The fiscal third quarter 2013 results of Finish Line Inc. (FINL) were break-even, which missed the Zacks Consensus Estimate of 10 cents as well as lagged the year-ago results of 11 cents. Earnings suffered owing to weak reception of the e-commerce business, aggressive promotional stance for underperforming products and inefficient cost management.
Indianapolis-based Finish Line reported year-over-year net sales growth of 5.2% in the quarter to $296.6 million. Sales marginally beat the Zacks Consensus Estimate of $296.0 million. However, a shift within athletic footwear trends and a less effective consumer response to the new ecommerce site launched in mid November impacted sales negatively.
Comps increased 3.6% which was lower than 7.7% growth recorded in the year-ago period. A 0.6% increase in comparable brick-and-mortar sales and a digital comp increase of 25% fuelled the comp sales growth. By category, Footwear comps were up 3.1% while soft good’s comps increased 6.1%.
During the quarter, Finish Line’s gross profit fell 1.3% to $89.8 million. Gross margin shrunk 210 basis points year over year to 30.3%. Occupancy expense increased 100 basis points as a percent of sales. To counter recent deceleration in margins, management plans to go back to its previous ecommerce site and implement cost controls.
Liquidity
At quarter end, Finish Line had cash and cash equivalents of $168.2 million compared with $216.6 million cash at the end of November 26, 2011. The company had no interest-bearing debt.
Share Buyback
Finish Line bought back 1.0 million shares of its shares during the quarter for $21.2 million. The company had 1.3 million shares left in its authorization of 5 million shares as of December 1, 2012.
Subsequent to its earnings, Finish Line increased the authorization by 5 million shares. This modification also extended the authorization to repurchase shares through December 31, 2017.
Store Update
Finish Line opened 14 stores during the quarter and closed one. In addition, the company relocated or refurbished 15 stores and ended the quarter with 651 units. At quarter-end, the company had 25 Running Company stores.
Outlook
For the fourth quarter, Finish Line expects its comparable store sales increase in the low single digit range and earnings per share in a range of 74–78 cents.
Finish Line continues to expect its earnings per share to grow 6–9% year over year in fiscal 2013, between $1.47 and $1.51 per share. The guidance takes into account annual comparable store sales growth of 6–8%.
Our Take
Although this premium retailer of athletic shoes, apparel and accessories performed poorly on the earnings front in this quarter, we believe management’s latest initiatives will likely bode well for its earnings in the upcoming quarter.
However, management’s efforts to spur technology, stores and digital capabilities will lead to increased SG&A expenses and constrained operating margins in 2013. In the upcoming quarter also, management expects to witness deleverage in store occupancy, which will again pressurize its margins. Beginning fiscal 2014, management expects to leverage the same.
For the long term, we reiterate our Neutral recommendation on the stock. Finish Line, along with its peer Genesco Inc. (GCO) carries a Zacks #3 Rank (a short-term ‘Hold’ rating).
FINISH LINE-CLA (FINL): Free Stock Analysis Report
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