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Executives

Steve Schneider – President & COO

Edward Wilhelm – EVP & CFO

Glenn Lyon – CEO

Sam Sato – Chief Merchandising Officer

Analysts

Camilo Lyon – Wedbush Securities

Tom Shaw – Stifel Nicolaus

Jeff Van Sinderen – B. Riley & Company

Sam Poser – Sterne Agee

Bernard Sosnick – Gilford Securities

Chris Svezia – Susquehanna Financial Group

The Finish Line, Inc. (FINL) Q3 2010 Earnings Call December 23, 2009 8:30 AM ET

Operator

Good morning. At this time, I would like to welcome everyone to the Finish Line Inc. third quarter earnings conference call. (Operator Instructions) At this time I would like introduce the host of today’s call, Finish Line Chief Financial Officer, Mr. Edward Wilhelm.

Edward Wilhelm

Good morning everyone. With 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 Merchandising 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 condition, 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 the Man Alive transaction, our discussion today will focus on the continuing operations of the core Finish Line business.

With that, I will turn it over to Glenn.

Glenn Lyon

Thanks Edward and good morning everyone. In the third quarter our Finish Line team continued to run the business effectively and to improve performance within a continuing environment of inconsistent consumer behavior.

While the Federal Reserve noted in early December that the economy has picked up modestly and consumer spending has gained some steam, traffic in our stores remained down in the third quarter compared to last year.

And while shoppers turned out for events, like Black Friday, they did not show the kind of sustained shopping behavior throughout the quarter that would signal a real change in mood. At Finish Line while we look forward to a consumer turnaround in the future we are not waiting for customers to come back to the mall to move our business forward.

With the continued foundation of a strong balance sheet we are committed along with our vendor partners to finding paths towards profitable growth regardless of the consumer environment. Early on we responded to the economic downturn by creating efficiencies in our business and driving disciplines that we are keeping in place and building upon.

Our goal is to grow sales profitably and drive shareholder returns. We’re working towards this goal in several ways. We have been focused on our cost control efforts not simply cutting costs just to cut them. Our SG&A reductions have been strategic and effective.

We’ve put in place a real estate strategy focused on maintaining a portfolio of stores that will provide the right return on investment, not only for us but for the landlords as well. We’ve improved the quality and the productivity of our inventory across all categories of our business.

We have also placed a strong emphasis on product innovation. Working with our vendor partners we have continued to feature performance based footwear as we see strong sell throughs of full price on these styles, even if they’re worn by customers as everyday sport shoes.

Leadership in the running categories continues to be central to our business. Steve will talk more about this in a minute, but I want to emphasize that our strength in this category starts with a robust assortment of technical running shoes and continues with the offering of the newest styles, colors, and exciting Finish Line exclusives.

With support from our vendors such as Nike, Puma, as well as others, we will continue to expand our leadership in this category. For example we’re working to strengthen product knowledge among our store associates and continue to feature running through dramatic presentations in all of our stores.

In terms of other growth categories its worth noting the significant consumer response we are seeing in the toning category. This technology has generated excitement and has given customers a reason to come into our stores and buy.

Speaking of our stores, we continue to improve execution. In the third quarter our store associates delivered an improved performance. They helped drive better conversion rates, increased average transaction, and helped drive sales through our We’ve Got It program.

Through this program if customers do not find the item they want in our stores, we order it and have it shipped directly to their homes or the store of their choice. Sales through this program are up 50% year to date. In addition to continuous improvement in execution at the store level, we also recognize the importance of the internet in our shopping culture.

Our core customer is increasingly interested in and excited about procuring products through the internet. This business continues to grow as we remain focused on improving the quality of our interactions and communications with customers through this channel.

We believe we have lots of runway for continued success in the internet as we deliver product to consumers when ever and where ever they want it. Finally The Finish Line remains committed to our premium position in the industry.

As I said last quarter premium at The Finish Line means maintaining the very accessible niche we have carved out in the customers’ mind as being the premier retailer for sneakers, where the word premium translates to a great selection of the newest trend right styles from the best brands.

With that, I’ll turn it back to Edward who will run through the specifics of our third quarter performance.

Edward Wilhelm

Thanks Glenn, before I begin I want to remind everyone that all financial data discussed today has been adjusted to represent the continuing operations of Finish Line only. As reported in our news release last evening, comp store sales for Finish Line were positive 1.7% in Q3 compared to a 3.3% comp store sales decrease last year.

When you factor in the decrease in our store base overall sales declined slightly by 0.2%. The comp sales increase was driven by improved store metrics as conversion was up 1.6% and average ticket increased almost 4%.

These increases were partially offset by a mid single-digit decline in traffic for the quarter. We expect that traffic will continue to be challenging for the remainder of the year. As Glenn indicated consumer behavior was inconsistent throughout the quarter reflected in comp store sales trends.

By month, September was positive 5.4%, October was negative 4.4%, and November comps were a positive 2.5%. As you know we continue to remain cautious about the sales environment and our managing our business accordingly.

On a category basis, footwear comps were up 1% for the quarter with a monthly trend line that mirrored the total Finish Line experience; up 4.5% in September, down 6.9% in October, and up 3.7% in November.

For the quarter the soft goods comp increased 5%. Year to date Finish Line comps were down 4.7% compared to a comp increase of 1.4% last year. The comp decline was driven by footwear and soft goods, both of which were down 4.7%.

Turning to operating results, the gross profit percentage of 29.5% for the quarter was up 250 basis points compared to last year. Product margin was up 200 basis points and occupancy was leveraged by 50 basis points. The increase in product margin is related to selling more full priced premium products and effective management of inventory levels to increase turns.

The leveraging of occupancy is related to our ongoing efforts to work with landlords on renegotiating leases. Occupancy expenses on an absolute dollar basis declined 3.1% in the third quarter. SG&A expenses excluding store closing costs of $0.5 million decreased by 210 basis points to 29.3% of sales.

SG&A expenses on an absolute dollar basis declined by $5.2 million or 6.9% in the third quarter. Our strategic cost reductions have continued to drive improved SG&A results. 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 compared to last year. Taxes for the third quarter included a one-time benefit of $6.5 million. The benefit resulted from the company finalizing a favorable agreement with the IRS on the treatment of terminated merger costs.

Third quarter income from continuing operations was $6.5 million versus a loss from continuing operations of $6.5 million one year ago. Excluding the $6.5 million one-time tax benefit income from continuing operations for the third quarter was $16,000 compared to the loss of $6.5 million last year.

Earnings from continuing operations per diluted share were $0.12 with the tax benefit and break-even without the tax benefit versus a loss of $0.12 for last year. Year to date income from continuing operations was $20 million versus $10.8 million last year. Excluding the $6.5 million one-time tax benefit income from continuing operations was $13.5 million compared to $10.8 million last year.

Year to date earnings from continuing operations per diluted share were $0.36 with the tax benefit and were $0.24 without the tax benefit compared to $0.20 last year. That’s a 20% increase year over year. Merchandise inventories at Finish Line decreased by 14.4% overall and by 11% on a per square foot basis compared to last year.

In addition we continued to improve inventory turn and inventory aging levels. Capital expenditures on a year to date basis were $5.9 million and for the year we expect CapEx in the range of $8 to $11 million. Depreciation for the quarter was $7.3 million and $22.8 million year to date. Depreciation for the full fiscal year is expected to range from $29 to $31 million.

As far as our store program for Finish Line, we opened four stores and closed four stores in the third quarter. For the year to date we’ve opened five new stores and closed 13 stores. We do not expect to open any new stores in the fourth quarter but do expect to close an additional 12 to 15 stores in Q4.

As Glenn pointed out Finish Line continues to strengthen its balance sheet. We ended the quarter with just over $149 million in cash and cash equivalents compared to $55 million a year ago. We have no interest bearing debt. Maintaining a strong balance sheet is an important strategic advantage for our company, and therefore remains an important priority.

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

Steve Schneider

Thank you Edward, I’ll start out this morning talking about footwear overall. Comps for this category in the third quarter were up slightly by 1% with particular strength in women’s and kids. Footwear ASPs improved by 4.8% as we continue to see strong sell through at regular price on new performance based products.

I said it last quarter and it continued to be true today, what’s new and exciting is what sells at Finish Line. As Glenn said running is a winning category for us and one where we have a strong leadership position. Overall running comps were up in the third quarter in the mid teens with both men’s and women’s posting solid comp growth.

In men’s running was led by Nike with strength in lightweight running as well as Air Max 2009, Skyline, and Shox 09. We also saw strong results with Puma’s Jago. Women’s running results were led by Nike Air Max 2009 as well as Puma’s Jago and Bolt. Moving to basketball, the comp trend was down slightly compared to Q3 last year.

However we did see strength in Retro Jordan but expect to see continued sales pressure moving forward in basketball. As Glenn mentioned toning continues to be a strong category for us within women’s footwear. Reebok Easytones and Sketchers Shape Ups are both performing extremely well and Finish Line’s inventory is positioned for continued success in this category.

Within the athletic casual footwear category the overall comp trend was down for the quarter. Men’s performed slightly better than women’s as we continued to capitalize on the vulcanized trend and saw strong performance from Polo, a newcomer for Finish Line.

In kid’s footwear comp store sales were up 3.6% for the third quarter. Throughout the year in kid’s we have seen strong running business led by Brand Jordan, Puma, and Under Armor. The character business was also solid led by items within our exclusive novelty program. Now in soft goods we are very pleased with the results we saw in the third quarter.

Total comps increased by 5% and product margins were up 300 basis points. Most of you know that we’ve been working hard to improve our apparel business by right sizing inventory and moving into more premium brands, including The North Face, Brand Jordan, and Under Armor.

Our efforts have paid off and we turned a corner in this business generating the first positive comp in the apparel category in 15 consecutive quarters. Accessories also had a comp increase driven by socks, and shoe care.

Moving into our ecommerce business, as Glenn said our performance was positive in the third quarter. Internet sales were up 11% and are up 8.6% year to date with improved profitability. We have seen exceptional online sales of hot products such as toning and fleece, prior to their widespread availability in our stores and continue to enhance the site to improve navigation and enrich the overall customer experience.

Our in store pick up sales are accelerating rapidly and as Glenn said we saw a significant improvement in our We’ve Got It sales which are up 50% year to date. It is extremely important for Finish Line to continue to deepen our cross channel strategy which integrates the store and online experiences to serve customers when ever and how ever they want to shop with us.

Beyond those channels we saw sales from catalogue and direct mail increase by 67% in Q3 and we continue to focus on repeat purchases through our Winner Circle customer loyalty program which saw a 30% increase in sign ups for the quarter.

Looking ahead to Q4 we continue to have high expectations for running and particularly the lightweight running trend led by Nike and Puma. Toning will continue to be strong and we expect it to have a meaningful impact on our business moving forward in Q4. Basketball will continue to be somewhat challenged due to the comparisons to hot products of last year. ‘

We are excited about the kid’s category with new releases in running shoes and the ongoing development of our character business. In soft goods we expect to continue to build on the positive apparel trends and anticipate that our move to premium brands in apparel will continue to drive strong results.

At this point I’m going to hand it back to Glenn to close and then we’ll take your questions.

Glenn Lyon

Thanks Steve, I’ll wrap it up this morning by talking about our December performance. As reported in the press release last night, comp sales in December have increased about 5%. This compares to a very weak comp of negative 22% for the same three weeks a year ago. Our comparatives for the remainder of the quarter are much more difficult.

We’re up against an 8% increase in comps for the rest of the fourth quarter including a very positive 11% comp in the month of February. Sales are still expected to be choppy throughout the fourth quarter and therefore we will maintain our cautious consumer view.

In this environment we believe the best course of action is to stay with our current strategy; maintaining our premium position, maintaining disciplined cost controls, and maintaining improvements in inventory productivity.

Again regardless of consumer behavior moving forward The Finish Line is seeking out and finding paths to profitable growth and we will be ready to realize even more benefits from this strategy whenever meaningful consumer recovery occurs.

That’s all I have prepared, we’ll now open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Camilo Lyon – Wedbush Securities

Camilo Lyon – Wedbush Securities

Great quarter, first going back to last year can you remind us what drove the improvement in the last 10 days of the December, I’m assuming those were pretty promotional days.

Edward Wilhelm

The finish to December, again we started our with softer comparisons but it was a late holiday and it was strong finish not only through Christmas but then the week following was strong as well. So we do after Christmas on the 26th the year ago started our end of season sale. So those were primarily the reasons, again, soft start which most people saw, strong late finish which most people saw, and then for us we start end of season sale on the 26th of December.

Camilo Lyon – Wedbush Securities

On the gross margin front clearly you’ve done a great job here how much of the 200 basis point margin improvement there would you attribute to favorable weather in the quarter versus the work that you’ve done to have those improvements be sustainable to the business model and how should we think about that going forward.

Edward Wilhelm

We talking about the soft goods margin was up 300 basis points so that was clearly a contributor and when you’ve got inventories down 11% on a per square foot basis while comps are up, we just significantly improved the turns and the sell throughs and that was done at full price for the most part so it minimized markdowns and the need to mark down product.

We’re very confident in our ability to manage inventories, very pleased with the efforts to date, and it will continue to be a main focal point for us as we move forward.

Camilo Lyon – Wedbush Securities

So it sounds like a lot of that is sustainable going forward.

Edward Wilhelm

We’re going to be very disciplined, continue to be very disciplined in managing our inventories, yes.

Camilo Lyon – Wedbush Securities

Maybe you could shed a little bit more light on the factors that are leading to the improvements in conversion rates.

Glenn Lyon

We’ve had a tremendous focus on, in our stores, on improving the quality of service and making our associates aware that in our business its not only just selling that launch allocated shoe, but product knowledge, its something we’ve worked on a lot. Our customer just wants good, fast service. They want to be taken care of, they don’t necessarily want to be sold, but they want good, fast service.

And I think we’re just doing a better job. There’s more focus on it, right from the top of our operations organization right down to the part timers in the stores. They’re just more focused on it.

Operator

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

Tom Shaw – Stifel Nicolaus

Happy Holidays and great quarter, first question just thinking about balancing to cash options here with buyback, dividends, and investments, there wasn’t a whole lot of talk about the new website which I guess is still expected here by the end of the year.

Edward Wilhelm

Yes, as we talked about, having a strong cash balance and balance sheet is a tremendous asset for us particularly in this economic environment that we’re in. And we’re going to continue to explore ways that we can leverage that competitive strength to drive sales, profits, and long-term shareholder value so investments back into the business as you referenced. We talked about a major investment back into our internet.

And Glenn talked about that as there’s a lot of runway there and we think there’s a lot of potential through the internet to grow sales and profitability for the company and we’ll look at that as well as other ways to drive shareholder value again in the long-term and leverage the strength that we have on the balance sheet.

Tom Shaw – Stifel Nicolaus

And we’ve talked in the past about probably an optimal store base is about 600 stores and sort of an operating margin target of 8% to 10%, are these still reasonable targets, are you comfortable with those or have things changed with what you’ve learned in your last quarter or two.

Glenn Lyon

No, nothing has really changed there. The optimal number of stores are the number of stores that both we and the landlords can feel good about and that The Finish Line can operate profitably in but it’s a two way street on that. So our real estate team as well as our finance team have spent a lot of time and energy with all the leadership of the real estate community to work through those and really be true partners so that we both understand our goals.

We spent a lot of time talking with these guys and we can’t be in real estate that isn’t profitable for us. But we understand our relationship to the landlords is an important one and we’ll be there to support their initiatives.

Tom Shaw – Stifel Nicolaus

Some teams [inaudible] on the footwear walls, just in terms of the way the product was positioned based on I guess every day use versus some perceived performance attributes of the product, have you come to measure any changes or how the consumers responded to what seems like pretty subtle changes.

Sam Sato

We haven’t measured it necessarily based on its location. We’ve clearly begun to invest more of our inventory in products that are more for every day use and within our leadership in running that has taken a much larger position in both our inventory investment as well as placement in our stores and so while I don’t know that we can attribute the location necessarily to the improvements we’re seeing in running so much as we can the quality of our running inventory as well as our increased investments specifically in those categories.

But its clearly paying dividends in terms of our results.

Operator

Your next question comes from the line of Jeff Van Sinderen – B. Riley & Company

Jeff Van Sinderen – B. Riley & Company

Congratulations on the quarter, I wonder if you can give us your latest thoughts, I know with all the talk about economic recovery and so forth, maybe the landlords are feeling a little more confident hearing that from some folks, just wondering what you are seeing in terms of the flavor of negotiations, are the landlords getting more difficult to deal with or any color you can shed on that would be helpful.

Glenn Lyon

Listen, facts are the facts right. I’m willing to pay the landlord whatever they want as long as they bring customers into the malls. And we’re as anxious as everyone to see a change in that. We haven’t even seen a change as our business has gotten better through the course of the year, the traffic patterns have not changed.

That mid single traffic down number has been consistent all year. So I know the landlords are making efforts to drive traffic, we’re all trying to get the consumer more excited about product offerings. So that will all be dictated by how many people we can put in the mall and then our job to convert them.

We’re doing a little better job, we have more runway on that. We know our service can continue to get better so we understand what our responsibilities are and I think the landlords understand what theirs are. So I’m willing to pay them a lot of money as long as they can get me a lot of customers.

Jeff Van Sinderen – B. Riley & Company

And then can you give us any more color on regional differences in performance and then any difference you’re seeing between A, B, and C, crowds, mall performance.

Steve Schneider

I would say that we have still struggled in California areas and in Florida but we’ve seen some strength out east as well. But its not changed a lot the whole year for us so we’re continuing to really invest time and effort to look at those areas that have not been performing and to look at the product mix and operations and see how we can improve it and we think we’re finding some things that can help us there.

But the jury is still out, we’ve got a lot of work yet to do in those areas.

Operator

Your next question comes from the line of Sam Poser – Sterne Agee

Sam Poser – Sterne Agee

We did a little back of the envelope math and for the balance of December it looks like you’re up against about a positive 10, and if so, you said its going to be a bit choppy but how should we be thinking about comps for the balance of the quarter given the more difficult comparisons.

Edward Wilhelm

We tried to provide you guys as much facts and information as we have and we’re not giving guidance as you know, so while business is up so far in the first three weeks of December its against a weaker year ago number and the balance of the quarter, the comp comparison is a lot tougher for us so not only for the period through the rest of December but then as we mentioned February was a strong number for us as well.

So its going to be choppy and we’re just staying focused on executing the strategy and managing our business with that cautious consumer outlook.

Sam Poser – Sterne Agee

And then you also commented that last year you ran your clearance sale, it’s a couple of days away, but on a relative basis what are we looking at there, how aggressive are you going to get on a relative basis, what do you want to achieve from this year’s clearance sale.

Sam Sato

We’ve been on our clearance cadence for about three years now where we run our end of season sales three times a year and the day after Christmas being one of them and our strategy there hasn’t changed. The purpose of our clearance events are primarily to address distressed and aging goods.

We’re not going to add regular priced products to that in order to boost sales. Its is essentially a vehicle for us to get rid of older inventory so we can make room for new deliveries and we intend on staying that course as we go into this sale as well.

Sam Poser – Sterne Agee

And your inventories are much cleaner this year than last year so there won’t be as much distressed inventory around I would assume.

Sam Sato

That’s correct.

Operator

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

Bernard Sosnick – Gilford Securities

Congratulations gentlemen, you said the business is choppy out there in the malls but your strategy seems to be very clearly directed, could you amplify a little bit on the inventory strategy because managing inventories has been so crucial especially recently but in the past there was a lot of broken assortments that had to be moved out over time, how are you dealing with all of this to keep your inventories lean and clean.

Sam Sato

So a couple of things, our focus has been for quite some time now to ensure that our sales growth out paces our inventory growth. We believe we continue to have upside with our inventory turns and continue to remain focused on the quality of our inventory. Having said that there’s always the challenge of ensuring that we’re able to create a compelling assortment for our customers but at the same time ensuring that we don’t go to wide and not deep enough.

And so our merchant group is squarely focused on the editing process and ensuring that we’ve got a quality assortment of styles and colors but also depth in key models and its an ongoing process and we continue to look at those metrics and ensure that we’re not artificially reducing inventories strictly for the purpose of increasing our inventory turns.

Its about efficiencies and quality of inventory rather than just the number.

Bernard Sosnick – Gilford Securities

With regard sales per square foot on a trailing 12 month basis, what would your sales per square foot be.

Edward Wilhelm

So last year we finished about $300 and that would change especially via the comp change on a year to date basis. So if you apply year to date comps to that $300, that would be where we’re at today.

Bernard Sosnick – Gilford Securities

Would you say about half of the stores are running below that rate.

Edward Wilhelm

I don’t know.

Bernard Sosnick – Gilford Securities

What percentage of the stores might be running at a four wall loss.

Edward Wilhelm

We haven’t commented on that either. We certainly have stores that are losers and we’ve got a very focused effort in place to improve them through operations, through product strategies, etc.

Bernard Sosnick – Gilford Securities

The reason I ask is you’re very focused on cleaning up your real estate and I’m sure its going to be done, it sounds as though there’s a significant opportunity there. Does the number of stores opened for renegotiated lease still run around 300 over the next year.

Edward Wilhelm

There’s about, as we’ve talked about about 40% of our store base over the next 15 months that will have some opportunity to renegotiate. Those are stores that either have natural lease expirations or sales [kick out clause] that would come into play.

Bernard Sosnick – Gilford Securities

You were designated by Nike as the destination for running shoes and you’re making the most out of that quite obviously, how are you looking at that in terms of your positioning with Nike and of course differentiating yourself in the mall which you’re succeeding in doing.

Sam Sato

We’ve got a great partnership with Nike and I don’t know that it was an official designation but certainly our, one of our core strengths historically as a company has always been around running. We’re not only working very closely with the Nike folks across running as well as other categories like Brand Jordan, as well as some performance basketball.

Certainly our kid business has been strong with them as well. But within the running category specifically we’re taking full advantage of what the customer has come to expect from Finish Line and that’s across not only the Nike brand but all of our great vendor partners like Asics and Brooks and Mizuno, New Balance, and [Audi] and down the line.

And so we are focused on delivering the most relevant product to our customers and we see tremendous response today largely driven by the running category and so we’re going to exploit that opportunity.

Bernard Sosnick – Gilford Securities

It sounds as though there are more brands participating in success than a year or two ago and that’s good news for you quite obviously. Can we look forward to February, last year you an 11% sales increase that was with a very strong response to new releases I presume with basketball shoes if I remember correctly. What are your thoughts in terms of the product offerings for February.

Sam Sato

We think we’ve got a robust exciting offer and obviously we’re hopeful that our customers will feel the same way but we’re very bullish about what we have on order and like our chance of given some of the results we’re seeing again specifically within running and toning.

Bernard Sosnick – Gilford Securities

You guys have done a terrific job, congratulations, and best wishes.

Operator

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

Chris Svezia – Susquehanna Financial Group

Happy Holidays to all, first on the wellness toning category just how meaningful that could be given the average unit retail for some of that product that two key vendors that are participating there, and you reference that it could be pretty meaningful for fourth quarter but it seems like that’s a carry through and I’m not talking about next year but, continuing to carry through next year. So maybe you could put some parameters about what’s going on there and how meaningful that could be for your business.

Sam Sato

On our last call we talked about early reads on that category and we were extremely pleased with that. We also informed the group that we took a meaningful position as we get into the holiday season and in fact we are in a much better inventory position as we went into the back half of the third quarter and saw some of those results impact our total quarter.

As we move forward we remain bullish on that category. We think that there’s a lot of upside and certainly the brands are looking at how to continue to evolve their style and innovation around their design and technology and we’re going to continue to move forward relative to that category and we feel great about it.

Chris Svezia – Susquehanna Financial Group

And its pretty fair to say you’re pretty much in all doors with what you want to have from a toning perspective.

Sam Sato

With some of the product we are, obviously with some of the product that is selling at a bit of a faster sell through we’re having to be more limited in how we distribute that product in order to not disappoint customers. But for the most part I would say we’ve got some kind of toning representation in just about all of our stores.

Chris Svezia – Susquehanna Financial Group

And I just want to move to basketball, and I know you’ve got some tough comparisons maybe some other issues going on in the basketball category but in terms of as you look to February do you envision at all and improvement in trend at all as you get into February, when should we anticipate seeing an improvement in trend on the basketball side.

Sam Sato

Again we’re not going to provide guidance around that, what I will tell you is in the third quarter basketball while wasn’t as robust as our running business, Brand Jordan specifically still posted a solid increase and its been trending a little bit lower than where it has the last few years but nonetheless its still posting solid increases for us.

We anticipate that our basketball business largely driven by Brand Jordan will continue to grow just at a slower pace than some of our other categories.

Chris Svezia – Susquehanna Financial Group

On apparel, congratulations on seeing a positive comp, its been awhile there but when, could you maybe just tell us what percentage of your business year to date has been in apparel and then thoughts about the fourth quarter, how much bigger that category grows during the fourth quarter as a percentage of the business.

Sam Sato

So on an annual basis the soft goods business represents about 15% of our total and we’re still right about on track for that. We obviously do a higher percentage the back half of the year because of the price point going up largely driven by fleece and outerwear and that will remain roughly the same this year.

The percent will be a tad higher because we’re running a higher increase. In the third quarter our soft goods business was up 5% and footwear was up 1% and so the percent, the total sales is going to increase slightly but we’re pleased with the progress we’ve made in apparel and we’re going to continue to focus on improving that business both on the top line as well as the bottom line.

Chris Svezia – Susquehanna Financial Group

Just on occupancy costs, you’re down 3% I think or thereabouts in dollars, any thoughts as we head into the fourth quarter, should we look at roughly still down 3% in dollars as we go into the fourth quarter, any thoughts there.

Edward Wilhelm

What we’ve talked about for the year is being able to leverage occupancy on a negative 3% to 4% comp and we’re still comfortable with that for the year so that’s probably the best way to think about occupancy.

Operator

Your final question is a follow-up from the line of Sam Poser – Sterne Agee

Sam Poser – Sterne Agee

I just have a follow-up on the stores, first of all how should we look at store openings looking ahead into next year and two, are you still working to, given the cleaner inventory levels and the efficiencies you’re getting, are you still looking to down size the store box of, you had worked on that with some of the concepts, stores you had worked on some time ago.

Edward Wilhelm

For this year we’re going to open up a handful, five new stores, and close 25 to 30. We haven’t talked specifically about next year but kind of generally that same direction based upon what we know today is probably a good assumption at this point.

Glenn Lyon

And in terms of the size of the stores I think what we found out here over the last year or two is as we have discussed trying to down size the size of our stores is that dependent on the mall and the amount of traffic in that mall, is more relevant to how big we can be. So in the real A plus malls we could be bigger and provide, and create a lot of profit, a lot of volume and a lot of profit.

In some of the smaller malls, we want to be smaller. But I think you’re going to see us stay in the range of say 3,500 to 7,500 square feet again dependant on the size and the amount of traffic in a mall as well as obviously the opportunities.

Sam Poser – Sterne Agee

Looking at the store base right now, how much of your store base do you think needs to change right now to get it, I’ll say right sized where you’re over in one place and under in another, how much more work do you think you have to do there.

Glenn Lyon

I’d probably need an hour to discuss that with you but its constantly being reviewed and obviously we have tremendous opportunities with the landlords to work on that to help us improve our productivity, get bigger in certain malls, and get smaller in other ones. So that’s an ongoing process that our real estate guys and the reps at the various landlords constantly are working on to right size us.

Look a lot of the success at retail today is productivity right so everybody’s getting right sized whether its inventory or square footage. People who are performing well are getting that done. And I think we’re doing a good job of getting that done both on product as well as real estate. This business has always been a culture that’s built on partnerships with our suppliers.

So whether that’s square footage suppliers or product suppliers or other things that we purchase in the marketplace, that’s what The Finish Line stands for and we’ll continue to do that.

Steve Schneider

One thing that also comes into play here is as you’re working with the landlords there may be times where we have a pretty big store, maybe its 9,000 square feet and its up for a kick out, we may decide with the landlord together that you know we’re better off to go to some alternative rent for about a year and push that kick out out for a year so even though we may want to reduce that size, we might want to see what happens over the next year and work on a little bit different of a situation and in that case you’re not going to spend money to remodel that store or to relocate it. You’re going to kind of see.

So there’s a lot of factors playing in here now but certainly the opportunities are there.

Sam Poser – Sterne Agee

It just sounds to me like unlike some of the other people in the space you’re doing a very good job of operating your business more like I’ll use a women’s junior business, I would like to know how much like all store shoes versus select regional buys, how has that changed over the last year and it sounds like something like that may have really helped targeted buys might have really helped you achieve your results. Am I thinking about that right.

Sam Sato

I’m not sure that I would necessarily compare to the women’s junior business, certainly we want to continue to focus on getting inventory efficiencies and as I said earlier we’re constantly going through the process of editing and ensuring that we’ve got depth in those key models that are relevant across the larger channel as well as buying products that speak to specific stores and I wouldn’t necessarily say its geography driven so much as it is maybe consumer profile or demographic driven.

We try to create some local assortments specific to our stores but at the end of the day we’re a 600-plus store chain and we’re constantly looking for those products that are meaningful across the larger group and ensure that we’re able to exploit those opportunities.

Sam Poser – Sterne Agee

Are you bringing in more fresh product more often than you have in the past either in individual stores or en masse.

Sam Sato

Yes, I would say when we talked about inventory efficiencies, obviously its around having our stock to sales ratios in line and ensuring we’ve got a good flow of goods coming in on a consistent basis. We’ve got a great distribution center here in Indianapolis that is state of the art and we’re able to run trucks to our stores on a really frequent basis.

And so part of reducing inventory isn’t just about cutting the number, its about the flow of goods and obviously ensuring that you’re making timely deliveries to the stores in order to maximize your turns.

Operator

There are no additional questions at this time; I would like to turn it back over to management for any additional or closing comments.

Glenn Lyon

Thanks everyone for joining us this morning. We’ll be back on March 26 to discuss the fourth quarter. You folks have 48 hours to get out into the stores. We have plenty of great new shoes in our stock and Merry Christmas to everyone.

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Source: The Finish Line, Inc. F3Q10 (Qtr End 11/28/09) Earnings Call Transcript
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