The Finish Line Sees Weak Traffic Offset Running Strength in Fiscal Q2

Income from continuing operations slid 21.5% to $11.7 million, or 21 cents per share, in the three-month period ended Aug. 29 from $14.9 million, or 27 cents, in the year-ago period. The loss came to $874,000, or 2 cents, a share, after 23 cents-per share in losses related to the Man Alive chain, which had merged with Jimmy Jazz.

Revenue decreased 11.4% to $298.7 million as a result of fewer stores and a 9.9% same-store sales drop. A low double-digit traffic decline offset a pickup of almost 1% in conversion rate a 3% increase in average ticket. The year-ago quarter was also boosted by stimulus checks and the Olympics.

Comps improved throughout the quarter. Comps declined 15.4% in June, 9.2% in July and 6.1% in August. In September, comps are up about 7% through Wednesday, the 23rd, benefiting from a later Labor Day and back-to-school season versus last year. Combining August and September, comps are running down 1.7%.

“Overall, we continue to remain cautious about the sales environment and are managing our business accordingly,” chief financial officer Ed Wilhelm told Sports Executive Weekly in an exclusive interview.
On a category basis, footwear comps were down 10.3%. By month, shoe comps were down 16.2% in June, 9.2% in July, and 6.4% in August.

On a conference call with analysts, Steve Schneider, company president and COO, said that although footwear experienced “softness across-the-board,” footwear ASPs improved slightly, up 1.9%. “New and innovative products continued to be our primary drivers, and although overall price compression in the marketplace is having an impact on sales and profits, products that inspire and excite the consumer are selling well and at regular price,” said Schneider. “Right now at Finish Line, newness is what sells.”

While running was down, Schneider believes “the trend in running is still positive.” Men's and women's running noticeably improved in August, led by Nike and Puma. Standouts included Nike Air Max 2009 and mall exclusive models like Shox '09 and Skyline for Nike and its overall cell technology footwear for Puma. Schneider also is “excited about the encouraging sales results with new platforms such as lightweight running and toning.”

Company CEO Glen Lyon also said early results in the toning business “have been outstanding,” and the company is looking to aggressively build its positions in the category in the back half.

Basketball was also down in Q2 but “continues to be a big business for us,” said Schneider. He suggested that Brand Jordan “has experienced some softness of late due to tough comparisons, the penetration of that product and price competition.” While expecting “some bright spots surrounding key launches,” the Jordan trend is expected to “remain tough” due to difficult comparisons in Q3 and Q4. On the positive side, Lebron, Hyperized and Hyper Max have been selling well. Sport Style was down for the quarter although the retailer believes it can continue to capitalize on the success of the vulcanized trends.
Kids’ sales were soft at Finish Line but rebounded to flat in August, driven by Puma and Under Armour as well as strength in toddler and pre-school shoes.

Softgoods comps decreased 7.7% with declines of 10.9% in June, 8.6% in July and 4% in August. Apparel margins improved over 500 basis points, driven primarily by premium brands such as Jordan and The North Face. Accessories such as shoe care and socks also saw strength.

“We are right sizing inventory here, reducing it in Q2 by 15.2% versus last year, exceeding our plans for the quarter,” said Schneider. “While soft goods experienced a comp decline of 7.7% in Q2, we like where we are heading in this business and we expect to see sales trends continue to improve.”

Sam Sato, chief merchandising officer, said the apparel progress primarily reflects improved inventories and “providing the brands that resonate with our customers.” Although technical apparel such as Nike Dri-Fit and Under Armour are “part of it,” better assortments in standard categories such as fleece have been bigger movers.
Lyon admitted that the technical part of the business is more limited in their four walls than maybe it is in some of their competitors, but he said Finish Line will continue to stock technical items because of its performance roots.

E-commerce sales were up 2.3% for the period. The area saw a 55% hike in “We've Got It” program sales.

Under the “We've Got It” program, customers at the store who can't find their size or color in stock can order the item online while at the store and have it shipped to their homes.
Catalog and direct mail sales were up 33%. Sign-ups for the retailer’s customer loyalty program grew 22%.
Gross margins were up 10 basis points as product margins improved 50 points and shrink by 10 basis points. The comp decline's impact on occupancy costs cost 50 basis points in margins. In dollars, total occupancy costs decreased 7.5% in the second quarter driven by fewer stores, percentage rent reductions resulting from lower sales, and favorable lease negotiations.

SG&A expenses excluding store closing costs increased 60 basis points due to deleveraging from negative comp sales trends. SG&A in dollars declined 9.1% due to targeted cost reductions, decreased store payroll, lower credit card costs or reduced marketing expenses. Forty percent of its leases are up for renegotiation over the next year and a half.
Inventories on a consolidated basis decreased 18%. Finish Line inventory decreased 13.4% overall and 10.1% on a per square foot basis compared to last year.

Looking ahead, Lyon expects ASPs to remain flat to slightly up for the  remainder of the year, largely as the company focuses more on performance footwear that sell-through better, have the highest margin, and the highest selling prices.

“To support our positioning we are working closer than ever with our vendors and seeing strong cooperation led by Nike and Brand Jordan, as well as Puma, Adidas, Under Armour, Asics, and many more,” said Lyon. “We've challenged them to give us the cool, trend right, performance-based products that will help all of us succeed.”

Lyon said although Finish Line has avoided “the promotional fray that's going on” at the mall by focusing on inventories. And he believes Finish Line's commitment to premium product helps position the chain as the place to go for premium product at the mall and will also help it gain better allocations as vendors launch new products.
He also said that while inventories are significantly lower, the company will be able to get back into product should consumer spending bounce back faster than expected.

“I've always found during my 35 years of doing this that if things are better than we expect, procuring more inventory is usually something that we can get done. I have confidence in our merchandising team that we can take advantage of any positives that we don't expect, so we'll continue to pursue business that way.”

Finish Line ended the quarter with just under $143 million in cash and cash equivalents compared to $65 million a year ago and to $119 million in the first quarter.