While cautioning that sales in September had softened, Finish Line Inc. delivered strong double-digit comp gains and impressive earnings growth in its second quarter ended Sept. 1. The promising results prompted the athletic footwear retailer to raise its guidance for the year.
Finish Line also signed a deal to become the exclusive athletic footwear partner to Macy's Inc., beginning Spring 2013. (See story, pg. xx)
Earnings in the quarter rose 19.4 percent, to $25.0 million. Reflecting share buybacks, EPS grew 26 percent to 49 cents a share, exceeding Wall Street's consensus estimate of 44 cents a share.
On a conference call, Chairman and Chief Executive Officer Glenn Lyon said the robust earnings performance was achieved “while simultaneously investing in the capabilities necessary to deliver sustainable long-term growth, demonstrating our ability to flow through incremental sales to the bottom line.”
Consolidated sales, inclusive of Finish Line and The Running Company, increased 16.1 percent to $385.0 million.
For the Finish Line concept, comps increased 12.3 percent on top of an 11 percent increase a year ago. It was comprised of a 10.5 percent increase in comparable brick-and-mortar sales and a digital comp increase of 29.6 percent. Digital sales represented 10.3 percent of sales versus 8.8 percent for the same period last year. By month, comps were up 13.2 percent in June, up 10 percent in July and up 13.3 percent in August.
On the category side, footwear comps were up 13.5 percent and soft goods comp increased 3.6 percent. Footwear ASPs increased 10.4 percent.
On the call, Lyon said its comp performance over the past 12 months “stands up very well against our peers and against the broader retail industry in general,” with sales productivity improving to $354 per square foot on a trailing 12-month basis. Said Lyon, “This figure represents the highest level in the company's history, putting us well on our way to achieving and exceeding our long-term goal of $375 per square foot by 2016.”
Running growth in the high single digit gains and basketball up in the mid-20s drove the double-digit footwear comp gain. Running continues to be fueled by lightweight running with Nike Free “once again the driving force behind strong gains in both men's and women's.” Brooks PureProject has “maintained a steep upward climb albeit off of a small base from a year ago.” Finally, the introduction of Under Armour's Spine shoe “generated a lot of consumer interest late in the quarter,” Lyon said.
Basketball posted its largest comp gain in many years. Said Lyon, “The quarter got off to a great start with some key Brand Jordan product launches in June and that strength continued right through August. This has been especially true for retro-looking product, a trend that is also fueling growth in Nike-branded basketball as well.”
Following the success with Adidas Crazy Light 2.0, Finish Line is also bullish on the Derrick Rose signature basketball shoe, which launches October 4. Said Lyon, “The sustained success of basketball over the past several quarters has been driven by greater access to a broader, more compelling selection of premium performance and lifestyle products, particularly from Brand Jordan. This highlights our growing importance not just as a leading destination for running, but as a multi-category leading destination for athletic footwear.”
In kids, strong sales trends from the first quarter accelerated into the second on the strength of basketball, lightweight running and casuals with Jordan, Nike, Adidas, Reebok and Sperry all posting “sizable gains.”
Apparel continues to see “very good results” from its shift to an all-branded strategy and were driven by graphic tees and shorts from Nike and Jordan. A “nice lift” in licensed apparel came from the Nike NFL apparel launch. Accessories climbed 7 percent on the strength of socks, particularly performance socks.
At The Running Company, sales in the quarter were $6.3 million, driven by a 17.4 percent comp jump. Since acquiring the business last summer, Finish Line has worked on improving the stores' inventory assortments and in-stock positions, as well as “elevating the importance of the selling culture among store employees,” Lyon said. The net loss after minority interest was in line with expectations at $330,000 and impacted consolidated EPS by 5 cents a share. Running Company ended the quarter with 19 stores.
Having reached an agreement six months ago with the Gart Group that included Gart assuming day-to-day operations of the chain, Finish Line has “more visibility into the bolt-on acquisition opportunities and expect to be able to make some announcements on that front shortly,” said Lyon. It expects to open 15 to 20 stores and announce 15 to 20 store acquisitions over the course of the next 18 months. Run.com was also launched during the quarter and “early consumer reaction has been very positive.”
Gross margin rate for Finish Line was flat from a year ago at 35.1 percent. Product margin net of shrink was down 10 basis points. Occupancy expense increased low double-digits, resulting in occupancy leverage of 10 basis points. The increased occupancy expense is being driven in part by the shift in its strategy to open more stores and to lock in longer terms for its best-performing stores in A and B malls.
SG&A expense of $91.9 million was up 11.9 percent from year-ago levels resulting in 50 basis points of leverage driven by operational improvements on the digital side of the business, as well as leverage from the comp gain. The higher spending includes investments to enhance its omnichannel strategies.
Lyon said that year-to-date Finish Line has spent $45 million in capital expenditures. Investments include the planned opening of 30 stores this fiscal year, including 13 already opened. Seven stores have been remodeled to a new high-tech prototype that was tested in Castleton, IN. On the technology side, 100 stores have received a new POS system and handhelds with the full rollout expected by reach its remaining stores by holiday. A new e-commerce site featuring an updated look and feel with improved functionality will be launched pre-holiday. On the core systems side, it's beginning design work for merchandising, supply chain and CRM systems.
Lyon said Finish Line is already beginning to see the initial impact of the investments being made in its digital capabilities. In the second quarter, digital comp sales rose 30 percent on a 55 percent increase in traffic. Year-to-date operating margins for its digital business are at 11 percent, up 350 basis points from the same period last year. Overall, Lyon said Finish Line is making solid progress on its longer-term goal of over 20 percent digital sales contribution and $450 million in digital sales by fiscal 2016 along with operating margins in the mid-teens by the business.
Based on second quarter results, EPS for the fiscal year ending March 2, 2013 is expected to increase between 6 to 9 percent over the $1.53 in fiscal 2012, which excludes the 7 cents per share impact from the 53rd week, up from its most recent guidance of 6 to 7 percent growth. The guidance assumes an annual comp increase of 6 to 8 percent.
Month-to-date for September, comps are up 3 percent. Ed Wilhelm, Finish Line's CFO, said while the month started with trends similar to its second quarter, “business softened in our stores beginning around the middle of the calendar month due to declining customer traffic.” Its comp assumption for the back half of the year assumes a modest rebound from the two-week trend “as we remain confident about product pipeline and our strategic initiatives to drive sales,” said Wilhelm. Its digital business has remained strong, up 29 percent month-to-date.
