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Executives

Edward W. Wilhelm - Chief Financial Officer, Principal Accounting Officer and Executive Vice President

Glenn S. Lyon - Chairman, Chief Executive Officer and Member of Strategy Committee

Samuel M. Sato - President of Finish Line Brand and Member of Strategy Committee

Analysts

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Bernard Sosnick - Gilford Securities Inc., Research Division

Taposh Bari - Goldman Sachs Group Inc., Research Division

Kate McShane - Citigroup Inc, Research Division

John Zolidis - The Buckingham Research Group Incorporated

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Matthew McClintock - Barclays Capital, Research Division

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Paul Trussell - Deutsche Bank AG, Research Division

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Camilo R. Lyon - Canaccord Genuity, Research Division

Finish Line (FINL) Q2 2014 Earnings Call September 27, 2013 8:30 AM ET

Operator

Good morning, my name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finish Line Second Quarter Fiscal Year 2014 Earnings Conference Call. [Operator Instructions]

Thank you. Mr. Ed Wilhelm, you may begin your conference.

Edward W. Wilhelm

Good morning, everyone, and thank you for joining us. On the call with me today is our Chairman and CEO, Glenn Lyon. In addition, Sam Sato is with us for the question-and-answer portion of our call.

Before I get started, I need to remind you that this call may include forward-looking statements involving risks, management assumptions and uncertainties that could cause actual results to 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 effects of economic conditions, the effects of competitive products and pricing, the availability of products, management of growth and other risks detailed in our news release and SEC filings. The forward-looking statements included in this call are made only as of this date of this report and the company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances.

Now I will turn the discussion over to Glenn.

Glenn S. Lyon

Thanks, Ed, and welcome to everyone joining us this morning. Q2 was a well-executed, successful quarter in what is proving to be a challenging retail environment. We delivered a 1% comp improvement on top of a 12% gain a year ago, driven by a strong finish as August comparable sales increased 4%. Importantly, expenses were well controlled resulting in good operating expense leverage and healthy flow through to the bottom line. This helped to offset some pressures in gross margin from a softer-than-expected full price selling.

For the second quarter, EPS was $0.54, an increase of 10% over last year. While this was ahead of external expectations, it was in line with our plan. We think it's prudent to maintain our initial fiscal '14 guidance given the uncertain outlook for discretionary consumer spending. In addition, there is a difference between our fourth quarter SG&A projection and the Street's, which Ed will go through later in the call.

Looking at our comp performance in more detail, stores comped flat following an 11% increase in last year's Q2. Digital sales increased 6% on top of a 30% increase a year ago. Digital traffic continues to be robust, up 33% in the second quarter, fueled in part by strong gains in mobile traffic. We are maintaining a well-balanced approach to driving top and bottom line gains in our digital business, and we're pleased to have achieved our operating income plan for the second quarter.

By category, footwear sales on a comparable basis increased 2%. Looking first at running, there are a couple of key takeaways from the quarter. Q2 comps were down low-single digits consistent with the first quarter. However, Q2 results were on top of a tougher comparison versus the first quarter, and trends did improve towards the end of the second quarter with August comps flat for the month. This was fueled by much more exciting new product launches making us more optimistic.

In terms of product performance, we continue to see success with Flyknit Lunar, while the reaction to Flyknit Free, which was launched in Q2, was also positive. We continue to be excited about the potential of this new product from Nike and we look forward to the introduction of new colors, as well as the launch of a third platform, Flyknit Max, later this year. At the same time multiple styles from both Air Max and Nike Free continue to generate strong sales gains.

It is clear that new innovation is generating excitement in the marketplace and driving improved results in our business. SpringBlade from adidas, which launched in early August, is selling extremely well at a $180 price point. Other big wins in the quarter include our exclusive with Under Armour Spine and new fashion technology products from both ASICS and Brooks.

Basketball was once again a strong category with comps up low-teens. Results were driven primarily by retro and performance products from Brand Jordan and Nike signature series featuring shoes from LeBron and Kevin Durant. At the same time, while a smaller percent of our basketball business, Reebok and adidas Retro products did very well. On the strength of basketball, our men's business comped up low-single digits, while women's was down mid-singles, and kids posted another strong quarter with comps up mid-single digits.

Turning to softgoods, trends did improve from the first quarter, but with comps down high-single digits, the category remains an opportunity for us. As we look to the second half, we will focus on the following: Our licensed and branded fleece programs; our kids branded apparel to complement the strength of kids footwear; and our expanded backpack assortment.

Recent results indicate that our core business is heading in the right direction. With an improved product pipeline, our outlook for running is more positive than it was 6 months ago. That said, our optimism for the back half of the year is being somewhat tempered by the still challenging retail environment. We are committed to maximizing our near-term opportunity and executing against our long-term vision for the company. Developing industry-leading omnichannel capabilities is an absolute necessity given our core customer, as well as the evolving retail landscape. Our ongoing transformation into a leading multidivisional omnichannel business will also help maximize returns and profitability over the long term.

On the multidivisional front, we made great progress during the second quarter. First on our partnership with Macy's. We ended the second quarter with Finish Line branded shops in 133 Macy's locations. And as of yesterday, we're in 151 locations. We are very pleased with the initial results from the conversions and continue to learn a lot about this business. We remain very excited about this strategic growth initiative, and are confident we will deliver the financial goals we have laid out for this business.

As I mentioned last quarter, our Macy's effort is being led by Mike Marchetti, EVP and General Manager now, for the Macy's -- for The Finish Line Macy's stores. This past quarter, we bolstered the merchant team with the addition of a GMM who will enhance our collaboration with Macy's to better ensure our tailored offering appeals to our core customer.

We are continually refining the mix of brands, styles and colors and adjusting product quantities and sizes as we gain more experience operating this business. On the operational side, we continue to adjust the staffing model to maximize the potential of these shops, both from a sales and profit perspective. We have learned that adding staff to the stores a few weeks ahead of their conversion results in a much smoother transaction process and better performance post-conversion. Therefore, while we've opened -- while we've completed 151 conversions, we are actually fully staffed in 180 stores. As a result, obviously, we feel good about meeting our goal for 180 conversions by the end of October to take full advantage of the sales opportunities for holiday. At the same time, we're continuing to expand our assortment of footwear on macys.com to attract more of their digital customers and drive our overall digital growth. Lastly, we are collaborating with Macy's on specific marketing initiatives with their direct-to-consumer outreach and special event activation in key locations.

Now turning to the Running Specialty Group. We continue to speak with the best operators in the space, highlighting the positive reputation we are developing in this segment of the industry. Based on the frequency and tone of these conversations and the current pipeline of opportunities, we continue to be confident in meeting our goal of adding 30 new stores through acquisitions and organic openings this fiscal year.

There are mutual benefits to our organizations and these smaller chains in joining forces. We help elevate their merchandising and operational execution, while making a concerted effort to retain the unique elements that are critical drivers to their success. As we have increased our understanding of this model, it is clear the most successful stores are local market operators which have a significant community presence and strong engagement with their customers. To create a successful growth platform, we are institutionalizing the community programs and customer service standards of the most successful stores. This is being done through the hiring of great people, expanded training programs and the sharing of best practices.

With 39 stores now under the RSG umbrella, our learnings about this business and more importantly, the customers they serve, are increasing. These customers are fitness enthusiasts who lead active and healthy lives. For many of them, running is just one component of their overall workout regimen or active way of life. We think this presents us with some very interesting opportunities, particularly beyond running, as we continue to grow and evolve this business.

Finally, on our multiyear effort to replace our core systems, we remain on schedule. As a reminder, these systems will allow us to: One, enhance our CRM or customer relationship management; two, continue to improve our inventory management; three, upgrade our merchandising capabilities; four, increase our fulfillment efficiencies and speed; and fifth, support additions to our core business by providing a more scalable platform. We're also moving forward with additional upgrades to our store handheld devices to further enhance the customer experience and drive higher sales productivities. In addition, later this year, we will test our new supply chain system in our Running Specialty Group.

All in all, Q2 was a solid quarter. Operationally, we made good progress on each of our major initiatives. Financially, we delivered positive comp sales on top of a very strong quarter last year. And we tightly controlled expenses to deliver a meaningful bottom line improvement. Our team continues to execute well. I feel we are in a good position to successfully navigate through whatever near-term challenges arise, while remaining on our long-term strategic course that we established for the Finish Line.

Now I'll hand the call back over to Ed to walk through the second quarter financials in more detail and update you on our full year outlook.

Edward W. Wilhelm

Thanks, Glenn. For Q2, consolidated sales were up 13.3%. This increase was made up of Finish Line sales that were up 3.4%, sales associated with Macy's of $30.4 million and Running Company sales that contributed $13.9 million versus prior year of $6.3 million. Consolidated gross margin rate decreased 140 basis points from a year ago to 33.6%. Product margin net of shrink was down 110 basis points due to higher markdowns as we continue to adjust the breadth and depth of our product assortments to meet customer demand. Occupancy deleveraged by 30 basis points. Consolidated SG&A expense was 23.8% of sales, which leveraged 80 basis points from last year as we tightly managed our operating expenses and overhead costs.

On a consolidated basis, the second quarter net income increased 6% to $26.5 million, and EPS increased 10% to $0.54 compared to $0.49 per share in the second quarter last year. For Finish Line, second quarter comp sales were up 0.9%, on top of a 12.3% increase a year ago. For the stores, comp sales increased 0.3% on top of a 10.5% increase a year ago. Digital comp sales increased 5.7% for the quarter and represented 10.5% of total sales. With respect to cadence, comps were down 1.9% in June, down 1% in July and up 4.4% in August. September comps to date are up mid-single digits consistent with August trends. On the category side, footwear comps were up 2.2% and the softgoods comp decreased 8.7%. Footwear ASPs increased 1.5%.

Now moving on to our balance sheet. Inventory was up 18.1% on a consolidated basis. The majority of the consolidated increase is associated with the takeover of athletic footwear for Macy's and the store growth in our Running Specialty Group. We've largely completed the transition phase of Macy's inventory. For Finish Line, inventory was down 0.5%. Capital additions to fixed assets were $41 million in the second quarter, which excludes $6.6 million accrued in accounts payables at quarter end. For the full year, we still expect CapEx to be in the range of $80 million to $90 million, which includes an estimated $18 million in capital outlays associated with the building out of shops at Macy's. Depreciation and amortization expense was $9.1 million for the quarter, and the full year will be between $36 million and $38 million. We ended the quarter with $203.8 million in cash.

Our store activity for the quarter was as follows: For Finish Line, we ended the quarter with 659 stores, including 9 openings and 1 closing. In addition, we repositioned or remodeled 7 stores during the second quarter. For the full year, we still anticipate opening 20 to 25 new Finish Line stores, closing 10 to 15 stores and remodeling or repositioning 25 to 30 stores. At the Running Specialty Group, we opened 1 new store during the quarter, which brings our total openings and acquisitions year-to-date to 12. For the full year, we are still planning 30 new stores through both acquisitions and openings. Also during the quarter, we added 89 Finish Line branded shops within Macy's, giving us shops at 133 Macy's stores as of August 31. As we've said before, we plan to complete 180 conversions this fiscal year.

During the quarter, we bought back 250,000 shares totaling $5.5 million, which leaves us with 4.3 million shares remaining for repurchase under the current board authorization. Based on our second quarter performance and September month-to-date results, we now project Finish Line comparable store sales -- comparable sales to increase low-single digits, up from our previous expectation for a slight increase.

With respect to earnings per share, we are reiterating our initial outlook for fiscal 2014, which calls for adjusted diluted EPS to increase in the mid-single-digit range compared to the adjusted EPS of $1.47 in fiscal 2013. As Glenn mentioned, even though our Q2 EPS result compares favorably to the consensus estimate for the quarter, it was pretty much in line with our internal projections. In addition, while we slightly raised our comp guidance, we now anticipate some additional margin pressure during the back half of the year as a result of the challenging retail environment.

Furthermore, I want to highlight an important point about our Q4 SG&A expense. As a reminder, in Q4 last year, one of the drivers of the 7% decline in SG&A dollars and 90 basis points of leverage was lower incentive compensation expense, which was the result of us not meeting our financial targets. Right now, we are tracking to our financial targets for this year. And therefore, we anticipate recording a more normalized incentive compensation expense. Based on current projections, this will create a year-over-year delta of approximately $6.5 million and contribute to an expected percentage increase in overall SG&A in the mid-20s compared to prior year comparable quarter.

Now I'll turn the call back to Glenn for his closing comments.

Glenn S. Lyon

Thank you, Ed. 18 months ago, we outlined an ambitious plan to transform Finish Line into a premier, multidivisional, omnichannel retailer to better meet the evolving demands of our digital-savvy customers and position the company for long-term sustainable growth. We remain laser-focused on executing the initiatives that will serve as the foundation for this operating model. The model that we believe that will generate $2.2 billion in annual sales by fiscal 2017 through the following projections: Mid-single-digit growth in our core Finish Line business, with digital revenue growing in the 20% range and store revenue increasing low-single digits; our Macy's business generating $250 million in annual sales; and the Running Specialty Group contributing $200 million by fiscal '17. Combined with a disciplined capital allocation strategy, we expect to generate a compound annual adjusted EPS growth rate in the low-teen range over the next 4 years. We are fully confident that as more of the key pieces are put in place, our performance will continue to demonstrate the positive benefits from these strategic investments. We look forward to updating you on our progress, as well as a look at our initial holiday performance on the third quarter call in late December. Thank you.

Operator, we'll now ready to take some questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Eric Tracy.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

So Glenn, I guess for you, let's start on the comp and the outlook. Clearly, trends accelerated throughout the quarter, it looks like they're holding here the quarter-to-date. Understand the conservative – or the sort of prudency behind a low single-digit comp given the consumer uncertainty. But correct me if I'm wrong, I think the first 2 weeks of last year in September were pretty strong, up low-double digits, and yet compares do get easier through the balance of the year. Just lay out sort of the landscape right now and why maybe that comp shouldn't reaccelerate a bit more?

Glenn S. Lyon

Eric, I am not going to deny to you that we are being somewhat conservative based on current trends. But you and I have been through this many times, at least I know I have been over 40 years. And comparing to last year's results and evaluating your inventory position and evaluating the marketplace, I think the prudent move today is to be conservative in how we guide you. We're optimistic that, obviously, that a lot of things are in place for us to be successful here and we fully intend on delivering on that.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

And then fair to characterize though that the pipeline, particularly within Running, has improved year-over-year. You've got the SpringBlade, it sounds like sell-through is really good. Obviously, the Flyknit, the evolution there, you get the Air Max. Under Armour, finally bringing some product to market. Again, at least on a year-over-year basis, fair to say that, that running pipeline is improving?

Glenn S. Lyon

Eric, I feel good about it. I feel good about a lot of components of our business. When you add it up and the headwinds that we have and you're seeing the news of all of the people in the mall. And it's all -- the performance is all just okay, and the forecasts are just okay, and traffic is running flat in the malls, and conversion in our digital business continues to be challenging, as long as our goal is to make money as we convert sales, which we're doing. So I appreciate -- you just went through the litany of thoughts that we go through every day. And here's what we come up for today. And no doubt, we are up against much easier numbers for the next 5.5 months. No question about it.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

Okay. Then maybe if I could turn to Macy's. It seems like it's tracking really well, and if anything, maybe a little ahead of schedule in terms of at least what maybe I had modeled in terms of the rollouts. Maybe speak to, again, so 180 by the end of October, I assume there probably won't be any in November, December just not to disrupt the holiday flow. One, is that correct?

Glenn S. Lyon

Yes.

Eric B. Tracy - Janney Montgomery Scott LLC, Research Division

And two, just sort of talk through the learnings? And then the potential accretion, maybe when that inflection point, when we should sort of think about that, is there anything different than your previous thoughts there?

Glenn S. Lyon

Eric, we don't take lightly that we have ventured into a world that -- we think we know a lot about the athletic shoe business, but the idiosyncrasies of the department stores and of Macy's, and their historical promotional outlook on this business versus a model today that's totally different. This is all top of the line products from all of the key vendors sold at regular price other than seasonal reductions and an occasional promotion to participate in some of the strong Macy's promotions. So the learnings in terms of product assortment, the understanding of the numbers that we're up against, again, being highly promotional, huge learnings in that. So the forecast that we -- I will tell you this, we will be incrementally profitable for the Finish Line this year. That we're very confident in. Exactly what the sales number is, it's still to be seen. It's a huge fourth quarter coming in to department stores as a mix of the total year, when the traffic really spikes even greater than it does in our stores and the percent of the business that's done in the fourth quarter is huge. So again, we are very happy with what we've done. Things have exceeded our expectations as we convert stores. We were disappointed when we first put the inventory in, but as we converted the stores and put up the signs and put our people into the stores and set them up, we've had really good success. Another side note on that is we continue to track our cannibalizing of the Finish Line business. And Finish Line stores in malls that we've opened are still outperforming their trends from prior to Macy's opening. So all of that is good. We're tracking along and we're very positive about it.

Operator

And your next question comes from the line of Bernard Sosnick.

Bernard Sosnick - Gilford Securities Inc., Research Division

With regard to the Macy's, could you give us an idea of expenses, how they're going to be comparing next year with this year's expense level as you started to roll it out?

Edward W. Wilhelm

Yes. So Bernie, as we put shops in place and we add our employees to those shops, that payroll component, that service component is a higher cost than what we would see on average in a typical Finish Line store. And we knew that coming in and we're seeing that and that's right in line with our expectations. So as you think about next year compared to this year, we're going to have, obviously, more branded shops on a comparative basis than what we have this year. So because of that, primarily, you'd expect and we would expect, higher SG&A costs next year on the comparison to this year. Obviously, sales are higher as well because when we do convert these shops, we see a significant acceleration in top line as well, but we'll also see an increase in SG&A.

Bernard Sosnick - Gilford Securities Inc., Research Division

But there's also the startup component to hiring of a new organization, all of the things that you experienced this year, which won't be repeated.

Edward W. Wilhelm

Yes. No, there'll be a bit of an offset to that store payroll component that I talked about, but the store payroll component will still outweigh the startup costs that you refer to.

Bernard Sosnick - Gilford Securities Inc., Research Division

Okay. Could you give us some insight into the digital business which, up 6% isn't particularly exciting and there's a problem with conversion as mentioned. What about the digital sales pace and what are we -- what should we be expecting as we compare against last year's difficulty and the holiday season?

Edward W. Wilhelm

Yes. So coming into the year, Bernie, we said to expect about a mid-teen increase in overall digital sales. We're obviously tracking below that in the first half of this year, but we're also up against our tougher comparisons. So the comparisons, like it is for the total Finish Line business, are the same in digital. They do get easier in the back half of the year. We have reallocated some of our marketing spend. Sam and his team have reallocated some of our digital marketing spend. We've seen a bit of an acceleration here in September with digital. Digital is tracking closer to that annual guidance that we gave, so that mid-teen increase so far in September. And I think as long as we stay focused on balancing, driving top line and bottom like we have been, then I think we can get closer to that mid-teen number that we came into the year with, the expectation.

Bernard Sosnick - Gilford Securities Inc., Research Division

This is the second time you referred to focusing on the bottom line in digital. Could you expand on that a little bit?

Edward W. Wilhelm

Yes. So again, with the mid-teen increase in digital, our expectation coming into the year was to continue to expand our operating margins. If you remember that business last year had operating margins of 13% and that was a 500 basis point improvement over the year prior. So coming into this year, we wanted to continue to expand operating margins, as well as increase the top line, like we had talked about. And through the first half of the year, on the profit side, this business is right in line with our expectations, even though on the top line we're little below our expectations. So we're going to remain very balanced as we manage this business in driving both top line and bottom line.

Operator

Your next question comes from the line of Taposh Bari.

Taposh Bari - Goldman Sachs Group Inc., Research Division

So Glenn, I was hoping you could talk more about kind of how your business has progressed here from last quarter through September. You mentioned the challenging retail environment, you're taking your sales guidance up, but it sounds like you're taking your margin guidance down. Are you actually seeing -- are you actually taking greater promotions or greater discounts in your business or is that more of a safety net in the event that it actually does happen?

Samuel M. Sato

Taposh, this is Sam. So like we typically do quarter-to-quarter and season in and season out, we're continuously evaluating the quality and health of our inventory. And as consumer demand dictates our pricing strategy to an extent, in terms of price actions we take in the season, we are being a bit more aggressive around our pricing. We're not adding promotions necessarily, but we're being more aggressive around our pricing action given demand we're seeing from the customer. So as we move into the back half of the year, we still think that the retail environment is going to be challenging and sell-throughs at regular price in certain categories continues to be a bit weaker than what we expected. At the same time, we've got some optimism, as Glenn had said, around some continued introductions into the marketplace as follow-ups to some of the earlier innovation releases we have seen, specifically around SpringBlade and Flyknit. And so we think there's some great products coming and we're getting more quantities. At the same time, we're seeing pressure on demand of some of our existing businesses.

Taposh Bari - Goldman Sachs Group Inc., Research Division

Got it. And when did these more aggressive pricing actions begin, was that a -- did it happen in the second quarter?

Samuel M. Sato

We've been doing this all along over the last year or so, adjusting our assortments and so on, Taposh. So it's just a continuation. I would say to you that the response of the customer has been better the last couple of months to this whole initiative. And we'll continue to be price sensitive, be good partners to our brands and take timely markdowns. Remember, Taposh, we do not promote this business. There are no storewide events that go on in our stores. We take goods -- we take markdowns on seasonally appropriate and based on sell-throughs. And based on that, we work with our partners to adjust inventory flows. But look, the key to this business is to keep the new stuff coming, and we've been dedicated to the forever and we will continue to be. The results have been better, and that's good. For the last 6, 8 weeks, results from all of this, the combination of the execution of price changes by our team has worked. So…

Taposh Bari - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. And I just want to ask a quick follow-up just on the margin dynamics going forward. So your SG&A came in much better than we were expecting. Help us understand kind of what drove that? And just kind of the gross margin and SG&A relationship going forward. I think your competitors have spoken about IMU pressure, Nike's results last night, they're finally getting gross margin expansion. Are you guys going to share any of that as they see lower raw material costs?

Edward W. Wilhelm

Yes, so I'll start with SG&A. So coming into the quarter, Taposh, our comp expectations were actually for flat to down slightly. And so as a result, coming into the quarter, we did a very good job, the organization did a very good job buttoning down expenses. And so we delivered better than what we expected on the top line by a little bit, but we were diligent in managing the expenses. And that's where you saw an expense increase in dollars of high-single digits this year -- or this quarter compared to teen-like increases in the first quarter. Our expectation for SG&A in the back half of the year is to, now that we've taken our comp guidance up, is to have SG&A increase in Q3 at a similar level to Q1. And then I also gave kind of specific guidance on Q4 with the incentive compensation adjustment to expect SG&A dollar increases in the mid-20s. With respect to margin coming into the year again, we felt the overall margin for the year would be flat to down slightly with the first half kind of having the most pressure and the back half providing some opportunity. You just heard Glenn and Sam talk about the marketplace, and our expectation now for margins in the back half of the year is to have continued pressure, mostly because we're being aggressive on markdowns as we see sell-through rates start to slow down. And that's good disciplined inventory management and that's what Sam and his team do very well.

Operator

And your next question comes from the line of Kate McShane.

Kate McShane - Citigroup Inc, Research Division

I wondered if you could comment at all about Macy's overall athletic investment. I think they had made an announcement a couple weeks ago in investing more in the apparel side of the business. I just wondered if you knew if that will be located near your Finish Line shops and how you're viewing this change in strategy through them and does it alter your strategy with your shops in Macy's in any way to a positive degree?

Glenn S. Lyon

First of all, I think that it's great that Macy's is making this investment. Secondarily, we are working with them to create some adjacencies between the footwear and the apparel, as well as adjacencies between dress shoes and athletic shoes, and that is still work in progress to make sure that their productivity and our productivity both increase. They have been great partners on this, and we continue to work with them week-in and week-out as we lay out spaces, Kate. You can imagine the dynamics of laying out 450 locations and actually more than that because there are 2 shops in many of the stores. The dynamic of doing that and the work that goes into it on both sides has been tremendous, and actually, damn successful. So we're pleased with that. I'm pleased that they are more aggressive about this category in general, and I think both of us will see better results from it.

Kate McShane - Citigroup Inc, Research Division

Okay, that's helpful. And then my second question is on women's and kids. It looks like with women's, you said you had posted negative comps for the quarter. Could you help us understand what your outlook is for women's? Is the new innovation that we're seeing from the vendors not really enough to get women back in this category? And with the surge in at least what we see with athletic apparel for women, how can you try and leverage that opportunity on the footwear side?

Glenn S. Lyon

Yes, Kate, the reality is that unless the casual part of our athletics business is good on the women's side, no matter how good the running business is, no matter how many new training shoes come into the market, the element of casual fashion, if you will, is a much bigger piece of the women's business. So I think you're kind of seeing that across the board in all of the public athletic retailers that it's challenging. And putting more inventory against it in a world like ours is not a good answer because it just creates promotions and markdowns and so on. So we continue to watch the trends. But that's been a soft trend now for in excess of a year. The running business in women's has trended similarly to the men's. So as new things come into the market, give or take, some of the platforms work better in men's than women's and vice versa. So we don't expect to see any significant change in those trends. With basketball and running doing well, and you hear that everywhere, we're capitalizing on both. And in women's, it's only running. So that's the -- this is not nuclear physics right now. It's just good trending and watching the categories and watching the flow of product into the market.

Operator

And your next question comes from the line of John Zolidis.

John Zolidis - The Buckingham Research Group Incorporated

I wanted to focus in a little bit more on running. I guess, it was still slightly negative as a category in the quarter, but with the improving trends more recently, it sounds like -- I wonder if one of you can confirm that running's picked up along with the rest of the business? And then can you talk -- give us a little bit more of a dive on the assortments there? Do you think you had the right assortments in running? Is that changing going forward? Is it more about what Finish Line has in the stores, or is it about the category?

Samuel M. Sato

John, this is Sam. So I will confirm that as you heard us say, the running business has improved as we got into August. As we look at our current September month-to-date business, that category has continued to escalate. And in fact, it is growing faster than what it was at the end of Q2. As we move into the back half of the year, I'll again reiterate that much of what we're seeing in the pipeline, we feel very good about largely based on some initial results we saw in Q2 around Flyknit, around SpringBlade, around some of our Under Armour deliver -- products that deliver. So we see the broadening of those products in both colors, as well as new uppers, as we move into the late holiday, early spring season. We're actually introducing a new Flyknit on a Max Air platform. So the continuation of our brand evolving some successful new platforms and innovative ideas into the back half and into the spring of next year continues to be robust. So we think that we're going to be in a much better position than where we were the first half of the year, and we feel good about what's in the pipeline.

John Zolidis - The Buckingham Research Group Incorporated

That's really encouraging. Would you say that last year, that you did not have the right assortment in the stores or you just felt that the innovation wasn't enough to drive consumer interest?

Samuel M. Sato

Yes, I would say – well, it's a combination of both. Not the right assortment is, I would answer yes, based on the consumer's response. Having said that, we have a lot of products that continue to sell well. Last year, our Free platforms were selling extremely well, just that the demand was not growing at the same rate it was the prior 2 or 3 years. As we've now started to bring in new innovation, as we've always said, innovation is the key to our success in this business. And the innovation pipeline is expanding, not just with Nike, but with other brands. So I think a combination of continuing to fuel those businesses that are performing, as well as bringing in new innovation and exploiting some of those opportunities will continue to drive success for us.

Glenn S. Lyon

And John, let me just add something to that. Clearly, we have been positioned by all of our brand partners as the leader in running, and running is pushing 50% of our business. We've got a lead. We've got to take responsibility for that. We've got to come up with ideas. We've got to push our brand partners to do more and better initiatives. So we take full responsibility at any moment in time for the assortment that we put forth. But recognize this -- Sam has said this is ongoing, as goes running goes the Finish Line, and we will continue to dedicate ourselves and challenge our vendor partners to make us better and better and better every year. Last year, we were not better. We think that we had some learnings from that.

Operator

Your next question comes from the line of Mitch Kummetz.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Ed, maybe just starting with your comp guidance on the year. So you're now saying low-single digits, you've taken that up from what it was previously. I mean, as I look at your comparisons into the back half of the year, you've got an easier compare in Q4 than Q3, although on a 2-year stack basis, they're pretty similar. I mean, how should I think of comp flowing kind of quarterly over the back half? I mean, pretty similar across?

Edward W. Wilhelm

Yes, yes, consistent between the quarters and the back half.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then on ASPs, I mean, it looks like -- I mean, ASPs were up in the quarter. I think that was better than what they were in Q1. I mean, kind of when you look at what's happening in your stores, you see the product pipeline, I mean, how should we be thinking about ASPs trending over the balance of the year?

Glenn S. Lyon

Just think in terms of a growing basketball business. So the mix does a lot to create that. So when your men's business is growing, higher average retail and the basketball business is growing disproportionately, it impacts that. So that's a metric that I wouldn't pay a whole lot of attention to. It's a benefit to us. And look, the fact is, is that we have had no price resistance to anything that anyone has put into the market. When the stuff is right, it sells. I think the adidas guys were a bit anxious about $180 on the SpringBlade, and maybe the truth is we were a bit anxious, too. But wow, I mean, the sell-throughs on that stuff was incredible. So price -- it's about the mix on this one, Mitch. So I wouldn't pay too close attention. Recognize that the big deal for us is managing our inventories against customer sentiment. And it's not even purely -- our conservatism isn't necessarily about our category, it's about the mood of the customer. And we think that's why we need to be conservative right now in planning our overheads, in being aggressive about our pricing, and we think that's a good way to go into the back half of the year with that mindset. And you know what, as some of this comes -- falls in place, this – it'll go right to the bottom line.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay, that's helpful. But actually, as a follow-up to that, let me ask you about basketball because, obviously, you've had success with that through the first half of this year. And I don't know, maybe Sam can weigh in on this because he gave some good commentary on sort of the product pipeline for running. I don't know what you guys are seeing in terms of the pipeline and how much visibility you have on basketball kind of going through the back half of the year or even beyond that.

Samuel M. Sato

Yes. So Mitch, first of all, let me maybe correct you. Our basketball business has been good for a number of quarters now, not just the last couple. It is a very, very important part of our business. And it's a very important part of what the Finish Line brand is to the consumer. I'll tell you that the business continues to grow. We're excited about what we see, not only from the big guy, Brand Jordan, but what we see from Nike across their signature series, what we see from adidas in the case of D. Rose now coming back out, and we think that that's going to improve results. Retro products, as you heard in the prepared remarks from brands like adi and Reebok, are also doing extremely well and are on trend and in high demand. So as we look at the back half of the year, I think all brands have done a very good job of addressing the trends that are occurring in basketball, and we continue to be a participant in that category and will continue to focus our efforts on being a place for the customer to come and find great product in this category.

Operator

And your next question comes from the line of Matthew McClintock.

Matthew McClintock - Barclays Capital, Research Division

So I was wondering if we could focus more on the apparel piece of the business. Glenn, before -- on the last quarter, I think you were pretty excited about some new programs for the fall. And it sounds like there needs to be more work done on this category. When you think about performance, maybe specifically in August, how much of the performance was the overall challenging industry that we've seen at the malls? And then how much do think you had an opportunity to do better?

Glenn S. Lyon

Hold on, Matt. Let me get my hands off of Sam's neck. This is about us, folks, this is about us. We've got to do a better job. The opportunities are clearly, clearly there. It's a combination of our people getting more focused on the winning programs, having confidence and going after those programs and getting the brands to support them. Because now, we are totally driven by brands. We do not have cheap apparel in our stores that we don't think premium retailers need to have and take up space. So we want to average retail in all of our categories to go up and be consistent with the footwear offering that we give. And the brand assortment, same way. So we got a lot of work to do. We are going to get this right. And the day we get this right, you'll start to see really good results, and we'll be bragging about it. But we got a lot of work to do, and it is clearly opportunity and it is clearly on us.

Matthew McClintock - Barclays Capital, Research Division

And then, actually, if can I ask one more question. Last night, Nike called out the Track Club and -- as a successful initiative. And I was just wondering if you could just remind us on or maybe just update us on some of the lessons of you're learning from that initiative and how that's -- how you're applying those lessons to the merchandise mix that you present in the rest of your stores.

Glenn S. Lyon

Okay. I'll take that one for you, Mitch (sic) [Matt]. Look, Track Club now, 5 years in the works, great breadth of offerings across sportswear and performance, men's and women's, getting better and better, presentations getting better and better, side by side in the appropriate malls to elevate, hit especially in the key cities around the country where both us and the brand and Nike gets advantage in terms of awareness of both our company and their brand on key items in that category. So it's been a great success and continuing to. As we get more aggressive in there with Nike, with their product people, it gets better and better. It's an initiative that we'll continue to spend against, and one that we're proud of. But we also see continued ability to get better at it, both in terms of the assortment and the service model.

Operator

And your next question comes from the line of Robbie Ohmes.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

Glenn, I think in the beginning of the call, you called out some of the focuses for the back half. I think you mentioned licensed and branded fleece, kids branded apparel and kids backpacks. Can you remind us what the focus was or what the initiatives were last year, how different this is? And then also, I'm curious on the license business, if what you're seeing happen there and what's driving it. Is it the NBA, NFL? And also, are you seeing the jersey business uptick? Is that something that you could see expanding as well?

Samuel M. Sato

Robbie, it's Sam. So back half of the year for us is always more heavily weighted towards fleece, outerwear types of products, depending on what the trend is. But fleece has always been significant in the majority part of our apparel business in the back half. That's going to be true as long as we can see it, and we're going to put our energy and efforts around creating the most relevant offer in that category. In terms of license specifically, jerseys, yes, we're seeing some success in pockets against NFL and whatnot. But our real bread and butter is our position against NCAA. That's always been a large component of what we do, and we're seeing some early results that are pretty darn good there.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And Sam, the kids branded apparel, I forgot, where were you guys positioned in kids branded apparel in the back half of last year versus what you're looking to do this year?

Samuel M. Sato

Yes, so kids is a little bit different in that a big portion of kids, albeit there is some license and NCAA, is really about the brands. And across Nike and Brand Jordan specifically, we're continuing to grow that business as we're seeing much better success there than we are in adults.

Robert F. Ohmes - BofA Merrill Lynch, Research Division

And then just one last question, different question. The question before on the ASP outlook, I think it was Mitch's question. You're talking about a little more price sensitivity and I totally get the basketball shift. If you look away from the basketball category, can you give us any color on how ASPs look to you guys?

Edward W. Wilhelm

I'd say, Robbie, low-single digit kind of ASPs are what we're expecting, similar to what we just saw in the second quarter.

Operator

And your next question comes from the line of Paul Trussell.

Paul Trussell - Deutsche Bank AG, Research Division

Wanted to ask about just maybe a little bit of a margin breakdown between the different categories. Think total EBIT margins contracted about 50 basis points, gross margins down 140. Ed, could you kind of slice that out for us to help us understand what the core Finish Line business kind of did x running and x Macy's? And then also, just talk about the profitability of those 2 growth initiatives as well.

Edward W. Wilhelm

Yes, so the overall consolidated results, Paul, are substantially driven by Finish Line stores and digital since it's the overwhelming majority of what we're doing today. So as we talk about margin pressures in the first half of the year and continuing in the back half of the year, that conversation is largely around Finish Line stores and digital. The same would be true with the SG&A commentary that I made previously. With respect to Macy's and Running Specialty Group, our expectation coming into the year, and it remains the same now, is that Macy's is going to contribute positively to our bottom line this year and Running Specialty Group would be slightly negative to our bottom line this year.

Paul Trussell - Deutsche Bank AG, Research Division

Okay. And then the -- okay, that's helpful. Just in terms of where the contribution now from Macy's kind of comes, is that aiding the SG&A in terms of the comps -- or I should say the sales from Macy's is helping to leverage expenses? Or where do we see that contribution?

Edward W. Wilhelm

Yes, so I mean, coming through the margin line? Yes, Macy's would be a higher SG&A component than what we would see in the Finish Line store, again, because of this payroll dynamic that we had talked about. So the contribution from Macy's would come through sales and margin dollars primarily.

Paul Trussell - Deutsche Bank AG, Research Division

Okay. Okay, that's helpful. And then also, just, Ed, can you give us some additional color on what investments and systems are left to be made and just how we should think about CapEx and IT spend going forward?

Edward W. Wilhelm

Yes, so this year's capital plan is an $80 million to $90 million spend. Next year would be a similar level. And that's primarily driven by our -- the replacement of our core systems, so our supply chain merchandising and then the addition of a new CRM system. So next year's capital spend would be roughly equal to this year's capital spend. And then you would start to see a reduction in capital spending the year after. So we are, as we mentioned, putting the supply chain in, the new supply chain system into our Running Specialty Group this fall. And if all goes well, then the expectation would be to take that to Finish Line in the early part of next year.

Operator

And your next question comes from the line of Chris Svezia.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

So I guess, first, just the September trends. I'm just curious, you're commenting up mid-single or continuing that August trend. And you made your comment about digital showing improvement. Can you make any comment how the stores were doing versus digital, where kind of they stand as you went into September?

Glenn S. Lyon

Yes. Chris, everything is elevating. It starts with traffic, both digitally and in the stores, has been much better the last 4 or 5 weeks. Our conversion has improved, so we're optimistic that our offering is getting better. And again, the sole negative here is that you got to be a little more promotional to drive that activity. And that's why we've continued to be a bit cautious in our willingness to raise any of -- in any of the bottom line metrics on the business. So it's been positive for us. And yet, we understand the headwinds of the industry and the mood of the customer, so getting too optimistic, we don't think, is appropriate. And that really dictates a more conservative overhead plan. But we can -- as we've proven in the past, we can elevate when business gets better, provide the service necessary in the stores to service the customer and we can pull back. It's a lot easier to build than it is to pull back. So we're ready, willing and able if the customer acts more aggressively than is in our projections right now.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

So let me ask this question, just on the gross margins and your sort of wanting to be a little more promotional to drive traffic and get that customer in your store and do the conversion. Is there a point at which you would decide we don't need to be as aggressive on the cadence on price? And what would you need to see? Is it just traffic? Is it -- what would change that thought process?

Samuel M. Sato

Chris, this is Sam. So I want to be clear about something. We take price action every single day. We're evaluating sell-throughs, consumer demand. We're taking price action accordingly. So as Glenn mentioned earlier and we've talked a number of times about our price cadence, we've got 3 clearance events a year that we go out and clear out of old seasonal goods to make room for new goods. But we don't have a plan day to day, week to week that is a price action based on trying to hit some revenue number. It's based solely on sell-throughs and consumer demand. And so as the consumer behaves differently, if they get, as Glenn said, more aggressive about their purchasing and we see sell-throughs improve, we'll be less aggressive in our price action. If it maintains where they are today, we're going to continue to be aggressive about addressing products. But our focus is always going to be selling our products at regular price. And we only take price action based on the consumer telling us that they don't like it and we got to get rid of it.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just, Ed, for you, occupancy costs. Surprised you got -- wasn't -- delevered but I thought maybe it would have been more. Just sort of your thoughts for the balance of the year, how we think about it, and any initial blushes you sort of think about next year.

Edward W. Wilhelm

Yes. So our occupancy costs, Chris, are right in line with our plan. Coming into the year, we said to expect deleverage in occupancy given our comp outlook and that would be the expectation for the back half of the year. The percentage increases that we're seeing in occupancy primarily on the Finish Line side is being driven by the renewals that we're negotiating with the landlords. And consistent with what our strategy has been, we're taking our best-performing stores and we're locking them into longer-term leases. And as we do that, we're seeing a pretty meaningful increase in occupancy in those stores. That started last year, it's continuing this year. We're probably at peak levels in that. That starts to abate a bit as we get into next year and then, more significantly, the following year. So what would be high-single-digit increases in occupancy at Finish Line this year would be more mid-single digit next year, and then more normalized, which would be 3% or 4% the year after. The other thing to point out on occupancy, that the license fee paid to Macy's is included in our occupancy results, so that is a driver of the increased dollars there. And then as we continue to grow the store base at Running Specialty, that's having an impact on our overall occupancy dollar growth as well.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. And last question, just for Sam, on product. Talk a lot about adi. I'm just curious, on the running side, the Boost program, just curious if you guys are getting that or your thoughts about that as you go forward.

Samuel M. Sato

Yes, we did actually participate when they brought that to market in mid-second quarter, and the sell-through there as well were really strong, not as strong a SpringBlade. SpringBlade is off the charts. But both Boost and SpringBlade from adi performed extremely well. Just at this point, it's just not that -- it's not big enough for us to offset some of the pressures we're seeing in other brands or other items within running. But the reaction from the customer was unbelievable. And as we move into the back half of the year, we're shaking the bushes and working hard with them to get more allocation and more quantity in the pipeline.

Operator

And your last question comes from the line of Camilo Lyon.

Camilo R. Lyon - Canaccord Genuity, Research Division

I just had one principal question here. Just going back to the gross margin discussion and the pressures that you're seeing or expect to be seeing for the second half. You talked about the strength in running, you talked about the product mix being favorable from a basketball perspective. You talked about little resistance on these price increases that the vendors are putting forth. Yet, you're guiding to gross margin pressures. You need to clear more and be more active on some of those pricing strategies. Could you just help me reconcile the differences there? What are the categories that you're actually needing to be more aggressive with on some of these markdowns, given that running and basketball comprise roughly 2/3 of your business?

Glenn S. Lyon

Camilo, think of it -- this is Glenn. Think of it this way. The new stuff that comes to the market, you hear us applauding all the time. It is the sustainability of those over a longer period of time at full price and the sustainability of the high sell-throughs at regular price that, that small change from year-to-year can dictate these margin pressures. Having said that, we have a lot of ways -- the part of it is we continue to work even harder to put more of the key stuff into the key styles. So that I guess you could say that a couple of years ago, we had the luxury of a lot of things working in a sustainable way, and now it's a little tougher. So we've got to continue to be aggressive. We've got to watch the tail of sell-throughs on products and get through them and make way for the newer. And we'll see, as time goes on, that as the assortments improve, we will see more sustainable sell-throughs. Remember, on a business like ours, it turns about 3x a year. A couple of turns, couple of percent sell-throughs can make a difference of 5%, 8%, 10% in sales. The difference between 7% sell-through and 8% sell-through is 15% difference in sales. So it's that small a difference that creates it. So this isn't that -- again, I'm going to say this is not necessarily wholly about the market, it's about consumers' attitudes and their drive to have to have something at regular price. And they don't feel that need, and I think that's part and parcel of what's going on just in the consumer mindset right now. It's I want it a little cheaper, I want the promotion a little faster. And you know that we don't go out and run 20% off the store or 30% off the store or 40% off the store, we take it item by item. When it all adds up, we're telling you what the story is and that's causing us to continue to be somewhat more cautious in this environment. But having said that, I think in my comments, we're ready for that. And if it gets better than that, it's going to come to the bottom line, just like it did this past quarter.

Camilo R. Lyon - Canaccord Genuity, Research Division

So which categories, just to be clear, do you anticipate some of that markdown pressure to manifest in?

Samuel M. Sato

Yes, Camilo, this is Sam. It's by item, so it's not one particular category. It's -- obviously, we have a much greater investment in the running category. So naturally, the markdowns we take on poor-performing products will be higher in running only because we have a greater inventory investment there. But we don't necessarily look at this by category, it's item based and again, driven by sell-throughs.

Camilo R. Lyon - Canaccord Genuity, Research Division

Okay. And then just lastly, on the Flyknit Max that you guys mentioned as being an exciting product coming to market soon, what's the price point on that shoe going to be?

Samuel M. Sato

It's in the $200 and, I think, $225, Camilo, right in that range.

Edward W. Wilhelm

Thank you all for joining us today, and our next update will be in -- for our Q3 results in December. We'll talk to you then.

Glenn S. Lyon

Thank you.

Operator

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

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