The Finish Line Q4 Hurt by Weakness in Urban, Mid-Price Product and Paiva Costs…

The Finish Line, Inc. saw considerable pain in its urban formats in the fiscal fourth quarter ended March 3 and pointed to increased promotional activity and lack of differentiation in the mall as the primary reasons for the overall weakness in the athletic specialty business. FINL counts about 75 Finish Line stores as urban formats. New initiatives from Nike focused on more differentiation of product, combined with new product merchandising and store formats are also expected to help them create a new connection with the consumer in the mall.

Consolidated net sales for the fourth quarter increased 7.5% to $429.0 million from $399.2 million in the prior-year period. Excluding the fourteenth week in Q4, which contributed approximately $24.2 million of sales, revenues increased 1.4% from the comp 13 week period of the prior year. Comparable store net sales decreased 5.4% for Q4 compared to a 0.4% comp store sales gain reported in the prior-year quarter. (see SEW_0711 for full comp sales results)

Net income for quarter totaled $21.1 million, or 44 cents per diluted share, down from $28.1 million, or 58 cents per diluted share for the thirteen-week quarter for the prior year. FINL estimates that Q4 benefited from the additional week by 8 cents per diluted share.

In a conference call with analysts last week, FINL President Glenn Lyon said they saw weakness in a number of categories, including non-premium performance, women’s, and softgoods. The retailer is expected to focus on more premium performance product, increased offerings of sport style (fashion athletic) product, and new marketing initiatives in the direct-to-consumer business.

Mr. Lyons said that sales of higher price-point product continued to out-perform mid-price-point goods. He pointed to broad distribution of mid-price running product in the mall and at family retailers as an issue. He said Nike Shox, Nike+, adidas Bounce and Puma Cell product did well, as did performance running product from Asics. Average selling prices in running were up more than 12% to $73, compared to $65 in the prior year.

Basketball was down in the low-single-digits for the quarter, but the weakness was attributed to non-marquee product. Lyons sees increased allocations of marquee product going forward.

The classics consumer was seen moving to fashion athletic, canvas, surf, skate and sandals. In the fourth quarter, the sport style, or fashion athletic, product increased to 23% of men’s footwear sales and more than 40% of women’s sales, up from 17% of men’s and 29% of women’s in the prior-year period. Finish Line is seeing good sell-through of sandals, canvas, and vulcanized styles in both men’s and women’s for the first quarter-to-date period.

The kid’s business comped up in double-digits for the fourth quarter, driven by strength in Heelys, Puma, Jordan and other marquee product. The kid’s business grew to 23% of the business in Q4, up from 20% in the prior-year quarter.

The branded apparel business was said to be the weakest area for the quarter. Lyons said they were “bullish” on licensed business, especially in NCAA in both men’s and women’s. Fleece was called out as a key category.

The Man Alive business comped down 4.4% for the period. While the men’s and junior’s apparel and footwear showed increases, it was described as “highly promotional.”

For the year, apparel represented 80% of the business, with 55% coming from men’s and 45% coming from women’s. Footwear grew to 10% of the business and accessories was the balance.

Paiva was apparently a disappointment for FINL, but management sounded upbeat on the format. They experienced “significant” losses related to the start-up of Paiva, which were said to be primarily due to delayed openings.

Looking ahead, management said the 84 cents per share consensus estimate for first quarter earnings was a bit aggressive as it represents a 20% increase from the year-ago quarter. Management said they are making progress with sales, with comps running flat for the first 3.5 weeks of March, but didn’t expect the top-line improvements for the year would all flow to the bottom-line.

Finish Line closed the year with inventory on a per-square-foot basis flat to the prior year-end. Lyons said they had about one-fifth of the markdown product they had at this time last year.

FINL plans to open 20 to 25 new Finish Line stores and only 10 to 15 Man Alive stores this year. They have already opened the two Paiva stores planned for the year.

>>> No surprises that FINL is also talking about a new differentiation in the mall. Nike is clearly driving the initiative and has drawn the line on where and how the brand will be sold in the mall…