Wall Street Tackles Finish Line’s Challenging Q3 & CEO Transition

Finish Line
Finish Line
Courtesy photo

Finish Line Inc. gave investors and analysts a lot to digest Thursday when it released weaker-than-expected Q3 earnings and also unveiled its CEO succession plan.

After the specialty athletic retailer posted a diluted loss per share of 49 cents, a same-store sales decline of 5.8 percent and revenues well below Wall Street’s estimates, market watchers say they are attempting to separate one-time hiccups from persistent challenges.

Finish Line Chairman and CEO Glenn Lyon — who announced that he will retire on Feb. 28, 2016 — said supply-chain disruptions due to the implementation of the new warehouse and order-management system were responsible for the bulk of the earnings miss.

Overall, Q3 was highly disappointing and once again underscored the execution failures within the organization,” wrote Canaccord Genuity Inc. analyst Camilo Lyon. “The good news is that the systems implementation is now fully behind Finish Line, and while there are some lingering effects in Q4 stemming from necessary markdowns on late-arriving apparel, it is largely one-time in nature, implying that 2016 should see the benefits of these systems enhancements.”

Management contends that the supply-chain disruption contributed about 42 cents to the reported loss in the quarter and noted that now that the situation has been remedied, Q4 comps to-date are already up 6.2 percent. Still, even as Lyon announced plans to close 150 stores over the next four years to boost struggling margins, some analysts were unconvinced.

We remain on the sidelines as any turnaround plans laid out by management are a ‘show me story’ at best,” Sterne Agee CRT Sam Poser wrote. “Over the years, Finish Line’s management has raised investors’ expectations only to under-deliver. While there are initiatives to talk about, nothing is fundamentally changing at the company.”

Poser is also skeptical of the wisdom  of having the company’s president, Sam Sato, take the reins after Lyon’s departure.

“Incoming CEO Sam Sato will likely continue Lyon’s legacy,” Poser wrote, adding “… We are anxious to hear how Sato’s outlook for the company differs from that of Lyon.”

Susquehanna Financial Group LLLP analyst Christopher was more upbeat on the transition, but he also outlined concerns.

[The] CEO transition is a step in the right direction, but [there are] some caveats,” Svezia said. “While it is refreshing to see a new CEO, we would have preferred an outsider as chairman, as we believe that either one of these two roles would benefit from an outsider’s perspective.”

Lyon will serve as executive chairman of the board through the end of calendar year 2016. At the beginning of 2017, he will transition to the role of non-executive chairman of the board.

With the company’s stock was down on the softer earnings, analysts suggest the current cheapness could present a buying opportunity.

While we prefer to see more evidence that current supply-chain issues are fixed, accelerating sales in December, easy compares in F2H17, closure of 150 unprofitable stores, a management transition and a cheap stock price could create a better stock backdrop over the next few quarters,” wrote UBS Investment Bank analyst Michael Binetti.

Looking ahead, Finish Line also noted that it intends to receive better allocation of key products from vendors such as Nike, which it also hopes will improve sales.

At press time, Finish Line’s share price dropped about 9 cents, to $16.53.