Finish Line Swings to Loss in Q3

A combination of changing athletic trends and management missteps sent Finish Line Inc. into the red during its third fiscal quarter.

The company reported on Friday a net loss of $107,000, versus a profit of $5.6 million during the same quarter of last year. Sales during the period were $296.6 million, compared with $282 million for the third quarter of fiscal 2011.

Analysts polled by Yahoo Finance had anticipated earnings of 10 cents a share on revenue of $296.1 million.

During a conference call with investors and analysts, Chairman and CEO Glenn Lyon said three primary factors contributed to the loss.
First, Lyon said, athletic trends during the quarter shifted away from running — the retailer’s largest category — to basketball. To remedy the situation, the company aggressively marked down product ahead of the holiday season, which put pressure on margins.
“We were undergoing a change within athletic footwear trends characterized by a slowdown in running and a pickup in basketball,” Lyon said. “This began in mid-September, and we expect these trends to continue into next year.”
“Our expectation that the product pipeline in running would continue to fuel strong sales trends for the foreseeable future did not play out in the third quarter,” EVP and CFO Edward Wilhelm said during the call, adding that the retailer first noticed the shift in product preference in September. “At that time, we felt it was a blip. However, as we got deeper into the quarter, it became obvious that for us it was more than a blip. It was a shift within athletic footwear, characterized by the growing strength of basketball and a … slowdown in running.”
The second factor that contributed to the tough quarter was management’s slow reaction to the issues facing the firm, Lyon said. “We didn’t react quickly enough to better align the variable component of our store and digital expenses with the lower sales levels, costing us approximately $1.6 million,” he said, adding that the company has since implemented new cost controls.
Thirdly, while Finish Line acknowledged that its Web business is growing, the new e-commerce site launched in November failed to meet expectations and contributed to the challenges. “Digital sales for the quarter were up 25 percent,” Lyon said. “However, we believe the new site, which came online Nov. 19, cost us approximately $3 million in lost sales for the third quarter.”
On Dec. 6, the company transitioned back to its former website, and future plans for the e-commerce platform will be examined in the coming months, Lyon said.
During the quarter, comparable-store sales in brick-and-mortar stores increased 0.6 percent. Online sales during the period represented 14 percent of total sales, compared with 10 percent a year ago.
For his part, Susquehanna Financial analyst Christopher Svezia said the company faced continued top-line pressures and ongoing challenges in its product realignment and e-commerce business. Still, he noted the company has a firm foundation. “We believe [these challenges are] balanced by a strong balance sheet, share repurchases and interesting long-term initiatives,” he wrote in an earnings note.
Looking ahead, the company said it now expects fourth-quarter earnings of 74 cents to 78 cents a share.

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