Strong inventory and cost controls combines with a decent performance in footwear to help The Finish Line slightly trim its loss from continuing operations in the third quarter ended November 29. These improvements helped offset continued weakness in apparel, particularly licensed apparel, as well another sub-par performance from Man Alive.
In his first quarterly analyst conference call since becoming CEO of the company, Glenn Lyon called the current retail environment the “most challenging” in his 35-year retail career. He said the conditions require the company to place “greater emphasis” on its three core initiatives: aggressive cost controls, inventory management and ensuring a premium product assortment.
As such, Lyons noted that SG&A expenses were down $2.2 million in the quarter and inventory turns improved 10% year-over-year. Although overall comps declined 3.6%, he noted that the company experienced “strong performances” from brands like Jordan, Converse, Lacoste, The North Face and Ed Hardy.
At the Finish Line chain, comps declined 3.3% in the quarter. Footwear comps were up 0.1% while apparel tumbled 17.3%. By month, comps declined 1.7% in September, were flat in October and fell 7.7% in November. Average footwear selling prices increased 6.7%, feeding a 60 basis point improvement in product margins.
In footwear, kids comps were up low-single-digits, women's was down low-single-digits and men's was flat, said Steve Schneider, president and COO. Nike continued to lead footwear, driven by Brand Jordan. Performance categories were positive for the quarter. Running was led by Asics, Nike, Puma and Brooks. Basketball was driven by Nike and Brand Jordan. Seasonal products, such as slides and boots, also “showed strength.”
The performance of some of the traditional athletic brands “are well below” prior year levels, according to Schneider. He also noted that sport style footwear remains below plan.
The apparel comps decline largely reflects weakness in NFL and NBA products, “which have been unproductive and unprofitable.” Schneider adds, “The poor performance in these products is largely due to the fact that they are broadly distributed across the marketplace and require promotional pricing.” The chain plans to reduce sports licensed offerings in favor of premium brands. Finish Line found some success with premium brands such as Under Armour, Jordan, Livestrong by Nike and The North Face.
At Man Alive, comps declined 6.8% amid heavy markdowns. By month, Man Alive's comps slid 5% in September, tumbled 11.3% in October and were off 4.5% in November.
Lyon called Man Alive's results “not acceptable” while noting that all urban retailers have been challenged for some time. “Right now, we are working to reset the stores with [a] different mix of inventory and marketing position,” he said. “We will carefully monitor the results of our effort to invigorate Man Alive. And we will make appropriate decisions based on the results over the coming year.”
Net gross margins declined 10 basis points to 25.9% of sales as a 30 basis point decrease in product margins due to markdowns at Man Alive offset a 20 basis point improvement in shrinkage. SG&A expenses increased 50 basis points to 31.5% of sales, primarily related to the negative comps. The overall SG&A decline reflects expense cuts in freight, the distribution center and occupancy.
On a GAAP basis, the loss from continuing operations was $8.8 million, or 16 cents a share, compared to a loss from continuing operations of $13.8 million, or 29 cents, in Q3 last year. Included in Q3 2007 is a charge of 12 cents a share related to the terminated merger with Genesco. Excluding these expenses, the year-ago loss was 17 cents a share. The results still fell short of Wall Street's consensus estimate calling for a loss of 13 cents a share.
On a per square foot basis, inventories decreased 12%. By division, Finish Line inventories decreased 12% and Man Alive decreased 5%.
For its fiscal 2010 year, the initial store plan for the Finish Line chain is to open 10 to 15 stores, remodel 15 to 20, and close 10 to 15. Between five to 10 Man Alive stores will be closed with no new openings.
Regarding the first month of its current quarter, Lyon said Black Friday and Thanksgiving weekend were “slightly stronger” than planned. But the company saw a “steep decline” in traffic and conversion in following weeks with the consumer focusing on value-priced items until a “steady resurgence” occurred just before and after Christmas. The result was that December comps declined 6.8% with consolidated product margins down 100 basis points in the month.
To manage through the downturn, Lyon said the company will remain focused on costs, inventory and premium products. He also noted that despite the consumer's push for value, the retailer is not going to overly emphasize lower-priced goods.
