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Finish Line Inc. (NASDAQ:FINL) reported a breakeven third quarter before the bell on Friday, January 4th when analysts had been looking for the company to earn 10 cents per share. The company was challenged in the quarter by a poor consumer response to a new ecommerce site launched in mid November. The company was also negatively affected by a shift in consumer preference towards basketball shoes where competitor Foot Locker, Inc. (NYSE:FL) is more focused. The company also reduced guidance for the fourth quarter and the fiscal year. Finish Line now expects to earn between $1.47 and $1.51 per share for the year, compared with analyst estimates for earnings of $1.64 per share.

The concern for Finish Line is whether or not the company has a handle on the trends in different product categories. Management believes that basketball will be strong for the foreseeable future. However the company was behind on the shift from running to basketball. I do not think that everyone following the industry believes running is really slowing long term and that the mix will continue to shift towards basketball. Nike Inc. (NYSE:NKE) did not seem to be affected in its most recent quarter by a slowdown in running. Nike said on its last conference call "nearly every category was up, led by double-digit growth in Running, Basketball and Men's Training". As we move into the spring running season it will be interesting to see what happens to the mix between running and basketball. It is also important that Finish Line along with the brands improve product offerings in running. Women's sales are very dependent on running and if running is declining women's does not have the gains in basketball to offset it.

The misstep on the new website is concerning that the company would make such a critical error going into the holiday season. The new website was only online for 3 weeks, and sales improved with the move back to the old website. In the time the new website was online traffic improved slightly however I believe the conversion rate was well below expectations. This raises concerns about the company's ability to successfully execute the omni-channel strategy. Also it is concerning that the process for testing these changes did not work and might not work in the future.

The biggest catalyst for Finish Line is the roll-out of Macy's, Inc. (NYSE:M) partnership. This partnership will allow Finish Line to operate athletic shoe stores in 450 Macy's stores. Finish Line will also manage athletic shoes in Macy's other stores and its products will be available on Macy's website. Macy's will benefit from increased traffic into its stores as its expanded athletic shoe offerings will likely drive a new demographic into Macy's stores. The roll-out of this partnership will start this spring and not be completed until around fall of 2014. However Finish Line expects this to be accretive to earnings next fiscal year and it will add $250 to $350 million to revenues once the roll-out is complete. This is approximately a 20% increase to current revenue.

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When you look at the valuation of Finish Line to its peers it appears fairly valued. While its EV/EBITDA ratio and forward P/E are lower than Foot Locker, they have almost the same PEG ratio and Foot Locker has a higher dividend yield. These athletic retailers focused on shoes appear to be a better value than general sporting goods retailers like Hibbett Sports, Inc (NASDAQ:HIBB) and Big 5 Sporting Goods Corp. (NASDAQ:BGFV). Hibbett and Big 5 have higher EV/EBITDA ratios, forward P/Es and PEG ratios than either Finish Line or Foot Locker. Big 5 has a 2.3% dividend yield, the same as Foot Locker, however it has a much higher payout ratio.

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Finish Line's stock has been defined by a steep downtrend for a few months now and it does not appear that there is any reason for this trend to reverse. This is quite different from the chart of Foot Locker, which I believe is finding support at around $31.50. Foot Locker did recently break bellow a long term uptrend, but it appears to be more of a short term pull back than a longer term decline. Finish Line problems appear to be execution problems within the company. Furthermore a shift from running to basketball would benefit Foot Locker more even if Finish Line makes a strong push in basketball. Foot Locker will also benefit from poor execution at Finish Line like the failed launch of the redesigned website. One option for investors would be shorting Finish Line while taking a long position in Foot Locker. Should current trends continue Finish Line and Foot Locker's valuation will begin move apart.

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Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com

Source: Missed Execution At Finish Line