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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

Camilo R. Lyon - Canaccord Genuity, Research Division

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

Rafe Jadrosich - BofA Merrill Lynch, Research Division

Bernard Sosnick - Gilford Securities Inc., Research Division

Kate McShane - Citigroup Inc, Research Division

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

John Zolidis - The Buckingham Research Group Incorporated

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Sam Poser - Sterne Agee & Leach Inc., Research Division

Finish Line (FINL) Q3 2014 Earnings Call December 20, 2013 8:30 AM ET

Operator

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

Ed Wilhelm, Chief Financial Officer, 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; and President of the Finish Line brand, Sam Sato.

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 the date of this report, and the company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances.

I will now turn the discussion over to Glenn.

Glenn S. Lyon

Thanks, Ed, and welcome to everyone joining us this morning. It was a very good third quarter, capped off by a strong Black Friday holiday weekend. I firmly believe that the positive changes we are making across our channels of business are strengthening our consumer connections and reinforcing our market leadership. Never before during my retail career has the retail industry been in such a constant state of change. The rapid advancements in technology are reshaping all aspects of this business, from product and merchandising to marketing and logistics and, most meaningfully, the consumer experience. In order to remain relevant in this environment, we must adapt quickly.

We identified the need to evolve our business model several years ago and moved quickly to invest in an omni-channel strategy. With a limited playbook to guide us into this uncharted territory, we fully understood that the learning curve would be steep. Therefore, we're encouraged that the wins have far outweighed the losses through this critical process. I truly believe that our third quarter financial performance, delivered in this challenging macro environment, was a direct result of the investments we have made, and continue to make, in developing our omni-channel platform.

The enhanced selling, merchandise and service offerings we are delivering across each of our channels are resonating with consumers. I witnessed firsthand the impact of our efforts over the Black Friday weekend as technology utilized by our store associates helped drive an improved customer experience and increased conversions. On Black Friday alone, we processed approximately 70,000 transactions through handheld devices, dramatically speeding up the checkout process during peak selling periods. At the same time, associates were fulfilling web orders from the back of the store, a capability we put in place many years ago to better maximize inventory productivity and enhance customer satisfaction. This year, we've continued to improve this important function by getting even faster in our deliveries, becoming more effective in combining multiple unit orders and lowering our average cost per transaction by leveraging new supply chain capabilities. This is only part of the story.

Our total performance is being fueled by effective digital initiatives that create increasingly more personalized consumer engagements through desktop computers, mobile phones, tablets and social media. Our objective isn't to dictate where customers shop; rather, make sure we are wherever they prefer to shop. Analysis of our internal data tells us that more than half of our customers have multiple points of contact with us before purchasing. The typical shopping experience no longer exists. Consumers are spending an increasing amount of time researching products across multiple devices. They visit and revisit sites and stores before ultimately executing their transaction, either online or in-store. Brick-and-mortar and digital are completely interconnected. The lines between store and site traffic and sales transactions have become increasingly blurred as we now offer a seamless experience for the customer, no matter which channel they choose to shop. As a result, our stores and website have taken on multiple purposes in a customer's path to purchase. For example, 25% of the visitors to FinishLine.com are researching product to buy off-line. This has led to a spike in Store Locator mobile traffic, especially on weekends. These figures are even more pronounced within members of our Winner's Circle loyalty program, where 87% are more likely to go in-store to purchase after receiving an e-mail than they are to purchase online. Clearly, the customer is utilizing technology to become better informed prior to purchase, with online research ultimately leading to increased store traffic as well.

Importantly, our new store and digital technology and ongoing supply chain upgrades provides great flexibility to further improve the customer experience as the landscape continues to change and the consumer becomes even more empowered. The work we have done the past few years has established a solid foundation for sustainable growth. Our brand partners recognize our commitment, which further solidifies strong relationships we enjoy with each of them. This foundation extends beyond our core Finish Line business with our 2 important growth vehicles, Macy's and Running Specialty.

First, Macy's. We currently have Finish Line branded shops in 181 Macy's locations. We are pleased with the overall results we are seeing through our Macy's partnership and continue to refine our marketing initiatives, product assortment and service levels to reflect what we are learning. We have and will continue to make adjustments in all of these areas as we aspire to deliver all that the Macy's customers are seeking from the Finish Line experience.

It is also important that we continue to improve the merchandise stories we tell in these shops and present the product in a manner that befits the showcasing of industry-leading brands and products.

At Running Specialty Group, we closed on the acquisition of Running Spot, a 4-store chain with doors in Ohio and Kentucky, during the third quarter. With our acquisition of some of the most iconic running operators in the country, like Boulder Running, Run On! and now, Running Spot, we are strengthening the reputation we have established in specialty running. The way we have handled and integrated the acquired businesses is key to the success we are seeing, both with our existing portfolio as well as in the willingness of other small chains to engage in discussions with us.

We have retained the founders of each of these individual businesses, which is extremely important because these customers place significant emphasis on community and local presence. They also value customer engagement at the local market level, which we will continue to deliver through running groups, training groups and sponsored running events.

As we build this growth platform and learn more about the specialty running customer, we are lifting and shifting the community programs and customer service standards of successful local operators as we share best practices across the chain to drive increased productivity.

In total, we are pleased with our recent performance and encouraged to see that our momentum has continued to build in December.

Sam will now review the category merchandise performance and Ed will go through the financials and update our outlook for the year.

Samuel M. Sato

Thanks, Glenn. On our second quarter call, we said that we expected running trends to improve, basketball to remain strong and softgoods to show positive progress. We are pleased that each one of these played out as expected, especially in what has been a choppy macro environment.

For the quarter, footwear sales on a comparable basis increased high-single digits. Men's was up high-singles, women's up mid-singles and kids was up low-double digits. Importantly, this was the best women's performance in some time, while kids remained a consistent strength for us. In fact, our kids business has posted a low-teen average annual increase over the past 3 years, and trends don't appear to be slowing.

As we projected, running comps returned to positive territory in the third quarter, up mid-single digits, fueled by strong performance across the board from Nike. We continued to see nice gains from the Free, Air Max and Shox platforms. Nike Flyknit sales accelerated during the quarter, and both SpringBlade by adidas and our exclusive Under Armour Spine Laser did extremely well. This continues to affirm that new product innovation drives customer excitement, and Finish Line remains committed to bringing the newest, freshest products to market first.

Other standouts included ASICS and Brooks, which were both up double digits on a comp basis, as the popularity of their fashion technical styles continues to grow.

What was especially encouraging was the strength in women's running, which posted a high single-digit comp increase for the quarter, a meaningful trend change driven by demand from Nike, ASICS and Brooks. Our overall positive results across both genders, as well as key brands, highlight our marketplace leadership in running and give us great momentum heading into the new year.

Basketball was, again, a strong category, with comps up in the high-teens. Our basketball business continues to benefit from strong demand, especially for both Nike and Jordan products. Within Nike signature products, both LeBron and KD performed extremely well. Jordan continues to be a highly valued brand with our customers across all categories: footwear, apparel and accessories. The Jordan Brand once again delivered incredible results.

Our customers also responded well to the launch of the adidas D Rose shoe, and sales have remained robust despite his season ending injury.

Turning to softgoods, we did see sequential improvement in performance, with comps down just slightly. The improvement was most evident in youth [ph], licensed and branded apparel, which included very strong gains from Nike, Jordan and Under Armour. Premium branded socks, bags, along with shoe care also positively impacted our results. However, with the category, overall, still in negative territory, there remains much room for further improvement, which we expect to continue to deliver as we look to next year.

In conjunction with our omni-channel strategy, we are focused on delivering a more innovative and cohesive marketing program that is aimed at driving traffic, telling better product stories and strengthening customer loyalty. We are delivering a focused message across in-store, website, email, and social media, engaging our customer everywhere they are. A good example, which Glenn touched on earlier, is a recent email to our Winner's Circle members announcing a new product launch. We had a tremendous response, and out of the total purchases made within the first 7 days of receiving the email, 87% of the transactions took place in-store. Programs like this have dramatically increased consumer loyalty, which now drives 62% of transactions compared to 33% just 3 years ago.

Our recent efforts culminated in a strong Black Friday weekend, as comp sales increased in the low 20% range over the same Thursday-to-Sunday period 1 year ago. Store sales started off strong, due in part to having them open earlier on Thanksgiving Day, and remained robust into the weekend. Digital sales were strong out of the gate and accelerated into Cyber Monday and throughout that week. The overlapping of strong store and digital trends over the Black Friday weekend reinforces our blurred line thesis. It's no longer about one or the other, like it has been in the past, when channels played a specific role at a specific time.

At Macy's, we are pleased with the progress we are making and continue to implement change based on the many learnings of the past 8 months. One of the most exciting aspects of our partnership with Macy's is access to their predominantly female customer, a demographic that has been historically underserved by us. We have to make sure to engage this customer with the right marketing, product and visual merchandising, as well as service levels. As we expected, we have learned a lot more about her from her taste and brand preferences to size information. We have learned that product innovation in fashion is important, and we'll continue to evolve our offer to satisfy her needs. The great thing is we have been able to reap these benefits of the Macy's partnership with no cannibalization to our Finish Line store and digital business.

With that, I'll turn the call back over to Ed.

Edward W. Wilhelm

Thanks, Sam. For Q3, consolidated sales were up 22.9%. This increase was made up of Finish Line sales that were up 9.7%, sales associated with Macy's, up $33.5 million and Running Company sales that contributed $13.9 million versus prior year of $7.6 million. Consolidated gross margin rate decreased 70 basis points from a year ago to 29.6%. Product margin, net of shrink, was down 100 basis points due to higher markdowns as we continue to be disciplined in managing our inventories to adjust the breadth and depth of our product assortments to meet customer demand. Occupancy leveraged by 30 basis points.

Consolidated SG&A expense was 28.6% of sales, which decreased 220 basis points from last year as we leveraged fixed expenses on the 7% comp and prudently managed our variable operating expenses. On a consolidated basis, and excluding asset impairment adjustments, third quarter adjusted net income increased to $2.8 million, or $0.06 per share, from a net loss of $0.1 million or breakeven on a per share basis in the third quarter last year.

Our Q3 GAAP results included an impairment charge of $0.01 per share related to a write-off of some obsolete store technology assets. For Finish Line, third quarter comp sales were up 7.1% on top of a 3.6% increase a year ago. For stores, comp sales increased 6.8% on top of a 0.6% increase a year ago.

Digital comp sales increased 8.4% for the quarter and represented 13.8% of total sales. With respect to cadence, comps were up 5% in September, up 12.7% in October and up 4.9% in November. December comps to-date are up mid-single digits.

On the category side, footwear comps were up 8.9%, and the softgoods comp decreased 1.2%. Footwear ASPs increased 1%.

Now moving on to our balance sheet. Inventory was up 19.5% on a consolidated basis, driven by the increase associated with our Macy's business and store growth at Running Specialty Group. For Finish Line, inventory was up less than 1%. Capital additions to fixed assets year-to-date through the third quarter were $66 million, which excludes approximately $5 million accrued in accounts payable at quarter end. For the full year, we expect CapEx to be approximately $90 million, which includes an estimated $18 million in capital outlay associated with the building out of shops at Macy's.

Depreciation and amortization expense was $8.8 million for the quarter and the full year will be between $36 million and $38 million. We ended the quarter with $111.9 million in cash. Our store activity for the quarter was as follows: for Finish Line, we ended the quarter with 658 stores, including 3 openings and 4 closings. For the full year, we anticipate opening up to 25 new Finish Line stores and closing 20 to 25 stores. At the Running Specialty Group, we acquired 4 stores and opened 4 new stores during the quarter, which brings our total openings and acquisitions year-to-date to 20, or a store base of 47. For the full year, we are still planning 30 new stores through both acquisitions and openings.

Also during the quarter, we added 48 Finish Line branded shops within Macy's, giving us shops at 181 Macy's stores as of November 30, as we met our goal of completing 180 conversions this fiscal year.

During the quarter, we bought back 200,000 shares totaling $5.2 million, which leaves us with 4.1 million shares remaining for repurchase under the current board authorization.

And now on to our outlook. Based on third quarter performance and December month-to-date results, we now project Finish Line comparable sales for fiscal 2014 to increase 3% to 4%, up slightly from our previous expectation for a low single-digit increase.

With respect to earnings per share, we are raising our outlook for fiscal 2014. We expect fiscal 2014 adjusted EPS to increase 9% to 12% to $1.60 to $1.65 from last year's adjusted EPS of $1.47.

In addition, I want to reiterate an important point about SG&A in Q4 that I made at last quarter. 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 in Q4. As I said last quarter, this item alone 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

Thanks, again, Ed. I understand that the main takeaways from this call is likely to be: that our Q3 comps increased 7%, and the December comps to-date are up mid-single digits. We are certainly pleased with our ability to deliver these gains, which are the direct result of the hard work of our entire organization. What we are doing here at Finish Line isn't about 1 quarter or 1 holiday season. It's much bigger than that. We have a bold vision about what the future of this business looks like and how we'll continue to advance our leadership position in this evolving retail landscape.

Our commitment to investing in our people, systems, and channels is strengthening our brand partnerships and, in turn, providing our consumers with a plethora of choices from a product standpoint to how we choose to interact with our brand, as well as initiate and complete transactions. Through the premier omni-channel experience we have created, Finish Line has clearly established itself as the preferred conduit for delivering the product innovation that is fueling consumer excitement in the marketplace.

We will continue to hone our tactics and step up our game in order to move forward in concert with our consumer as their buying habits evolve and as industry trends change, as they always do. I am confident this strategic course will benefit our customers, brand and business partners and shareholders over the long term. The energy throughout our organization is very high as everyone is excited about the future we are building here at the Finish Line.

Operator, we're now ready to take calls.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Camilo Lyon.

Camilo R. Lyon - Canaccord Genuity, Research Division

I wanted to ask first on the gross margin. It feels like you guys have been on this clearing phase for the better part of the year as you try to cycle out of the older, less exciting running SKUs. Now we've gone through or we're starting to see an upturn in that business. Where are you on the clearings of that older product that hasn't been turning well is the first question. And then the second, follow-up to that, is how pervasive or how extensively distributed is the newer product across your store base? Because I think they're still, if I'm not mistaken, it's still -- it's not represented across all of the stores. Is that correct?

Glenn S. Lyon

Yes.

Samuel M. Sato

So you're talking, Camilo, about the SpringBlades and the Flyknits?

Camilo R. Lyon - Canaccord Genuity, Research Division

That's right, yes, because that seems to be what's exciting consumers and really driving the acceleration of comps.

Glenn S. Lyon

Our programs build over time...

Samuel M. Sato

Yes, I'd say more doors now...

Glenn S. Lyon

...from the way we start to where we end up.

Samuel M. Sato

So more doors now than it was back-to-school, but not at all doors.

Camilo R. Lyon - Canaccord Genuity, Research Division

And so could you quantify maybe, like, below 50% of the doors, above 50% of the doors? I'm just trying to get a sense as to how much more a continuation of this acceleration we can see and for how much longer.

Glenn S. Lyon

Camilo, I think you know if I could predict that, we'd be running higher margins and even more successful a business. As we escalate each one of those categories or items, the sell-throughs are somewhat unpredictable as they grow from 50-store programs to 300-store programs to 650-store programs, things changed. But let me go back to your initial question because one thing we have been proud of here for a long time, and maybe for the history of the Finish Line, is our ability to manage the inventory. And the fact is, look at the end of the quarter, at Finish Line, inventories are basically flat. I think they're up 0.6% and sales were up 9. So obviously, our turns are a little bit better than they were a year ago. It's critical to us that we keep these stores clean and fresh and that we have and are encouraging the brands to ship as fast and as early as they can on new initiatives so that we're always there for them. So I think we're taking our markdowns diligently, quickly. This is a shaky macro environment and we don't want to get caught. So we're going to be aggressive on that and we're going to be aggressive on bringing in the new stuff.

Camilo R. Lyon - Canaccord Genuity, Research Division

So how should we think about the gross margin composition -- the merch margin composition, relative to how much more clearance you anticipate having on some of these lower-turning items?

Edward W. Wilhelm

I think in Q4, Camilo, we'd expect some sequential improvement in that product margin year-over-year comparison than what we've seen in the first 3 quarters of this year.

Camilo R. Lyon - Canaccord Genuity, Research Division

Okay. Great. And then just finally, on Macy's, a year ago is when you started planning the assortment for the shop-in-shops. I think you've talked about a lot of learnings over this year in terms of what's selling, what's not selling. How do you think about the opportunities to improve that assortment going into next year and what that might mean to accelerating some of those -- the performance of those shop-in-shops?

Samuel M. Sato

Camilo, this is Sam. As we said in our prepared remarks, we continue to learn what that customer wants in terms of the categories, the fashion styles and sizing being one of the key opportunities for us. Our partner -- vendor partners have been incredibly supportive and we'll continue to partner with them, as well as the Macy's leadership has been unbelievable. And they share a lot of consumer data with us, which helps us better plan our future buys. And so we think that the opportunity for us to continue to tailor the offer, to be much more specific and curate that offering, as well as tell great product stories in the Macy's shops, leads us to remain optimistic about the things we're doing.

Glenn S. Lyon

Camilo, as you can imagine, our team is early in the learning curve. And we fully expect that we're going to be much more confident, not only in the coming months but in the coming next couple of years.

Operator

Your next question comes from the line of Eric Tracy.

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

So I guess, Sam, for you, just in terms of the pipelines, as we think across both running and basketball, really into spring next year, you're working off the SpringBlade and Free Flyknit, maybe speak to, if you can, the visibility that you've got across the categories and what excites you as we head into next year.

Samuel M. Sato

Yes, so a couple of things I'll say. One is, when we think about what's coming in, first, let me level-set it by saying we work with some of the great innovators in the industry. And this coming year is no different. We're excited about what we see. Having said that, I'll tell you today it's more about expansions of both platforms that are performing extremely well, like Free and SpringBlade, Shox and Air Max. It's also about the expansion of new innovation that's coming to market, like Flyknit. So we talked a bit about how Flyknit accelerated through the quarter.

We've got the introduction of 3 new shoes coming up on the Flyknit upper. Flyknit Max Air actually launches online at FinishLine.com the day after Christmas -- or 2 days after Christmas, excuse me. Then as we go into spring, you're going to see a brand-new Free platform that we're extremely excited about, as well as the new Lunar glide with Flyknit. SpringBlade will continue to expand and will continue to innovate against the uppers as well as, as you heard me mention, fashion styles from performance brands like Brooks and ASICS, the pipeline there looks incredible. Needless to say, basketball has been a strong business for us. As we look at the design and innovation pipeline against Nike signature and Brand Jordan in particular, it looks incredible. And we're excited about what we got coming and we think our consumers are going to respond well to that.

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

Okay. And then I guess a follow-up just in terms of pricing and ASPs relative to the product margin and in terms of the clearing of older styles, is -- I mean, are we fair to assume that the ASP is mixing up as these new product platforms are coming to market? And when is sort of the inflection of maybe when that takes over and it could actually be a driver of product margin, again, relative to the clearing of sort of some of the slower-moving stuff. I know it's a fluid process, but just trying to gauge.

Edward W. Wilhelm

Absolutely a fluid process. So it's certainly -- it's mixing up, as you said. Looking at long term, the ASPs in this business have historically increased low single-digits and, as we look to next year, that feels right to us.

Glenn S. Lyon

Eric, one of the things that warms our hearts is when we hear Nike talk about the premium end of their business and acceleration there, which we've been feeling in all of our viewings over the last 6 or 9 months, and that carries through the rest of the industry as well. You think about adidas at $180 in the marketplace, it's a phenomenal success along with the Boost product that -- these our price points that have not existed with -- consistently with brands during the near past. So this is a good time for us, good time for our segment.

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

And then I guess just last question on the women's, it seems to be turning a corner here. There's a lot going on in the marketplace in terms of competitors and just the landscape trying to address that female consumer. Obviously, you guys are good segmenting the market with women's and Macy's now. Glenn, maybe just talk to the women's business in total and the landscape and where you see it going.

Glenn S. Lyon

I'll let -- Sam is our women's expert.

Samuel M. Sato

So 2 things I'll say. First is, as you mentioned there around the Macy's piece, there is a tremendous opportunity. And really, one of the main strategic reasons behind our partnership with Macy's, to leverage their commitment to the female consumer. And quite frankly, Macy's is a destination for that customer, which has been largely underserved by not only Finish Line but I think the athletic footwear industry in total. And so we see a tremendous opportunity there for a consumer that we really haven't been able to tap into. Specific to the Finish Line business and our Q3 results, the younger consumer that's shopping with us there is absolutely responding to some of the great things that are coming into our offer, specifically, again, to running and training. There's some incredible products in terms of not only performance innovation but their design. And as you heard us talk in the past, the female consumer has so many choices for footwear that when athletic is hot and, for us especially, when the running or training categories are hot, we're going to be the recipient of that good trend.

Operator

[Operator Instructions] Your next question comes from the line of Robbie Ohmes.

Rafe Jadrosich - BofA Merrill Lynch, Research Division

This is Rafe Jadrosich on behalf of Robbie. Since you guys initially launched the Macy's in-store shops you kind of talk about refining it. Could you talk about any specific adjustments you've made there maybe in terms of staffing? And then now you've got a chance to go through a back-to-school with the Macy's shops, can you talk about the Macy's customer versus the Finish Line women customer? What's the overlap in product and are you seeing different brands or categories working?

Glenn S. Lyon

Maybe I'll answer the first half and Sam can answer the second. The biggest challenge that we knew we would face and that we faced has been real estate within the Macy's stores. It's been a very, very dynamic process because there are 2 models that we have, one where we put in all genders -- actually 3 models. One where we put in all genders, men's, women's and kids, one where we just put in men's and women's in the same shop, and then another model that has men's in the men's store and women's in the women's shoe departments. So the evolution of that process with Macy's has been challenging. It's actually been great, better than any of us could've imagined as, obviously, Macy's has skin in the game to generate increased sales for their stores. But that's been -- that was the biggest challenge that we faced in setting up the first 180 stores, and we've still got almost another 300 to go. So a lot of work to be done on that front.

Samuel M. Sato

Yes. In terms of the female customer, what I'll tell you is this. Our strategic partnership focuses on the opportunity with Macy's target female customer, which is a millennial customer, which is slightly older than who we serve and who we target in the Finish Line mall-based stores; different fashion style, different need state. So we think that the opportunity for us to gain presence and share of mind with her, again, a consumer who we don't target with our Finish Line mall-based brand stores, we think that the opportunity there is tremendous.

Operator

Your next question comes from the line of Bernard Sosnick.

Bernard Sosnick - Gilford Securities Inc., Research Division

With regard to the Macy's expansion, what kind of pace are you planning for the next year in terms of quarterly rollouts?

Edward W. Wilhelm

Well, we do about 20 to 30 a month, Bernie, so it will kick that off in earnest in late February but certainly for -- to capture the full month of March. Unlike this year, we didn't start until late April this year, so we'll get 12 months of 20 to 30 stores done a month.

Bernard Sosnick - Gilford Securities Inc., Research Division

Okay. With regard to apparel, you are quite optimistic about the outlook for fleece and the weather has been cooperative in that regard. You have an improvement in the last quarter. But given the weather conditions and the positioning of your inventory, could we expect better as we go through the holiday period?

Glenn S. Lyon

Bernie, here's what I'll tell you. So as we look into next year, we believe we'll continue to deliver improvement. Holiday, to the extent that I can tell you, from a weather perspective, cooperated later on versus earlier on. We're continuing to work hard on getting the mix right within each store, each geography. The good news is our branded business, as you know, we put our entire emphasis around that versus some of the private label businesses we've done in the past, some of the less expensive products. And so we're really focused on delivering a holistic head-to-toe product offer for the consumer, understanding that apparel is a smaller part of the business. It's really about key items and being able to service kind of those category killers, if you will, for our target customer.

Operator

Your next question comes from the line of Kate McShane.

Kate McShane - Citigroup Inc, Research Division

With regards to your channel growth, it seemed more balance during the quarter than it's been in a while, with stores up 6.8% and digital up 8.4%. So can you walk us through that a little bit and also what traffic and ticket was at the store level?

Glenn S. Lyon

Kate, this is Glenn. First of all, recognize that Cyber Monday is in Q4 for us. We projected to do about a 15% increase in digital for the fiscal year and we're tracking to that number. So we're happy with what's going on in there. We also projected that profitability would once again be up significantly, and we're tracking towards that as well. We see a tremendous roadway to much bigger businesses in the year. We think the digital business still has the ability to double from where it is today over the next couple of years. So we're going to continue to be aggressive in there. But we've been pleased with our progress across the year and we've made all of our sales plans and are exceeding our profit plans.

Edward W. Wilhelm

With regard to ticket and conversion and traffic, all 3 were positive in the quarter and contributed to the positive comp.

Glenn S. Lyon

And Kate, let me just finish one thought in there. We mentioned twice in the prepared remarks about the blurred lines and customers using multiple -- engaging us in multiple ways before they make their purchase. It's never been more evident between mobile and desktop traffic and foot traffic into the store. We know that we're helping the stores generate traffic through all of the initiatives we're doing digitally. There is no question about it. So those lines are going to continue to get blurred, Kate. And I think I want to focus and I want my team focused on the total sales and the productivity of such so that we invest to get the best returns for the company.

Kate McShane - Citigroup Inc, Research Division

Okay. That's great. I appreciate that. And if I could just ask 1 follow-up question on that thought, with the blurring of the channels, which I totally appreciate. Do you think there was something significant that changed from Q2 to Q3 with regards to how much more balanced it's become, or is it just the ongoing messaging that you think is starting to reach consumers?

Glenn S. Lyon

Kate, it's moving fast. It's going to continue to move. The traffic in the online segment of our business is huge, but the traffic that we're getting is -- they're looking for information. So it's not all just traffic to generate a transaction. And we will continue to invest against that. Social media, huge. So as I keep saying, the world has changed so dramatically and we're just trying to be in step with it.

Operator

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

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Jeff Van Sinderen of B. Riley. Just kind of a follow-up on how are you approaching evolving omnichannel. I know you've -- obviously, you've made great strides and you're certainly getting closer to being really seamless. And just maybe you could just touch on some of the things that you're working on for refining your omnichannel efforts as we look into 2014.

Edward W. Wilhelm

Jeff, we continue to focus on the supply chain side and making -- and improving deliveries to customers and getting faster with those deliveries. So for this holiday season, the amount of fulfillment that we did out of our distribution center here in Indianapolis was up from 25% last year to 40% this year. That allows us to get product to customers faster and at a lower cost. It also allowed us to take the pressure off of the stores because, a year ago, the stores had to fulfill that product. So by taking that pressure off the stores, the stores were able to increase their on-time deliveries 7 percentage points from 89% to 96%. So we continue to look at ways we can speed the delivery process to the customers through the omnichannel strategy, and we're also more effective this holiday season in combining multiple unit orders, as Glenn talked about in his prepared remarks. And again, that provides a better customer experience as well. So there's a number of investments that we're making with regard to omnichannel that are helping improve the customer experience.

Glenn S. Lyon

Jeff, not to be glib, but we're competing with drones. And if we don't recognize that the world is moving in a direction, albeit when and how exactly, and if we don't improve on this supply chain, we will be obsolete. And we're committed to be where the customer needs us to be. As we said, there are many touch points before the transaction happens. The customer is always connected, always have their laptop, their tablet. Each generation, each gender has touch points that they're connected all the time. And the digital channel is not only driving sales, it's driving engagement. And that's all good stuff, especially at the premium end as they get better educated and they recognize the value of what we are providing. So this is all really good stuff as long as we face it and embrace it and make investments against it. I will tell you, you won't see drones from us during our 5-year plan.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Okay. Good to hear. Maybe you can just touch a little bit more on your outlook for running. Obviously, that's been pretty strong in women's lately. And overall, it's gotten better. Just wondering sort of how you're looking at running in the overall scheme of things. Do you expect that to continue to be a positive business, especially on the men's side as we look into early 2014?

Samuel M. Sato

Yes, Jeff, as I've said earlier, as we look at the product pipeline moving into the future, we feel great about what we've got coming. We continue to see expansion on both platforms that are selling through now, as well as the expansion of new technology and innovation that's coming to market. We're really excited, obviously, about next week's launch of Flyknit Max. That's right in our wheelhouse. And our hope is, similar to the introduction of the new Air Max '14, got out of the gates quick. And if we can get back into that cycle of where the consumer is really responding favorably to the expansion on these current platforms, as well as the addition of new technology that's coming to market, then we'll reflect that in our results. Running is clearly where our leadership position is. We continue to bring the best and the newest to market. We'll continue to do so. Given that the product sells through, we'll continue to partner with our brands to expand upon that and we'll move quickly on inventories that the customer tells us they don't want. So our commitment to bring the newest and the freshest first to market is forefront of our merchant group's efforts and we'll continue to focus on that.

Jeffrey Wallin Van Sinderen - B. Riley Caris, Research Division

Ok. So is it fair to say then that there's nothing that we see -- or that you see that makes you think that the running category is about to have a cyclical downturn? There's nothing in the horizon that would tell...

Samuel M. Sato

Well, I'll tell you that ultimately the customers votes with their dollars and I can't predict how they're going to respond. Our best efforts are to assort our stores based on what we know and what we believe the consumer will react to.

Glenn S. Lyon

But there's no shortage of newness. No shortage of newness coming in.

Operator

Your next question comes from the line of John Zolidis.

John Zolidis - The Buckingham Research Group Incorporated

Question on the Macy's revenue. I think at the beginning of the year, you gave us guidance for $130 million to $150 million for the full year. Is that guidance still valid?

Edward W. Wilhelm

Yes. John, we're tracking towards the low end of that range, quite frankly. So the fourth quarter is big for Macy's business and it's our first experience with them in the holiday season, and there's a lot of traffic in their stores and we're doing all we can to maximize sales. What I will say is if we get to $130 million or even a little less than that, we're still very comfortable with our earnings guidance, which we gave at the beginning of the year for Macy's, which was for it to be modestly accretive. So long term, we're still very committed to this business. It's a great growth initiative for us. Long term, we still believe firmly that we can do between $250 million and $350 million top line with Macy's. And it's a great opportunity for us to grow sales and earnings as a company.

John Zolidis - The Buckingham Research Group Incorporated

Okay, great. And then one last question on the digital and E-commerce. Can you just address the challenges associated with pricing transparency out there and how Finish Line can be positioned to continue to grow and win in that channel in spite of that challenge?

Glenn S. Lyon

Our brand partners have been unbelievable about segmenting product, about keeping the channels clean. And wherever we compete online, it's competing at equivalent pricing strategies. So we have been blessed in a world that has dramatically changed and become more promotional in certain categories like electronics and so on. So we have been blessed. We worked really hard to make sure that the initiatives we bring forth fosters the growth for our brands, and the biggest competition we should have is with their own direct businesses. But that doesn't seem to affect us because as they build impetus through their direct marketing and their direct commerce, it seems to help us. It just exposes products more and people expect that we have them, which we do. They don't leave us out of product lines in lieu of their own stores or their own in-line processes. So we're partners to the end on this stuff and they have been sensational.

Samuel M. Sato

John, this is Sam, I'll add. Our product strategy has always been one that is focused first on customer that shops with us; 2, on delivering at a premium level the best products in the industry. Those products, as Glenn mentioned, are not baseball-ed around in terms of price. When the product goes on sale, it goes on sale typically because the consumer isn't responding to it and the price at that point is what it is. But the majority of where we put our efforts and we focus our marketing initiatives and our entire assortment strategy is around the top end of each of our brand partners, and that product is not sold off-price on a day in and day out business.

Operator

Your next question comes from the line of Chris Svezia.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

I guess, first, just so I understand something about the digital business. So the calendar shift negatively impacted digital business with Cyber Monday falling in the fourth quarter. Could you maybe just talk to the fact that -- if you still think there's a 15% plus growth business that assumes Q4 has got to accelerate, number one? Number two, any color on the EBIT margin performance in the third quarter year-over-year? And also just curious, any update on, I guess, the outlook for a head in that division, any updates on the hiring aspect there.

Edward W. Wilhelm

So Chris, the Cyber Monday did fall into our fourth quarter. So it has accelerated in the month of December given the comparisons. The operating margins for that business we planned up this year compared to last year and we're seeing -- we're meeting those profit margin expectations for our digital business. Long term, our long-term plans assume that the digital business will be over 20% of total Finish Line brand sales and have operating margins in the mid-teens, and we still very much believe those are very achievable.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Any update with regard to a head for the digital business?

Edward W. Wilhelm

Yes, we're still searching for the right person. So the search continues. And again, we're trying to find the right match for our business and for our culture.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. The other question I had is occupancy cost. If you add just -- sort of what's the thought here as we go into the fourth quarter, I guess it starts to peak into the fourth quarter. And then as we go into -- tip into next year, it starts to trend into that mid single-digit growth...

Edward W. Wilhelm

Yes. So coming into the year -- this is Finish Line. Coming into the year, we said Finish Line occupancy cost would increase high single-digit percent year-over-year, and we're right in line with that. Next year, that moderates a bit, so high single-digit comes down to the mid, maybe the high end of the midrange next year. And that's still consistent with the way we're thinking about things.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. And then just on product margins, I guess a little surprised it was down as much as it was given the comp. I'm just curious, you expect it to start to show some improvement sequentially in the fourth quarter. What would it take -- I mean, I guess it isn't a level of comp that could potentially drive -- in other words, you did the 7 comp in the fourth quarter, would that drive product margin improvement or you're just letting the customer decide? I'm just trying to get a sense as to why...

Edward W. Wilhelm

The product margin, Chris, is really driven by the consumer and the consumer's willingness to pay full retail or not for the product that's in the marketplace. And the merchants -- Sam's group every day are going through sell-through reports item by item. And where sell-throughs aren't meeting their expectations, we're being quick to action that and take the necessary markdowns to sell-through that product. So it's really simply a function of the consumer's willingness to pay the full retail price that we go to market with and us maintaining the discipline and managing inventories that we need to to keep the product flowing and to have the space and the room for the inbound of new product.

Operator

Your next question comes from the line of Sam Poser.

Sam Poser - Sterne Agee & Leach Inc., Research Division

I've got a bunch. One, what is Nike right now as a percent of your total? I know you give it once a year, but could can you give us an update? That will be great.

Edward W. Wilhelm

Yes. It's high 60%.

Sam Poser - Sterne Agee & Leach Inc., Research Division

Okay. And then one other thing, when we spoke a month or so ago, you said like the E-commerce business was getting really -- is getting very hazy as far as how it breaks off from the brick-and-mortar. It's all omni-channel, all one thing. So when -- how do you define your 20% E-commerce business or growing to 20% of the total Finish Line sales? How do you even define E-commerce when the lines are as hazy as they are?

Edward W. Wilhelm

Well, when lines are blurring as we've continued to talk about, we do measure sales separately for our digital business, which is a sale that occurs from someone either on a handheld device or at home, someone that's not in the store. And then separately, we record our store sales from folks that either purchase product in store or special order product in store, so they are separated. However, our omnichannel strategy, as we've talked about, continues to say that it's -- those lines are getting more and more blurred.

Glenn S. Lyon

Sam, I'd just add to that, just a bit here. We're at 14% of our sales. Commerce being done digitally, we're forecasting 20%. That might change as the world changes, and we'll continue to invest because we see the opportunity to go to 20% based on traffic and conversions and so on. But that's going to be a dynamic number but, for our purposes, that's how we're looking at it.

Sam Poser - Sterne Agee & Leach Inc., Research Division

All right. I was just more concerned there about the definition. Next, will the rollout of the current platform, Sam, into more stores, will that help to increase your merchandise margin in that you might have not -- you might just not have enough of the hot stuff in enough stores yet. And as that goes out, that pushes out some of the product that you may be needing to clear?

Glenn S. Lyon

Yes. Sam, that's always going on. I mean, we're always starting out slower with launches and so on of new initiatives that the brands have. So that's always going on. And again, go back to what Ed said, we put inventory into the stores. It is our goal to always keep our inventories fresh, make room for the new stuff, highlight the new stuff and not let the stores become overburdened with promotional goods. So we'll continue to effort that. We're in a good spot right now. We had a 7% comp last quarter. And our inventories in the stores on a per square foot basis are pretty much flat. So that's a good position to be in and we'll continue to effort towards that.

Sam Poser - Sterne Agee & Leach Inc., Research Division

And then lastly, could you talk about what the key brand drivers are that you're seeing out of Macy's and what kind of differences you're seeing there from -- you mentioned a bunch of whole - of brands that were driving businesses at Finish Line. Can you talk about the Macy's business and how it might differentiate itself?

Samuel M. Sato

So the differentiation, Sam, is really going to come in the form of product assortment, what's selling. Again, realize there is going to be a lot of similarities, but we're targeting that different consumer, one that isn't accessing mall specialty today. And our reports, internal data around cannibalization in the Finish Line stores where there is a Macy's shop, continues to affirm that we are getting incremental business here. To answer your initial question, I'll tell you that Nike, like in most athletic businesses, be it specialty or sporting goods, is the top brand. Skechers plays an important role with their GOrun products. And then, actually, as a percent of total, we've got fashion brands like Puma, for instance, that are right in the wheelhouse, especially for that female customer at Macy's from a fashion perspective. And that brand is overperforming as a percent of total compared to Finish Line mall-based.

Glenn S. Lyon

Before we close, I just want to make sure that, again, I thank the entire Finish Line team for the hard work that they put in this past year. Their commitment and dedication to this company is, as I have said many times, our most valuable asset. And none of this would be possible without their continued efforts. So I wish all of them, as I wish you, a happy and a safe holiday and we'll talk to you the beginning of next year. Thank you all.

Operator

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

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