Shares of The Finish Line increased 4.3 percent for the week to close at $24.41 Friday after the retailer reported earnings rose 6.1 percent in its fiscal second quarter ended Aug. 31, to $26.5 million, or 54 cents a share, exceeding Wall Street's consensus target of 45 cents.
The upside performance was helped by expense controls and share buybacks that helped offset sluggish top-line growth and margin pressures.
“Q2 was a well-executed successful quarter in what is proving to be a challenging retail environment,” said Glenn Lyon, Finish Line’s chairman and CEO, on a conference call with analysts. “Importantly, expenses were well controlled resulting in good operating expense leverage and healthy flow-through to the bottom line. This helped offset some pressures in gross margin from a softer than expected full price selling.”
He noted that the earnings results were in line with its internal plan.
Consolidated net sales grew 13.3 percent to $436.0 million. This net increase was made up of Finish Line sales that were up 3.4 percent and sales tied to its new Macy’s partnership of $30.4 million. Running Company sales contributed $13.9 million versus prior year of $6.3 million.
Finish Line comparable store sales increased 0.9 percent on top of a 12.3 percent gain in the same period a year ago. Comps were down 1.9 percent in June, down 1 percent in July and up 4.4 percent in August. September comps to date are up mid-single digits consistent with August trends.
Footwear comps were up 2.2 percent and the soft goods comp decreased 8.7 percent. Footwear ASPs increased 1.5 percent.
In footwear, running comps were down low single digits, consistent with the first quarter. Q2 results were on top of a tougher comparison versus the first quarter and trends improved towards the end of the second quarter with August comps flat for the month. Lyon said this “was fueled by much more exciting new product launches, making us more optimistic.”
Positive responses were seen for the Flyknit Lunar and Flyknit 3, with the introduction of new colors as well as the launch of a third platform, Flyknit Max, later this year expected to build on those gains. Air Max and Nike Free also continue to generate strong sales gains. Lyon remarked, “It is clear that new innovation is generating excitement in the marketplace and driving improved results in our business.”
Springblade from Adidas, which launched in early August, is “selling extremely well” at a $180 price point. Other big wins in the quarter include its exclusive with Under Armour Spine and new fashion technology products from Asics and Brooks.
Basketball continued its recent momentum with comps up in the low teens. Results were driven primarily by retro and performance products from Brand Jordan and as well as Lebron and Kevin Durant signature product. While a smaller percent of its basketball business, Reebok and Adidas retro products “did very well,” said Lyon.
On the strength of basketball, men's comped up low single digits while women's was down mid-singles and kids delivered comps up mid-single digits.
The 8.7 percent comp decline in soft goods marked some improvement from the 10.2 percent drop seen in Q1. The second-half focus will be on licensed and branded fleece, its kids branded apparel to complement the strength of kids footwear, and an expanded backpack assortment.
Digital comp sales increased 5.7 percent for the quarter, on top of a 30 percent increase a year ago, and represented 10.5 percent of total sales. Digital traffic was up 33 percent in the quarter, fueled in part by strong gains in mobile traffic. Said Lyon, “We are maintaining a well-balanced approach to driving top and bottom line gains in our digital business and we are pleased to have achieved our operating income plan for the second quarter.”
Regarding its partnership with Macy’s, Finish Line ended the second quarter with Finish Line branded shops in 133 Macy's locations and as of Sept. 28 was in 151 locations. It’s on track to meet its goal for 180 conversions by the end of October. Lyon said the company is “very pleased with the initial results from the conversions and continue to learn a lot about this business.”
He added, “We are continually refining the mix of brands, styles and colors and adjusting product quantities and sizes as we gain more experience operating this business.”
Staffing is also being adjusted, and footwear assortments on macys.com are at the same time being expanded. It’s also collaborating with Macy’s direct-to-consumer outreach and special event activation in key locations. The effort is being led by Mike Marchetti, EVP and general manager, and a GMM was also added to help tailor the offerings.
Running Specialty Group now counts 39 stores and management remains comfortable of meeting its goal of adding 30 new stores through acquisitions and organic openings in its current fiscal year.
“There are mutual benefits to our organizations and these smaller chains in joining forces,” said Lyon. “We help elevate their merchandising and operational execution while making a concerted effort to retain the unique elements that are critical drivers to their success.”
He said the stores attract not only runners but also “fitness enthusiasts” and that “presents us with some very interesting opportunities particularly beyond running as we continue to grow and evolve this business.”
Consolidated gross margin rate in the quarter decreased 140 basis points from a year ago to 33.6 percent. Product margin net of shrink was down 110 basis points due to higher markdowns due to shifts in its product mix. Occupancy deleveraged by 30 basis points. Consolidated SG&A expense was down 80 basis points 23.8 percent of sales due to a focus on operating expenses and overhead costs.
Lyon said the company remains on track with its multi-year effort to replace its core systems, which will enhance its CRM (customer relationship management) tools, improve inventory management and fulfillment, and upgrade merchandising capabilities. Handheld devices are also being brought to the store level. A new supply chain system will be tested at Running Specialty Group later this year.
Based on its second quarter performance and mid-single digit comp growth seen so far in September, Finish Line comps are expected to increase low single digits for FY14, up from previous expectation for a slight increase. While the comp guidance was slightly raised, management now anticipates some additional margin pressure during the back half of the year as a result of “the challenging retail environment.”
EPS for FY14 is still expected to increase in the mid single-digit range compared to the adjusted EPS of $1.47 in fiscal 2013.
