As a follow-up to my previous article, The Finish Line: A Stock That Could Run Up In The Near Future, I would like to provide an overview of the The Finish Line's (FINL) latest conference call (Q1 2014). There were some very important updates on the call, including updated long-term guidance. The most important takeaways from call were:
- Long-term Guidance - The long-term guidance basically came in line with our "base-case" scenario, but it is important to note that these projections have been extended from 3 years out to 4 years out. Overall, even though expectations are already low for the company, this is a negative.
- Macy's (M) Store Guidance - Overall, the company seemed bullish on the success of Macy's so far, but long-term guidance for the concept stores came in at the low end of the previous guidance- a negative for the company.
- Running Category Resurgence - Sequential improvements for the running category, the company's largest segment, is great news after 6 months of struggles with the category.
- Strong Earnings for the Quarter, but no Increase for the Year - The company beat on both the top line and bottom line for the quarter, but did not increase guidance of $1.47 for the year (this includes share repurchases). This makes sense considering Q1 is overall a small quarter for the business, but no increase in expectations, considering the rollout of new basketball shoes coming in Q2, is alarming. Is the company being conservative or will it take longer to see a real pickup in the business?
Long-term Guidance As stated above, the company is pushing out its guidance forecast to FY2017 (4 years out) from FY 2016. If we include the sales growth of the extra year, this estimates come in line with the "base-case" scenario I presented in my last article: The Finish Line: A Stock That Could Run Up In The Near Future. Overall revenue and earnings per share should grow about 12% annually over the next 4 years:
- The Finish Line - Management is guiding to $1.75B in revenue. A 9% normalized operating margin that gives us $155MM in EBIT and about $2.10 in EPS.
- Macy's - Management guided for $250MM in revenue, which would equate to about $20MM in EBIT and $.30 EPS.
- The Running Company - Management guidance to $200MM in revenue, which should get us about $10MM in EBIT and $.10 in EPS
Overall, the company is looking at approximately $2.2B in sales, $225MM in EBITDA, $2.50 EPS, and $120MM in Free Cash Flow. The following charts show the valuation ranges I am using:
This chart shows the bottom end of my new "base-case" range. The company will grow revenues by 12% annually over a 4-year period and will get almost no expansion on an EV/Sales, EV/EBITDA, and Free Cash Flow basis. EPS should grow by about 12% also, so I am using a 1.0x PEG and a base for the P/E Multiple. These multiples are all justified considering management miscues (add on the lower guidance given this quarter), but expectations are low for the company right now, and I believe we could see some re-valuing of the multiple if management could just stay in line with these longer-term targets.
This chart shows the top end on the "base-case" range using the assumption that if management were to come in line with the new long-term targets, there would be some multiple expansion because of a reduction in the risk investors associate with management execution. All-in CAGR ranges from 8.5% to 13% annually over the next 4 years.
Other Items to Note
- The company is seeing no cannibalizing from the Macy's stores
- The Finish Line ended the quarter with 651 stores, including 10 openings and 4 closings
- Full-year store guidance - the company will open 20 to 25 new Finish Line stores, close 10 to 15 stores and remodel/reposition 25 to 30 stores
- The company acquired the Boulder Running Company, considered one of the top specialty running operations in the country
- Basketball remains very strong - a positive for Foot Locker (FL)
- The 50 Macy's stores currently opened have performed better on average than the rest of The Finish Line chain
- Management is hoping to get productivity up to $500-square feet
- Management is still looking for a new head of the digital business
This latest call strengthens our opinion on the base-case scenario for the business, but dramatically lowers the probability that the company can hit the bull-case scenario. Overall commentary/guidance was negative on the call. I am using a $30 long-term price target for FINL. I don't expect the stock to fall back in the $16-$18 price range, but would be using this kind of opportunity to add to my position.
The largest driver of the stock over the next 6 months will be updates on the success of Macy's roll-outs. Also, look to make sure running trends continue their improvement going forward.