and its core category “is still in a lull.” Krasik noted that Finish Line had already forecast same-store sales for its fourth quarter ended February 25 would decline in the 3 percent to 5 percent range and the arrival of promising innovation from Nike, including Air Max 270 and Epic React, will only begin to positively impact sales in late February into early March.
Krasik wrote, “It is not clear to us that FINL can re accelerate growth on a sustainable basis, which keeps us from getting more positive in spite of opportunities to improve margins and its strong balance sheet (33 percent of market cap in cash, no debt).”
Photo courtesy Finish Line
