Analysts Call For Change After Finish Line’s ‘Disappointing’ Q2

'Analysts Call For Change After Finish
A Finish Line store.
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The stark contrast between Finish Line Inc.’s tough second quarter and the solid Q2 finish of its chief competitor, Foot Locker Inc., along with robust momentum in the athletic-footwear space, has left analysts scratching their heads about the firm.

“We see no reason why Finish Line’s paltry comps should diverge so drastically from those of its chief competitor, Foot Locker, or more broadly underperform the market — yet they have — indicating that issues exist at the management level,” wrote Cannacord Genuity Inc. analyst Camilo Lyon. “There needs to be bold action taken at Finish Line. [Its] woeful stock performance over the past five years should be a wakeup call for the [board of directors] to spur much-needed changes at the company, or risk becoming irrelevant.”

The news that Finish Line’s revenues missed expectations, that profits declined and that comps rose a soft 1.5 percent sent the company’s stock plunging.

“Friday’s 20 percent decline in the stock was investors’ referendum on management’s inability to leverage the best athletic cycle in a decade,” Lyon added, noting that he lowered his price target for the shares to $27, from $33, but is maintaining a buy rating.

UBS Investment Bank analyst Michael Binetti said he was most disappointed in Finish Line’s elevated inventory levels (up 11 percent year-over-year, versus sales growth of 3.5 percent), low-single-digits quarter-to-date comps and its Q2 comp miss (Binetti had predicted same-store-sales of 4 percent).

Still, there was some good news, Binetti added.

“On the positive side, merchandise margins were actually up in the quarter despite tougher compares and Nike’s elevated North America inventories,” wrote Binetti. “We expect merchandise margins could be a source of upside in [the second half] as Finish Line laps product missteps in 3Q and a [Running Specialty Group] inventory writedown in 4Q — which could create a favorable catalyst for the stock.”

Nonetheless, Binetti lowered his price target for the stock to $21, from $29, and maintained a neutral rating.

“A tepid start to Q3”at RSG — which will be rebranded as JackRabbit over the next two years  — is among Citi Research analyst Kate McShane’s concerns regarding the athletic-footwear-and-apparel retailer’s challenges. McShane maintained a neutral rating on the stock, noting that the firm “continues to lag behind Foot Locker in the athleisure race” and that its comp trends “present reason for concern.”

“Management has expressed optimism that top-line and margin improvement will come from its ongoing initiatives, particularly the optimizing of merchandise to match the shift in consumer preferences from performance to casual,” wrote McShane. “That said, we expect trends to remain challenged in the near term given that Finish Line’s fashion-casual product overlaps with more competitors than technical product.”

Although Lyon is adamant that “something has to change” at the firm, he, too, said he sees some potential remaining at Finish Line.

“In the meantime, we continue to see significant merchandise margin recapture opportunities in [the second half],” Lyon wrote. “That said, our enthusiasm is tempered by moderated comp expectations.”