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The Finish Line Inc. (FINL - Snapshot Report) posted adjusted earnings per share of 39 cents in the second quarter of fiscal 2012, a penny ahead of the Zacks Consensus Estimate. However, the quarterly earnings exceeded the year-ago results by 8 cents.

Indianapolis-based Finish Line reported year-over-year net sales growth of 10.1% in the quarter to $331.5 million backed by a strong back-to-school season. Overall, both average dollars per transaction and conversion were up in stores while traffic was slightly down. Categorically, digital business grew dramatically with a 61% increase in sales on 53% traffic growth.

Comparable sales (comps) increased 11.0% in the second quarter on top of a 2.0% rise recorded in the prior-year quarter. This was the eighth consecutive quarter of same-store sales growth. In footwear, second-quarter comps increased over 11%, led by the running and basketball categories.

The basketball category delivered strong double-digit comps in the second quarter with stellar performance by Brand Jordan. Men's footwear, the largest segment, was up more than 14% in comp sales while in women's running, the company posted high single-digit comps. Toning sales represented less than half of the 1% total footwear sales and was a dampener in the quarter.

During the quarter, Finish Line’s gross profit increased 16.5% year over year to $116.3 million. Gross margin expanded 200 basis points to 35.1% driven by efficient cost containment. Better-than-expected product margin growth of 60 basis points benefited from effective inventory management.

Financials

At quarter end, Finish Line had cash and cash equivalents of $289.6 million, compared to $253.7 million in the year-ago period. The company had no interest-bearing debt.

Finish Line bought back 2.1 million shares in the second quarter for $44.8 million. Finish Line currently has 4.1 million shares remaining on the 5 million share repurchase program in place.

Store Update

Finish Line did not open any store in the second quarter, but closed ten. For the full year, the company expects to open 5 to 10 new stores and close 20 to 30.

Our Take

Going forward, we remain optimistic on Finish Line. This premium retailer of athletic shoes, apparel and accessories is in a strong product cycle for athletic footwear. The uptrend in basketball category and other footwear will continue to bode well for the company. With 11 consecutive months of sales increases, this category has emerged as a consistent performer.

In the running category, Finish Line expects the positive trend to continue into the next quarter, aided by the strong product line-up.

We remain impressed with the company’s solid partnership with the vendors, consumer demand for products and strategic closing underperforming stores. Moreover, Finish Line sits on a pile of cash. The company plans to use cash generated from operations to fund inorganic growth initiatives within the existing business as well as dividend payment and share repurchase.

In September, Finish Line acquired the assets of an 18-store chain of specialty running shops to provide an impetus to future growth.  While the acquisition will be a profit-earner in the long run, it will result in a penny’s dilution to current-year earnings per share.

The dilution is expected to be distributed evenly throughout the third and fourth quarters. Additionally, high unemployment rate and faltering consumer confidence as well as the underperformance in the toning category will remain concerns in the near term.

Finish Line currently retains a Zacks #3 Rank (short-term Hold rating). For the long term, we reiterate our Neutral recommendation on the stock. However, one of Finish Line’s peers, Genesco Inc. (GCO - Snapshot Report) retains the Zacks #2 Rank (short-term Buy rating).

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