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Mixed Earnings Results for Finish Line

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The premium retailer of athletic shoes, apparel and accessories Finish Line Inc.'s fourth-quarter 2013 adjusted earnings per share of 76 cents declined 6.2% year over year but beat the Zacks Consensus Estimate by 2.7%. Earnings suffered owing to weak traffic growth, aggressive promotional stance for underperforming products and inefficient cost management.

Indianapolis-based Finish Line reported year-over-year net sales decline of 3.1% in the quarter to $442.7 million. Sales also missed the Zacks Consensus Estimate of $452.0 million. Softness in the Running business and overall macro headwinds impacted sales negatively.

Comps increased 0.7%, much lower than the year-ago comps increase of 10.8%. Comps growth consisted of a 21.0% increase in comparable digital sales and a decline of 2% in brick-and-mortar comps. For the stores, comp sales declined 2.4% due to weak traffic.

By category, comps for soft goods increased 3.7% driven by some strong gains in accessories.  Footwear comps were slightly up by 0.2%.

During the quarter, Finish Line’s gross margin shrunk 210 basis points year over year to 35.1%. Occupancy expense increased 100 basis points as a percent of sales. Product margin fell 100 basis points owing to higher markdowns to clear out slow-moving inventory.

Fiscal Year Update

Finish Line’s adjusted earnings were $1.47 per share versus $1.60 per share in 2012. Sales increased 5.4% year over year to $1.44 billion.

Store Update

Finish Line opened 29 stores in 2013 and closed 21. In addition, the company relocated 19 and refurbished 14 stores and ended the year with 645 units. At year-end, the company had 27 Running Company stores including 6 acquired and 2 new store openings. Management expects to open 20 to 25 new Finish Line stores and close 10 to 15 stores.


For fiscal 2014, Finish Line expects its comparable store sales to increase slightly and earnings per share to grow in mid-single digit range. The Running Company business is expected to be modestly dilutive in 2014.
Management expects pressure on sales to persist even in the first quarter of 2014. In addition, in the first quarter, Finish Line will incur significant expenses associated with the partnership with Macy's Inc. ((M - Free Report) ) which will constrict its margins as well.  

Beginning mid-April, Finish Line will be taking ownership of the athletic footwear inventory at all Macy's stores. Finish Line will also begin rolling out its  branded shops to Macy's stores nationwide. Upon completion, Finish Line targets to open 20 to 30 outlets every month and expand its presence to around 450 Macy’s stores. Finish Line expects this partnership with Macy’s to deliver $250 million to $350 million in annual sales and 30—35 cents per share in earnings once the initiative takes momentum.

Our Take

Finish Line currently carries a Zacks Rank #4 (Sell). We had a tepid performance from this premium retailer this earnings season and we do not expect a drastic improvement in the upcoming quarter as well.

However, the scenario might change as the year progresses mainly on the back of the new growth initiative related to the partnership with Macy's and digital activity. We believe these initiatives will likely bode well for its earnings in the second half of 2014.

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