Finish Line Report: Crunching the Numbers

Finish Line Report: Crunching the Numbers
Finish Line execs ring the NASDAQ opening bell.

All eyes are on the bottom line at Finish Line Inc.

At the end of the day, “building a long-term, sustainable business is about making smart, sustainable moves that will grow the top line,” said Ed Wilhelm, Finish Line’s CFO. “It’s not through cost-cutting.”

Take the acquisition of The Running Co. and the subsequent sale of a minority stake to Gart Capital Partners.

“They’re good, smart guys, experienced in executing what we call a roll-up strategy, [which] they had with Vail Resorts. Our intent is that they would incubate this for us and we would buy their interest back at a future date,” explained Wilhelm, noting it could grow to a $250 million business. “We’ve still got control over the business, but they’re looking for a certain [rate of] return [as capital partners], so they’re incentivized to grow it profitably.”

In fact, said Wilhelm, the firm will be highly disciplined in future acquisitions. He said, “We don’t need to make a ‘bet the farm’ acquisition. We have a great business in Finish Line, a great growth opportunity in The Running Co. and a lot of potential in both.”

Other moves include expanding Finish Line’s store base for the first time in several years. Plans are to bow 25 to 30 new doors, while closing five to 10 this year — a rate Wilhelm doesn’t consider aggressive.

“It’s right for us. But it’s not a number we’re pushing. If there are only 20 stores we can open profitably, we’ll open 20. If we see the opportunity to do 30, we’ll do 30. It’s a matter of our real estate team finding the right opportunities and [us implementing] the financial rigor that our deals require to make the right decision,” he explained.

The firm plans to spend $90 million this year in its retail strategy. Half will go toward opening new doors and relocating existing ones, while the rest will be ploughed into replacing merchandise systems and implementing technology in stores to aid mobile POS devices.

Wall Street analysts, however, have mixed opinions about the size of the investment, which calls for about three times more capital expenditure than in the previous fiscal year. The firm’s stock slipped more than 9 percent, to $21.13, on May 30, when the company announced its plans.

Christopher Svezia, analyst at Susquehanna Financial, said, “We don’t question whether the investments are the right investments. The question is timing and the cost involved. It’s a massive amount of capital — $90 million — and three-and-a-half years is a long time to wait for these things to materialize.”

Rob Samuels, analyst at The Benchmark Co., noted that shareholders are concerned these investments are taking place at the top of the footwear cycle, or close to it. “[But if] the company did not choose to make these investments now, they would eventually be left in the dust by both online and brick-and-mortar retailers who are moving quickly to beef up their digital presence,” he said. “The first-mover advantage will help to build customer loyalty.”

But other analysts were more upbeat on Finish Line’s initiatives, including Camilo Lyon of Canaccord Genuity, who was impressed by the showcase of “Apple-like in-store technology.”

He added, “The rate of spend will likely continue to be a drag on earnings-per-share flow-through for the next two quarters, [but] we believe these investments will position the company to grow comps in excess of industry growth in 2013 and beyond.”

Kate McShane, analyst at Citi Investment Research, also noted that Finish Line’s long-term guidance implies an upside to its stock.

“[Management’s] investments position the company for the future of footwear consumption. Moreover, we believe the footwear cycle will continue with a strong product lineup, and online [sales] appear encouragingly non-cannibalizing [to the brick-and-mortar business] as the majority of transactions take place between 8 p.m. and 12 a.m.”

Wilhelm was quick to point out the early successes of the firm’s investments. Two weeks ago, Finish Line’s first-quarter results beat the Street, as it earned 24 cents a share, sending its stock price up 9.4 percent to $20.43 as of press time on June 29. Revenue advanced 6.5 percent to $319 million, on the back of an 8 percent comp increase.

“The good news is [that our performance] was driven by the top line,” Wilhelm said. “The higher-than-expected comps converted to the bottom line in the proportion that they should. Digital was in line with expectations, so it was really the stores that outperformed, which is a testament to [the effectiveness of our initiatives].”

Wilhelm noted that the prototype store in Castleton, Ind., which has been open a month, has seen sales surge double digits across all categories, with average dollars per transaction increasing above the company norm.

Will that make the chain roll out its technological revamps faster than planned? Wilhelm said, “A lot of energy and resources are required to deliver what we have on our plate. We couldn’t go any faster, frankly, even if we wanted to.”