Finish Line (FINL 13.09, -2.32, -15.0%) is a premium retailer of athletic shoes, apparel, and accessories. It is also responsible for the athletic footwear assortment, inventory, fulfillment, and pricing at all of Macy's (M 28.09, -0.28, -1.0%) locations and macys.com. That's enough of an introduction most likely to let readers know that the latest earnings report and outlook from Finish Line left a lot to be desired.
Macy's struggles have been well documented at this point and both Nike (NKE 56.10, +2.18, +4.0%) and Under Armour (UA 18.11, +0.60, +3.4%) shared some disappointing guidance of their own when they reported their latest quarterly results. In fiscal 2016 Nike accounted for 73% of Finish Line's merchandise purchases.
It seems only natural then that Finish Line, a mall-based retailer, would have encountered some sales challenges in its fourth quarter. Sure enough, it did.
Fourth quarter consolidated net sales decreased 0.4% year-over-year to $557.5 million, which was above analysts' average expectation, and comparable sales decreased 4.5%. On a brighter note, Finish Line Macy's sales surged 35%.
The sales challenges manifested themselves in a highly promotional cadence that led to a 500 basis points decline in its gross margin rate to 29.1%. In turn, the lack of sales growth, combined with the promotional activity aimed at clearing inventory, led to a 41% decline its non-GAAP profit of $0.50 per diluted share, which was well below analysts' average expectation.
The company said it ended fiscal 2017 with clean inventory levels. Its balance sheet suggested as much, showing consolidated merchandise inventories were down 4.8% year-over-year versus a 2.5% increase in consolidated net sales of $1.84 billion for fiscal 2017. It was further noted that merchandise inventories decreased high-single digits at Finish Line but increased high-single digits at Macy's.
That attention to inventory management as the quarter wound down should help Finish Line cut down on its aggressive promotional activity, but of course the demand needs to be there from customers to make that happen.
At this juncture, it sounds as if Finish Line is taking a conservative approach to its outlook for fiscal 2018, which is a 53-week year.
It is forecasting comparable sales to increase low-single digits and earnings per share to be in the range of $1.12 to $1.23, up 6% to 16% from its non-GAAP diluted earnings per share of $1.06 for fiscal 2017. The additional week in fiscal 2018, it was said, is expected to contribute approximately $0.06 per share to its fourth quarter and fiscal 2018 results.
The high end of the earnings per share guidance range for fiscal 2018 is well below analysts' average expectations, underscoring the point that analysts still have some work to do of their own to get a better handle on Finish Line's business in the face of some severe industry challenges.
Investors have a sense that a turnaround won't be quick, or easy, and that is showing up in the stock price. At Thursday's close, FINL had fallen 15% over the last 52 weeks, yet it has plunged 15% alone today in the wake of the retailer's fourth quarter report and outlook.