Finish Line Got Clobbered Because It Needs to Execute

The stock fell more than 20% after posting disappointing results

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Sep 28, 2015
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Finish Line (FINL, Financial) is a retailer of athletic shoes, apparel and accessories for men, women and children, with 1,090 stores throughout the United States. Among its stores, it operates branded shops within Macy’s (M, Financial) and also the Running Specialty Group.

The company’s stock fell more than 20% after posting disappointing Q2’16 results. Sales grew 3.5% to $483.2 million versus analyst estimates of $490.8 million. Same-store sales increased 1.5%, which was down from Q1's 5.5% same store sales growth. Diluted earnings was 57 cents a share, in line with analyst estimates. As of Friday’s close, the stock traded at $19.91/share.

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Sneaker companies like Skechers (SKX), Nike (NKE, Financial) and Under Armour (UA, Financial) are all performing well. In July, Skechers reported Q2 sales that grew 36% Y-O-Y to $804M. Nike beat expectations this past Thursday and reported that sales grew 14% excluding currency translations. Under Armour’s revenue in Q2 climbed 29% to $783.6 million year over year. Why is Finish Line not performing like the other sneaker companies? Management points to the company’s inventory mix. Basketball shoes have been selling well in the industry. Finish Line is more heavily weighted toward running shoes, and its basketball shoe offerings have not sold as well as other retailers like Foot Locker (FL, Financial). Those should be correctable problems. For frustrated shareholders, management has had trouble addressing the inventory mix issue for a while.

If we look at the company’s performance over the last 15 years, Finish Line has performed solidly. Revenue has steadily climbed over the last 15 years with a 10.35% CAGR over the last five years.

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Net income has also had a steady upward trajectory over the last 15 years with the exception of the financial crisis in year 2009.

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Comparison to Peers

When comparing Finish Line to competitors like Hibbett Sports (HIBB, Financial) and Foot Locker, it doesn’t look like any of these stocks are unreasonably priced from a headline numbers perspective. With Foot Locker, you’re getting much more growth for a higher multiple. The price-to-book ratio is where Finish Line stands out. The risk is that we are at the peak of the “athleisure” trend where consumers favor athletic apparel over more formal attire. Fashion is cyclical and you never know when trends will shift. Perhaps boots will come back into style sooner than we expect.

Trailing 12-Month Metric Finish Line Hibbett Sports Foot Locker
Revenue $1.87B $926.74M $7.25B
Market Capitalization $893.4M $880.72M $10.56B
PE ratio 11.24 13.06 19.10
EV / EBIT 6.48 7.02 10.97
Price to Book 1.57 2.79 4.09
Current Ratio 2.71 3.24 3.44
Debt to Equity No Debt No Debt 0.05
12 Month EBIT Growth % -1.10% 3.70% 22.70%

Conclusion

Management said that it expects low-single to mid-single-digit EPS growth. Wall Street analysts expect a 7% EPS rise to $1.79 for 2016 which gives a forward PE of 11. It feels like there is too much pessimism built into Finish Line. However per GuruFocus, there is not much guru sponsorship for Finish Line, Hibbett or Foot Locker. Perhaps, there’s something about the sneaker industry Gurus don’t like. If you choose to buy Finish Line, you’re betting that management will eventually correct its merchandise mix issues. Keep in mind that the company will likely need a couple of quarters to flush out the slow-moving inventory. At the time of this writing, Finish Line’s Web site was having big discounts.