Finish Line, Inc. F2Q10 (Qtr End 08/29/09) Earnings Call Transcript

Oct. 7.09 | About: The Finish (FINL)

Finish Line Inc. (NASDAQ:FINL)

F2Q10 Earnings Call

September 25, 2009 8:30 am ET

Executives

Ed Wilhelm - Chief Financial Officer

Glenn Lyon - Chief Executive Officer

Steve Schneider – President and Chief Operating Officer

Sam Sato – Chief Merchandising Officer

Analysts

Robby Ohmes – Bank of America

Camilo Lyon – Wedbush Securities

Tom Shaw – Stifel Nicolaus

Jeff Van Sinderen – B. Riley & Company, Inc.

Heather Boksen – Sidoti and Company

Chris Svezia – Susquehanna Financial Group

Bernard Sosnick – Gilford Securities

Operator

My name is Christine, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finish Line earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question and answer session. (Operator Instructions) I would like introduce the host of today’s call, Finish Line Chief Financial Officer, Mr. Edward Wilhelm.

Edward Wilhelm

Good morning everyone. Joining me in the call today is our CEO, Glenn Lyon as well as Steve Schneider, our president and chief operating officer. Also sitting in for the question and answer portion of the call is Sam Sato, our Chief Merchandizing Officer.

Before we get started, I need to remind you that this call may be include forward-looking statements that involve risks and uncertainties; and therefore, actual results may differ materially from the statements expressed or implied. Such risks and uncertainties include, but are not limited to, product demand and market acceptance risks, the effect of economic conditions, the effect of competitive products and pricing, the availability of products, management of growth and other risks detailed in the company’s news release and SEC filings. I will also note that with the closing of Man Alive transaction, which was previously announced, took place in the second quarter. Our discussion today and going forward will focus on the continuing operations of the core Finish Line business.

With that, I will turn it over to Glenn to begin with a strategic overview.

Glenn Lyon

Thank you, Ed, and good morning everyone. As you know, our focus at Finish Line is to sustain the health of our balance sheet, maintain our premium brand position, and within the realities of what remains a cautious consumer environment, position ourselves for future profit growth. We are encouraged as everyone about the recent comment coming out of the Federal Reserve that the recession has ended. However, we also know that consumer spending will be a lagging indicator in this recovery. It will take time for the consumer to respond; therefore, we maintain our conservative view and believe that our current strategy is the right one.

In the second quarter, we continued to manage the business effectively, first controlling costs, appropriately managing inventories, and working closely with our landlords and our vendor partners to drive efficiencies. Second, prudently investing in parts of our business and product lines that exhibit sales and profit growth opportunities. Quarter in and quarter out throughout this tough economy, we have demonstrated an ability to improve in both of these areas. As a result, even within a period with sales decrease more than we expected and comparisons were particularly tough, we ended the second quarter with a balance sheet that remained strong, $143 million in cash and no interest-bearing debt.

A strong balance sheet is a significant competitive advantage in today’s retail environment that we can leverage to grow sales and profit. For example, in the second quarter, we announced the formation of a dedicated team focused exclusively on growing our e-commerce channel and enhancing our cross-channel strategy. Our internet sales are up nearly 8% year to date, and we have put a focus on expanding the e-commerce contribution under the leadership of 21-year company veteran, Don Courtney. Don was responsible for building our advanced distribution and information systems and is now bringing his considerable expertise to growing the business by enhancing the customer experience.

In the future, you will see exciting innovations in site design and functionality that we are working on right now and plan to launch prior to the end of our fiscal year. Our cross-channel strategy includes not only the e-commerce site but also a continued focus on programs such as We’ve Got It, which is a great customer service and sales driver. With this program, customers who come in to shop with us but don’t find their size desired color in stock can order the item while in the store, and we will ship it their homes. While currently a small part of our revenue, sales through the We’ve Got It program are exploding, up 48% on a year to date basis. We are also seeing sales growth in our in-store pickup program where items found online can be reserved and later purchased in our stores.

In addition to our investment in e-commerce and our cross-channel strategy, we continue with a strong commitment to premium positioning. When I use the word “premium,” I’m not talking about it in an aspirational sense that luxury retailers do. I am talking about maintaining the accessible niche that we have carved out in the consumer’s mind as the premium retailer for sneakers, where the word premium translates to the newest, coolest, and trend-right styles with the best brands all in one place.

Our core customer seeks a performance product but generally not for a performance end use. We have many customer athletes who come to us for the latest high-tech running shoes, but we know that most of our customers are looking at performance products as fashion, to wear to school, to work, and throughout daily activities that likely do not include sports. Our customers are motivated to buy performance silhouettes to wear as everyday sport shoes. We will continue to actively adjust our product mix with a bias towards these performance-based products because they sell through better, have the highest margin, and the highest selling prices.

To support our positioning, we are working closer than ever with our vendors and seeing strong cooperation led by Nike and Brand Jordan as well as Puma, Adidas, Under Armour, ASICs and many more. We’ve challenged them to give us the cool, trend-right, performance-based products that will help all of us succeed. We have made it clear to our vendor partners that Finish Line wants to represent their brands in this premium niche. They have responded by working with us on exciting exclusives and performance products that we all win with today and tomorrow.

True to our core mission and core values, we do not see our business based on being the lowest price. The concept of value to our core customer is based on the cool factor, not the discount factor. While we have and always will have lower price points represented in the store, our leadership position will never be based on lowest price. Strategically, we are where we want to be in our business considering today’s economic environment which will continue to put pressure on the top line, but we are also well positioned for the future when that top line recovers. For now, we are sticking with our plant to remain cautious, managing our business tightly, and protecting our solid financial position while continuing to support our premium position, and investing in enriching the customer experience whenever, wherever, and however they shop with us.

With that, I will turn it back to Ed who will run through the specifics our second quarter performance.

Edward Wilhelm

Before I begin, I want to remind everyone that all financial data discussed today and going forward has been adjusted to represent the continuing operations of Finish Line only now that the Man Alive transaction is closed. In connection with the disposition of that business, we took a pre-tax charge of $18.4 million in the second quarter, which is included along with other Man Alive results and discontinued operations.

As reported in our news release, Q2 comp-store sales for Finish Line were down 9.9% compared to a 4.9% comp-store sales increase last year. When you factor in the decrease in our store base, total sales declined 11.4%. Comparisons were tough as last year Q2 sales were driven by stimulus checks and the Olympics.

The sales decrease was primarily driven by decline in store traffic which moved down in the low double-digits for the quarter. Once customers were in the store, however, we were able to more effectively sell them as conversion was up almost 1% and average ticket increased 3%. We expect that traffic will continue to be down in the back-half of the year but not as much as we experienced in the first half.

We did see a comp sales trend improvement throughout the quarter. In June, comps were negative 15.4%, in July negative 9.2%, and in August, negative 6.1%. In September, our comp store sales are up about 7% through Wednesday, September 23rd. September comps to date have benefited from a later Labor Day and back to school season compared to last year. Overall, we continue to remain cautious about the sales environment and are managing our business accordingly.

On a category basis, footwear costs were down 10.3% for quarter with a trend line that mirrored the total finish line experience throughout the period, down 16.2% in June, down 9.2% in July, and down 6.4% in August. Soft goods costs decreased 7.7% for the quarter and again echoed the same trend line, decreasing 10.9% in June, 8.6% in July, and 4% in August. Year to date finish line costs were down 7.3% compared to a comp increase of 3.4% a year ago. Year to date footwear costs were down 6.9% and soft goods were down 9.7.

Turning to operating results, the gross profit percentage including occupancy for the quarter was up 10 basis points compared to last year at 31.9% of the sales. Product margin was up 50 basis points and shrink improved 10 basis points. These improvements were partially offset by occupancy deleveraging of 50 basis points resulting from the negative comp sales trend. In dollars, total occupancy costs decreased 7.5% in the second quarter driven by fewer stores, percentage rent reductions resulting from lower sales, and favorable lease negotiations. We are continuing to manage our real estate portfolio and are aggressively renegotiating leases as they come due.

SG&A expenses excluding store closing costs of $1.4 million increased 60 basis points to 25.2% of sales due to deleveraging from negative comp sales trend. SG&A expenses on an absolute dollar basis declined $7.5 million or 9.1% in the second quarter. Several variables contributed to our SG&A results for the quarter including our targeted cost reductions as well as a decrease in store payroll, lower credit card costs, and reduced marketing expenses.

Depreciation was down as well due to store closings, prior year impairments, and a limited number of new store openings. Our decreased inventory position allowed us to keep freight and distribution costs down as well compared to last year. Second quarter income from continuing operations was $11.7 million versus $14.9 million one year ago. Earning from continuing operations per diluted share was $0.21 in Q2 versus $0.27 for Q2 last year.

Year to date income from continuing operations was $13.5 million versus $17.3 million last year. Earnings from continuing operations per diluted share were $0.24 year to date compared to $0.32 last year. Merchandize inventory on a consolidated basis decreased 18% to $221.4 million at quarter end compared to 1 year ago. Finish Line inventory decreased 13.4% overall and 10.1% on a first work with basis compared to last year. In addition, we continued to improve inventory turn and aging level.

Overall, we are pleased with our performance in his area. Capital expenditures on year-to-date basis were $4.4 million, and for the year, we expect CapEx in the range of $10-13 million. As far as our store program for Finish Line, we opened one store and closed 4 stores in the second quarter bringing the total number for the year to one new store opened and 9 stores closed. We expect to open 4-5 new stores for the entire fiscal year and close 20-25 stores.

As Glenn pointed out, Finish Line continued to strengthen our balance sheet. We ended the quarter with just under $143 million in cash and cash equivalents compared to $65 million a year ago and $119 million in the first quarter. We have no interest-bearing debt. Maintaining a strong balance sheet remains an important priority for our company.

Now, I will turn the call over to Steve, who will provide color on product and category results.

Steven Schneider

Thank you, Ed, and good morning. As Ed mentioned, footwear comps in Q2 were down 10.3% with softness across the board in men’s, women’s, and kids. However, during the quarter, footwear ASPs improved slightly up 1.9%. New and innovative products continue to be our primary drivers, and although overall price compression in the marketplace was having an impact on sales and profits, products that inspire and excite the consumer are selling well and at regular price. Right now at Finish Line, newness is what sells.

While running category was down for the quarter, we believe the trend in running is still positive. We are especially pleased by the improvement we saw in August when sales in men’s and women’s running improved led by Nike and Puma. Specifically, innovative products from Nike such as Nike Air Max 2009 and more exclusive models like Shox 09 and Skyline performed well. Sales of Puma cell technology footwear are also driving our optimism. Additionally, we are excited about the encouraging sales results with new platforms such as lightweight running and toning.

The basketball category was down in Q2, but continues to be a big business for us. Brand Jordan, our basketball leader, has experienced some softness of late due to tough comparatives, the penetration of that product, and price competition. On the positive side, LeBron Hyperize and Hypermax have been steady as consumers continue to be interested in advancement in technology and design such as Flywire. Due to difficult comparison in Q3 and Q4, we expect the Jordan trend to remain tough, but we also expect some bright spots surrounding key launches.

The sports style category was down for the quarter, yet we believe we can continue to capitalize on the success of the vulcanized trend. Kids sales were soft for the quarter but rebounded to flat in August driven by Puma and Under Armour as well as strength in toddler and preschool businesses.

I want to spend a minute talking about soft goods, which includes both apparel and accessories. We have been working on this business for some time. We continue to evolve our product offering to be more focused, and this has resulted in much improved performance. In fact, apparel margins were up over 500 basis points in Q2 driven primarily by premium brands such as Jordan and the North Face, and we felt strength in accessories such as shoe care and socks. We are right-sizing inventory here, reducing it in Q2 by 15.2% versus last year exceeding our plan for the quarter.

While soft goods experienced a comp decline at 7.7% in Q2, we like where we are heading in this business, and we expect to see sales trends continue to improve. As Glenn said, our e-commerce business was positive. Internet sales were up 2.3% for the quarter and are up 7.6% year to date. Glenn also mentioned that our in-store pickup sales are increasing, and he noted the significant improvement in our We’ve Got It sales, which was 55% for the quarter and up 48% year to date.

Catalog and direct mail sales were up 33% in Q2, and we continue to focus on repeat purchases through our Winner’s Circle customer warranty program which saw a 22% increase in signups for the quarter.

With that, I’ll hand the call of to Glenn to close, and then we’ll take your questions.

Glenn Lyon

In summary, we expect the consumer environment to remain challenging, and we’ll continue to operate our business conservatively in light of that expectation. Still, there’re quite a few positives in the second quarter that we can build on. In footwear, the running category remains strong. Our soft goods business is getting healthier with a more focused assortment and better margins. We continue to be pleased with the commitment of our vendor partners who share our belief that the consumer while cautious will respond to exciting products, colors, styles, and exclusives. Our direct consumer business continues to grow profitability with an internet metrics that continues to improve. Inventory levels are well managed, and our balance sheet remains strong. We exited Man Alive which was dragging down our profitability, clearing the way for better profit performance. We’ve successfully reduced expenses and are controlling occupancy costs.

All of these steps put us in much strong position once the consumer bounces back. To echo what I said at the beginning of the call, our priority is to maintain our existing healthy balance sheet and leverage our financial position to invest in areas of growth within our core business. We’ll also continue to preserve our premium brand position and keep our focus on enriching the customer experience in our stores and online. Now we’ll take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Robert Ohmes with Bank of America.

Robby Ohmes – Bank of America

I’m actually surprised the ASPs were still up just given the way Labor Day shift and late back to school worked for you guys. Can you comment on how you feel about ASPs heading into the back half of this year, and then I think you guys might be doing some work on spring ’10. Do you see a change in the way your business will drive the ASP versus unit volumes as you re doing those plans, and then also if you could comment on it, and I might have missed it, the plus 7% comps you’re doing? Obviously the Labor Day shift probably helped with that. Are you still benefiting from a late back to school now or have you seen following this past weekend here, have the business trends really dropped back of, maybe not as negative as they have been, maybe not as strong as plus 7?

Glenn Lyon

Let me start with the ASPs. We expect ASPs to remain flat or slightly up for the remainder of the year. That’s driven by a few different things. Of course the quality of the assortment but also based on the mix. As we put more and more impetus on the performance categories and our mix as I said, the average selling price of that product is higher, but we also benefit from well managed inventory and better margins, so things trade up. We have not engaged in all store sales and promotions. We take our markdowns on the poor selling products, and we try and get full retail on the best selling items. Robby, our focus continues to be to get more of the good stuff and more of the right stuff, and we’ll continue to do that right through this year. I hope that helps you on the ASPs.

Ed Wilhelm

In terms of the September month to date comps, clearly driven by a later Labor Day and the calendar shifts resulting for later back to school, we benefited the second week in particular which had the benefit of the Labor Day. It’s only a couple of weeks. If you look at August and September on a combined basis, we’re down about 1.7%, so as we said while plus seven is encouraging, we remain cautious on the consumer going forward, and we’re going to manage our business accordingly.

Operator

Your next question comes from the line of Tom Shaw with Stifel Nicolaus.

Tom Shaw – Stifel Nicolaus

Can you maybe provide any extra color on sort of the least negotiations. In the past, you talked about 35% as a basis for some form of renewal in the next 12 months, maybe where that stands? Any color on average savings or even the posturing as the economy shows signs of recovery?

Steve Schneider

As we continue to go forward, we have more and more stores that come up or even some type of kick out, negotiation or a maturity, right now with the second half of this year and all of next year, we still have about 40% of the chain that’s going to be up for some kind of action. That doesn’t mean that every one of those was going to get benefit of a certain number. The ones that are on kick out, you still have to have sales level that are below a certain number, but we have been very pleased with how our negotiations have gone with the landlords, and I think that although we’re certainly going to be in a position where we were closing stores, we’re finding that in majority of the new lease negotiations we’ve been successful in turning some losers into winners, and we think that’s going to continue. I’m not in a position to give you a specific average reduction on those, but based on what we have been seeing, those are indicative of the position it puts us in over the next year and a half.

Tom Shaw – Stifel Nicolaus

You’re breaking up a store closure cost, it’s something a little different, and obviously the description around higher store closures than I think we previously had been looking for, did anything change there that changed that stance from trying to keep these stores open and having a lower rent base versus higher closure rate?

Steve Schneider

No. I think it really comes down to each individual negotiation. We’re very clear with our landlords that if we can’t work something out that’s good for both of us, we are going to close the store, and this is different than it was in the past in terms of the numbers, so we expect we’re going to have more closures. This year, it’s going to go up. We have already closed nine as it is. It will be 20 to 25 for the year. We have not done that in a long time. I don’t know if we ever have, and then we will be looking next year to see whether we can reduce that number of closings or not, but it is going to be dependent upon the individual negotiations, and to us it’s a win-win. If we close a store that is losing money, it’s going to improve our profitability, and in many of these cases, if it’s a natural expiration, there really is very little or no write-off, but if it’s the end of a kick out, we may have some leasehold improvements that are still on the books. That’s really majority of what sits on there for those lease closures, and because of that we felt like it would be important enough as we go forward to break that out for the analysts and for the street.

Operator

Your next question comes from the line of Jeff Van Sinderen - B. Riley.

Jeff Van Sinderen – B. Riley

It seems like full pricing selling improved, if I heard you guys correctly. I am just wondering if you have any thoughts on promotional cadence expected for Q3. It sounds like you guys have stayed away from doing all store promos and so forth.

Glenn Lyon

There is no doubt that there is continued aggressiveness throughout the mall with respect to price promotion, and while we’re not making investments in promotional efforts to drive sales because everything with accomplishing now is driven off our motivation to get good return on our investments. The brands expect that from us, and we’ll partner up on them, and we have been able to manage our inventories well and not get into this promotional fray that’s going on. We think that continues to position us in the customer’s eyes as the place to go for premium products. We also believe that that in partnership with the brand motivates them to look to us to launch new products and get involved in stories that we think are the most exciting stories in our category, so we’re going to maintain that in light of what’s been going on for a quite a while in the mall.

Jeff Van Sinderen – B. Riley

In terms of inventory being down as much as it is, how should we think about that in the context of same store sales, average price point, turns, and I guess flexibility of your vendors to shift more product at once?

Glenn Lyon

We believe that we can continue to improve our inventory turms, and we believe that helps us in a lot of ways. I have always found during my 35 years of doing this that if things are better than we expect, procuring more inventory is usually something that we can get done. I have confidence on a merchandizing team that we can take advantage of any positives that we don’t expect, so we’ll continue to pursue business that way.

Jeff Van Sinderen – B. Riley

Finally, can you remind us of the comp anniversaries that you’re up against in October and November?

Ed Wilhelm

For the third quarter in total, our comp was down 3.3%. In September, it was down 1.7. It was flat in October, and in November, it was down 7.7.

Jeff Van Sinderen – B. Riley

You would expect that with comps getting easier even if once we get past this late back to school year that your trend would be better than it was in Q2?

Ed Wilhelm

We’re not commenting on guidance at all, but the down three that we are up against in third quarter is certainly an easier comparison than the quarter that we just came of off, and then looking ahead to the fourth quarter, our cost for the fourth quarter last year was down 2.3%, so comparisons do get easier for us in the back half of year.

Operator

Your next question comes from the line of Heather Boksen – Sidoti and Company

Heather Boksen – Sidoti and Company

What percentage of cost to goods sold these days is occupancy cost?

Ed Wilhelm

We haven’t disclosed that for competitive reasons, and we’re going to stay away from doing that.

Heather Boksen – Sidoti and Company

What kind of rent decline are you seeing when you do renewal lease?

Steve Schneider

I don’t know if we in a position that we want to say that number, but I would say that it’s pretty significant. This isn’t a 10 or 12% off situation. In many cases you take rests that could be in high teens to low 20s, and all of a sudden become high single digit percentage of sales or low double digits. That’s what we are looking for. We’re not looking for shavings there, we’re looking for much more than that in order to keep it full.

Heather Boksen – Sidoti and Company

You raised the store closure count for this year. If we look ahead to 2011, are you happy with how much you’re closing this year? Are we going to see more again in 2011? I know it’s still ways out but just maybe what you’re thoughts are as far as store base going forward?

Ed Wilhelm

Heather, it will really be a function of the negotiations with the landlords and how they go. If we get significant rent reductions to turn an unprofitable store to get it to an acceptable profit level, we’ll keep that store open, and in many cases, that’s what’s happening. If we unable to do that, then we’ll close the store and the increase in store closures for this year of 20 to 25 is the result of the store negotiations that we’re doing, and many we’re keeping open, but as you mentioned the number that we’re closing is increasing, but going forward, it is really hard to say because it will just depend on both individual negotiations with the landlord.

Heather Boksen – Sidoti and Company

What percentage of the chain right now is unprofitable?

Glenn Lyon

We’re looking at over the next 18 months almost 300 stores that are coming up again, and it’s very hard of us to predict what the profitability program is for the landlords. They all have a sense of what we need to be profitable, and as we sit through, as Ed said, that is a one by one situation. We have said we would like to keep as many of these stores open, but we are not going to do if the four wall productivity is not positive.

Operator

Your next question comes from the line of Chris Svezia with Susquehanna Financial.

Chris Svezia – Susquehanna Financial Group

First on apparel, over the many years we’ve seen the apparel is just getting contracted. We’re starting to see some general improvement in trends. You didn’t talk about the technical end of the apparel component, though you did mention Jordan. Can you put out your thoughts about what’s happening there, what we can expect, and any color about how many stores you have in North Face at this point?

Sam Sato

Specific to the North Face, that’s one of the brands that exemplifies the direction we’re going relative to our premium brand position. As we stated in previous calls, it is in a limited amount of stores today, but certainly represents the direction we’re going. We continue to focus on this business. We worked hard to right size the inventory relative to our sales trends, and we’re making good progress there as we mentioned earlier on the call. Our gross margin rate continues to improve, and that’s part of our focus obviously. Relative to our go forward strategy, it is really about providing the brands that resonate with our customers. Technical is part of that. It’s a smaller part of the business, but certainly it’s a part of that, products like fleece as an example continue to be a mainstay for us, and as we expand that program, throughout the brands that we’re representing in our regular assortments, we continue to see good traction and momentum there as well. So we’re making good progress, and that continues to be a strong focus for us, and as we go forward, I think we’ll continue to make the necessary adjustments to improve our business long term.

Glenn Lyon

The apparel and the soft goods component in general are positive additions to our business now, and it has been a long time since that’s been the case, so they’re adding value to our profitability.

Chris Svezia – Susquehanna Financial Group

Does Nike Dry Fit or Under Armour Compression, does that continue to play a part to that apparel component as you continue to make adjustments there?

Sam Sato

It does; however, what we’re finding is the technical part of the business is more limited in our four walls than maybe it is in some of our competitors. Having said that, we also believe that the root of our company is a performance part of the business both in footwear and apparel and so we’ll continue to offer that as long as the customers continue to tell us that they expect that from Finish Line.

Chris Svezia – Susquehanna Financial Group

Just to move to the footwear side for a moment, I guess one question here, maybe the percentage of exclusives that you’re getting at the Finish Line as you look to the second half, is there any change to that number one and, number two, fitness has become one important category. It seems as if I think EasyTone, Reebok plays a piece to that, Sketchers Shape-Ups, just your thoughts about that category, how important it might be to you in the second half, just thinking about product drivers to your business.

Sam Sato

In terms of exclusives, I don’t know that you’ll see a significant change from the first half or even last year. That continues to be a part of where we focused our merchandise efforts. Exclusivity really has to first be driven by customer demand and where we believe we’ve got opportunity to satisfy that and also enhance our assortment and create this distinct offer in our stores versus others. The toning category, a lot of buzz around that category and certainly the results that we’ve seen while still early have been outstanding. That’s one of the emerging categories that based on our results and certainly based on the demand we’re seeing both in stores and online we’re taking a significant position as we move into the back half of the year. We believe that that is something that will add some excitement as well as improve our business as we move into the back half.

Chris Svezia - Susquehanna Financial Group

On the September trends for a second being up 7% and then the stores I’ve been to, it seems like you guys are running your clearance events, and I’m just curious if you can talk about ASP trends on the footwear and apparel you got into that September period, how they’ve been sold if you could?

Ed Wilhelm

The ASPs were trending the same as they did as we’ve seen through the quarter, so there really hasn’t been a significant change there.

Glenn Lyon

I tried to answer that, Chris. We still expect ASPs over the long-term here to be flat to up. That’s our plan; that’s our expectation.

Operator

Your next question comes from the line of Bernard Sosnick - Gilford Securities.

Bernard Sosnick - Gilford Securities

With respect to seasonality, normally September-October-November, especially October-November are flat months in the athletic footwear business post back to school. Could you give us a little bit of an idea of how September normally compares with August if you use August as a base of 100? Is it a lower month, how much lower, and where are sales coming in on a base of 100 this year for September?

Ed Wilhelm

We’ve got a lot of calculators working now, Bernie. You’re really challenging us.

Glenn Lyon

There has not been as much of a change in our business as people might expect. September is a highly promotional month. It is this year. We’ve not done anything unusual. We don’t expect to see margin challenges different than what we’ve seen in the past. So nothing out of the ordinary going on in our stores in terms of the promotional calendar and what we see we need to do to drive the appropriate return on investments.

Bernard Sosnick - Gilford Securities

In any event, the quarter got off to a good start, but October-November are usually flat periods, and if things are promotional right now, judging from the behavior of competitors in the mall in the past, what might we expect during the slack period?

Glenn Lyon

Again, Bernie, I can’t speak for the competition. I think in the mall in general promotions have been up. It’s been that way for a while, and there is a lot of people driving more and more of their business off of price. We don’t see that as a vehicle to drive more return in our business. We are getting enough from the brands to be optimistic about our position going forward. We continue to run our inventories in really good shape. Our aging is better than it has been historically. Our levels are creating turns that are faster. We’ve got at least another 12 months, I believe, where we can increase turns before we start putting ourselves in a position of potentially missing any sales. So we’re very conscious of that stuff, but I think again no big change here at the Finish Line.

Bernard Sosnick - Gilford Securities

I just simply want to get ready for the fourth quarter actually, and so much of what you’re expecting from the fourth quarter has already just been built in by the big back to school business and what you are seeing then. So we can assume that you’re anticipating better apparel performance and you’ve identified key items for the holiday season where you can build inventories.

Glenn Lyon

That sounds good to me, Bernie.

Operator

Your next question comes from the line of Camilo Lyon – Wedbush Securities.

Camilo Lyon – Wedbush Securities

I just have a question regarding the total occupancy to see if I can approach it in a different way. In the first quarter, total occupancy was down 4.5% year over year. This past quarter, it was down 7.5%. Can you discuss a little bit about what drove the incremental improvements quarter to quarter and perhaps how we should think about that run rate of savings going forward?

Ed Wilhelm

Yes. In the second quarter, a year ago we had higher levels of sales than we did this year, so there is a percentage rent component that would have shifted to help with part of that reduction, and also we had fewer stores outstanding, but I would say that we’ve continued to do a very good job in renegotiating these leases. So there was benefit from that as well in the second quarter, and I think we mentioned in the first quarter call that the way we account for these lease negotiations is when the actual amendment gets signed on both sides, our side and the landlord’s side. That’s when we book the benefit of the amendment and we mentioned at the end of the first quarter that there were some in transit and hadn’t been completed, and those fell into our second quarter as well. So again, it’s really Camilo the combination of all three—lower store base, lower percentage rents, and continuation of good lease negotiations.

Camilo Lyon – Wedbush Securities

So would you say that this 4.5% reduction is probably the safer assumption to make going forward?

Ed Wilhelm

Yes, I think that’s a good conservative assumption to use going forward.

Camilo Lyon – Wedbush Securities

Similarly, on the rate of SG&A decline, how should we think about that as there was a pretty significant improvement quarter to quarter Q1 to Q2?

Ed Wilhelm

In the first quarter again, we were down about 3.5% in dollars, it increased to 9% in the second quarter. Again, part of that is the shift in the sales base from last year to this year, but I would say the 3.5% that we achieved in the first quarter is something we can do a little better than that, and we continue to show that in the second quarter. If we think about both occupancy and SG&A, we continue to believe that we can leverage both of those on a comp sales decline of 3-4%, so that might be a little easier to help you think about things.

Camilo Lyon – Wedbush Securities

As you continue to build up healthy cash balance, at what point do you become comfortable redeploying that cash and how would you do it?

Ed Wilhelm

Having a strong cash balance and a strong balance sheet is a tremendous asset, and particularly in this economic environment, and we’re going to continue to explore way that we can take advantage of that competitive strength that we have with a strong balance sheet to drive sales, profits, and shareholder value, and we’re going to continue to be thinking about that and doing that.

Operator

Your next question comes from the line of Chris Svezia - Susquehanna Financial Group

Chris Svezia - Susquehanna Financial Group

As it pertains to real estate and your average store size being roughly 5500 or so square feet at this point for the chain and as you think about reductions in inventory that have certainly taken place over the past two years and you think about store productivity, I think at one point 360-370 a couple of years ago, just walk us through when you talk about real estate and you’re having these negotiations, are you thinking about contracting the size of the box given what’s happening with inventory and productivity, or is productivity just going to be function of better product at better ASPs and hopefully improvement in traffic as we move forward?

Glenn Lyon

We believe that we’ve got to right size our stores based on the malls. There are many malls around the country that we operate in 6000 to 8000 square feet and we can product $500 to $600 a square foot. So as we look at our portfolio, we have a pretty good understanding of what traffic we can drive in different malls across America, and that’s what we will base our real estate decisions on, both as we look at expirations and kick outs. We may be moving from larger spaces to smaller ones or vice versa. What we are looking at is productivity. Yes, we would like to get that business back up to the 350-360, and I think everybody recognizes here and on Wall Street what that can do to earnings, back to the 8-9% earnings that we achieved during that time. So that’s our goal. That’s what we want, higher productivities, rightsizing of everything we do, rightsizing of the inventory, rightsizing of the footprint.

Chris Svezia - Susquehanna Financial Group

Alright, thank you.

Glenn Lyon

Thank you all for joining us this morning, and we’ll be back to you again a couple of days before Christmas on December 23rd, and I look forward to that, and hopefully we’ll present you with some good results here.

Operator

This concludes today’s conference call. You may now disconnect.

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