Market watchers had stern words for Indianapolis-based specialty-athletic retailer Finish Line Inc. when it reported declining profit and sales that grew modestly but missed Wall Street’s estimates in Q2.
Ahead of the firm’s third-quarter earnings release, slated for Jan. 7, analysts are singing a slightly more optimistic tune.
“In discussions with our industry contacts, we believe the tide is turning for Finish Line, not only via better allocations but also from an improving trend in running,” wrote Canaccord Genuity Inc. analyst Camilo Lyon. “Separately, we expect Macy’s to remain a bright spot for Finish Line especially as it begins to benefit from the door repositionings and enhanced omnichannel initiatives.”
During the firm’s Q2 conference call, Finish Line Chairman and CEO Glenn Lyon had highlighted his team’s work toward growing the Macy’s shop-in-shops concept.
“Our recent efforts to increase the productivity of the enterprise are bearing fruit — namely, the investment in our top shops aimed at improving adjacencies and optimizing square footage to drive higher traffic,” Lyon said. “. … we repositioned and expanded 20 percent of our shops, which collectively are exceeding our expectations. We also see the opportunity to further improve sales and product margins at Macys.com by leveraging great traffic levels and our new store-fulfillment capabilities for the Web.”
Of the issues that weighed on Finish Line this past year, the most significant, Lyon said, “has been a lack of sufficient inventory to fully meet its demand.” But, he notes there have been improvements on that front too.
“In our store checks throughout the holiday season, we noticed increased allocations of Jordan 6 and 8 retros which likely helped improve sell through in December,” Lyon said. “We expect this increase in inventory to manifest in a solid quarter-to-date comp (we’re anticipating mid-single-digit comps). … Q4 should also be the quarter in which Finish Line recaptures much of the merchandise margin lost last year.”
Susquehanna Financial LLLP analyst Christopher Svezia said that although the company’s “self-inflicted issues,” lead to a disappointing 2015, “most of the heavy lifting appears intact for better earnings growth next year.”
For Q3, Svezia predicts comp gains of 1.8 percent, losses per share (EPS loss) of 4 cents and 4.4 percent sales growth driven by Macy’s. Lyon reduced his EPS estimate from 2 cents per share to a loss of 4 cents.
Both Svezia and Lyon also predicted some gross margin decline in Q3.
“Based on our checks, it appears there were some fulfillment/logistical issues in 3Q, with one vendor noting that some product appears to be ‘backed up,’” Svezia wrote. “We note this may be due to new order and warehouse management systems put in place in September. As such, we conservatively assume 20 basis points gross margin decline.”