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The Finish Line, Inc. (NASDAQ:FINL)

Q4 2014 Results Earnings Conference Call

March 28, 2014, 08:30 AM ET

Executives

Edward W. Wilhelm - EVP and CFO

Glenn S. Lyon - Chairman and CEO

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

Analysts

Robby Ohmes - Bank of America, Merrill Lynch

Bernard Sosnick - Gilford Securities Inc.

Jeffrey Wallin Van Sinderen - B. Riley Caris

Camilo R. Lyon - Canaccord Genuity

Kate McShane - Citigroup Inc.

Sam Poser - Sterne Agee & Leach Inc.

Christopher Svezia - Susquehanna Financial Group

Sean Naughton - Piper Jaffray

Paul Trussell - Deutsche Bank

Mitchel J. Kummetz - Robert W. Baird

Steve Strycula - UBS

Taposh Bari - Goldman Sachs

Jay Sole - Morgan Stanley & Co.

Operator

Good morning, ladies and gentlemen. My name is Ryan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Finish Line Fourth Quarter Fiscal Year 2014 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) 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. As you saw from our press release issued earlier today, we delivered strong fourth quarter results capping off a very productive year for our company. I'm excited to discuss these results with you today, and I'm really proud of our team of associates who delivered them.

In fiscal 2014, we achieved record revenues of about $1.7 billion, digital sales growth of 15% to approximately $210 million or 14% of Finish Line brand sales. And we did approximately $170 million in combined sales from our two growth initiatives.

With our strong top line performance, which included a 4.2% comparable sales increase, we were able to leverage expenses and post record earnings per share of $1.66. These results were fuelled by a pipeline of innovative products from our vendor partners across running and basketball, and the successful execution by our team of the key initiatives we laid out at the start of the year.

Three years ago we set out to transform Finish Line into a leading multi-divisional omni-channel retailer. We put the company on a path to deliver a sustainable sales and earnings growth and return greater value to our shareholders.

Several key components comprise this broad strategy with the customer at the center of it all. This means better understanding -- this means better understanding our core customers' needs, and more effectively marketing to that demand and more efficiently converting that demand to drive sales.

We want to be the destination of choice whenever, wherever and however they choose to shop for athletic footwear. We need to ensure customers get the premium experience they seek at every touch point.

The notion that stores and digital are separate channels run independently of each other is a thing of the past. At Finish Line one drives the other. And together they are strengthening our customer connections and propelling our total business forward.

Evolving and executing our omni-channel channel strategy has been and remains a key driver of increased productivity in our core business. Finish Line's performance in fiscal 2014 validates this strategy.

In support of this omni-channel strategy, over the past year, we made upgrades to the front and back-end of our digital platform, launched new mobile solutions and instituted marketing and consumer outreach programs to drive traffic to our brand. Key performance indicators have tracked our measurable progress on this front.

We also elevated the store experience with improved handheld functionality and enhanced capabilities of our POS system. This resulted in improved conversion and increased dollars per transaction throughout the year.

At the same time, we made progress with our multi-year core systems upgrade initiative. Our new supply chain system is now live at the Running Specialty Group, and we are incorporating learnings as we prepare to implement this new system at the Finish Line later this year.

The result of our continued omni-channel efforts helped us drive a 6.3% increase in fourth quarter comparable sale despite the much talked about consumer headwinds.

Our Winner's Circle loyalty program is a major contributor to our recent success. Our improved capabilities allow us to directly market to our more than 9 million loyalty members. These marketing campaigns have been very successful, typically generating multiple points of contact via smartphones, tablets or PCs to research products and compare prices, and more often than not ultimately resulting in a store transaction.

To illustrate our progress, over 60% of our total transactions came from loyalty members in 2014. This was up from 53% last year.

As I have said before, stores and digital are completely intertwine at Finish Line. Customers can search our entire inventory to find their exact style and size through our in-store POS system or outside the store via our Internet and mobile sites.

We are continuing to enhance this seamless experience to improve delivery methods that would include ship to home, pickup in store, expedited shipping and the ability to return their purchase to any store regardless of which channel they bought from.

With brick-and-mortar a vital element to our successful omni-channel strategy, we are continually looking for ways to enhance the in-store experience. In fiscal 2014 this was achieved through the increased utilization of handheld devices by store associates to help speed up customer check out, sign up loyalty customers and inevitably drive incremental sales.

We significantly increased the number of experiences on handhelds, which represented more than 40% of all store credit and debit card transactions in fiscal 2014. These are just a few of the enhanced omni-channel features that positively reshape our sales, marketing and distribution model as we work to meet the demands of today's empowered consumer.

Fiscal 2014 was also about expanding our brand presence to engage new consumers and crate incremental revenue streams. I can think of no better vehicle to accomplish this goal than our strategic partnership with Macy's.

We quickly capped into their predominantly female customer base. Our research on this venture was no small undertaking. I'm extremely proud of the execution by the teams from both organizations as we enter the year with branded shops in 185 Macy's stores, while managing the athletic footwear business in another 477 stores as well as online at Macys.com.

We continue to see no cannibalization when we open up shops in mall that also have a Finish Line store. In fact, if there is a pattern to call out, is that those Finish Line stores are performing better than the chain average.

The progress at Running Specialty Group has expanded our customer audience within running as well as the broader active lifestyle community. Through the acquisition of several top operators in the country, such as Boulder Running Company, Run On! and Running Spot, we attained a greater understanding of the specialty running customer.

We have seen that many different activities in addition to running play a significant role in their daily lives. We are also gaining a tremendous amount of knowledge on how to develop a strong community presence and cultivate consumer loyalty at a very local level, tactics that we are combining into a suite of best practices and deploying it across the group to drive increased productivity.

I'm proud to say that throughout this transformation -- throughout this transformational process, we have successfully funded our initiatives internally, while at the same time, maintained our commitment to driving value to our shareholders.

In addition, to expand the earnings through the pursuit of our omni-channel strategy, we returned $36 million to shareholders in 2014 through a combination of quarterly dividends and share repurchases.

Our recent results affirm that we're on the right strategic course. As we look to fiscal 2015, our priorities remain the same. We will; one, improve our digital capabilities. This is about engaging the consumer and creating an elevated experience that strengthens their connection to the Finish Line brand and also serves to drive higher penetration of our digital business.

Two, invest in our stores to maximize the potential of our existing fleet through technology and service levels that further elevate the customer experience. The shopping behavior of our customers and positive performance of our stores underscores the importance of our brick-and-mortar locations to our omni-channel strategy. This gives us the confidence to grow our store count in fiscal 2015.

And three, we'll continue with the multi-year core upgrade to our merchandising CRM and supply chain systems that enable this omni-channel strategy.

Now, also with respect to our growth initiatives, we will ramp our Macy's partnership as we open Finish Line shops in 220 more doors this year and plan to complete the full roll out ahead of the holiday season.

Our experience in 2014 demonstrated that this partnership is a tremendous opportunity for us to drive new customers to our brand, as I've said before. These customers are loyal and are reacting positively to an offering they simply did not have prior to the launch of this partnership.

As we double our number of current shops, we will gain access to even greater allocation of key products from top vendors and drive towards the scale necessary to deliver our long-term goals for this business.

Our expansion plans at RSG include a combination of organic store openings and acquisitions to build the critical mass needed to generate the profitability we believe this business is ultimately capable of.

As we further understand the active lifestyle world, we have discovered potential opportunities for this business beyond our initial scope. As these are not traditional Finish Line customers, this platform affords us the ability to further extend our reach and grow our share of the larger active lifestyle market.

We will do all of this while remaining steadfast to our commitment to return capital to shareholders. This is a strategic focus for us and a key component of our capital allocation plan. To this point, the Board of Directors recently approved the 14% increase to our quarterly dividend to $0.08 per share, and we have 3.9 million shares available under the current repurchase authorization.

With these exciting accomplishments of 2014, our progress against key initiatives has positioned the company to build on our momentum in the new fiscal year.

Sam will now review the category Merchandize performance, and then Ed will go through the financials and outline our guidance for 2015.

Samuel M. Sato

Thanks Glenn. Our core business performed well during the fourth quarter in what proved to be at times a challenging retail environment.

Fourth quarter footwear sales on a comparable basis increased high-single-digits. Men's was up mid-singles, women's up high-singles, and kid's up mid-teens. It was encouraging to see our women's business accelerate further into positive territory during the fourth quarter, and that our kid's business kept up its robust double-digit growth rate.

Our marketplace leadership in running helped drive comps up low-single-digits in this category, which clearly led the marketplace. The strength of multiple platforms by Nike continues to fuel positive results. Air Max, Shox, Lunar and especially Free also well during the quarter.

Innovation is continuing to generate excitement and demand from our customers, and we see this as new technology comes to market. Max FlyKnit was a big hit when launched in late December and demand remained strong throughout the quarter. At the same time, we continue to see great results with SpringBlade by adidas and early reads on Under Armour's SpeedForm have been tremendous.

Brooks remains a very solid business for us; and again, comped positive driven in part by the popularity of fashion technical styles. Basketball again remained a very strong category for us in the fourth quarter with comps up mid-teens. This business has grown 58% on a three-year stack basis and continues to be a very meaningful contributor to our overall results.

The strength and relevancy of the product we are bringing to market is resonating deeply with our customers and has created a strong foundation to support further growth of this category moving forward.

Consistent with recent quarters, Nike and Jordan fuelled our growth. For Nike, signature products from both LeBron and KD were once again top sellers, coupled with strong demand for performance products such as Hyperdunk and the new HyperRev.

Within Jordan the strength was across the Board as the brands line up of retro performance and lifestyle footwear includes some of the most coveted products in the marketplace.

Speaking of lifestyle footwear, we saw some measurable success beyond brand Jordan with key items specifically Air Force 1 and Roshe Run both by Nike as well as retro running styles by New Balance.

As I mentioned earlier, our kid's business continues to perform at a very high level. Nike and brand Jordan remain in high demand and adidas continues to be a growth driver. This past quarter we saw terrific results from New Balance and Under Armour as well.

Turning to softgoods. The fourth quarter was a more challenging than we expected as comp sales decreased mid-single-digits. Apparel overall was below plan due primarily to our NCAA license business. However, there were some bright spots, namely bags, shoe care and cold weather apparel from Under Armour and The North Face.

We've identified opportunities we believe can improve our softgoods performance including a key focus on key items most important to our customer, improved and purposeful head to toe storytelling, and leveraging our digital commerce business to offer a broader selection not available in stores.

As Glenn said earlier, our focus isn't on what channel our customers choose to shop, but the customer themselves. Offering the products they want and selling to them in the most convenient and desired method is critical to our strategy.

Importantly, we must engage our customers on a more personalized level wherever they are through innovative and cohesive marketing programs that drive traffic to our brand. This is an area where we have stepped up our game in order to deliver a relevant purposeful omni-channel customer experience.

Our digital efforts within the omni-channel strategy continue to produce great results. The conversations with our customers via social media have dramatically increased as we remained focused on fostering this relationship as the go-to-source for the hottest sinkers.

We've optimized our digital marketing efforts to better maximize mobile traffic to drive sales in-store and online, and we've built on our already successful loyalty program and have added additional value to drive incremental sales across all channels.

These initiatives are all aimed at improving the consumer experience, particularly as they choose to engage with us digitally on a more frequent basis. In response to this growing trend, we've expanded our digital play book to include more online product exclusives, user-friendly site enhancements and a more holistic approach to omni-channel marketing, again to drive traffic across all channels.

The results of these actions are noticeable. For the fourth quarter, digital sales were up 27%, traffic continues to grow high-double-digits with mobile representing nearly 30% of the total. We're excited about the opportunities our digital efforts will enable as we further deploy key elements of our strategy.

Moving on to our Macy's partnership. We closed out the first year with a solid fourth quarter. The holiday season is obviously a much larger event for Macy's than it is for Finish Line, so we were eager to see what type of impact the increase in store traffic would have on this new business. Overall, we are pleased with the results, particularly in the Macy's locations, where we have our branded shops and staff in place.

We're excited to enter fiscal 2015 with a greater understanding of the Macy's customers and how to better service her needs through a more curated product offer and customer experience. These learnings include improvements in sizes and style preference by location, in-stock position on key items and going deeper on the merchandize offered through Macys.com.

Lastly, one of the most important key takeaways from year one is what Glenn touched on earlier. Our Macy's business has been incremental with no cannibalization of our core Finish Line business. The opportunities with this business are substantial. And we believe our ability to execute and deliver results is further enhanced by the learnings of this past year.

Looking forward into the top product pipeline, we're excited about the innovation that's coming to market. Nike continues to evolve their very successful Free platform with several new versions featuring different uppers, including a highly anticipated new FlyKnit Free.

Meanwhile, updated styles of Roshe Run will continue to hit shelves as well a new model of the very successful adidas SpringBlade in early June.

In addition, new color ways of Under Armour's SpeedForm arrived in Q2 along with their latest running shoe, Spine Clutch. We've received great allocations for these upcoming launches as well as mall exclusives on some key running products.

On the basketball side, there are a number of products dropping throughout this year that have us very excited, including several non-retro Jordan styles as well as key items from Under Armour.

The great brand partnerships we have forged over the years continue to strengthen which along with our commitment to providing a premium omni-channel customer experience is further solidifying our market position.

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

Edward W. Wilhelm

Thanks Sam. Before I begin discussing our results, there are few items to note. First, my comments will focus on results that exclude any non-GAAP adjustments. Please see the financial tables in our news release which reconcile non-GAAP results to GAAP.

For Q4, consolidated sales were up 17.2%. This increase consisted of Finish Line sales that were up 6.7%, sales associated with Macy's of $42.4 million and Running Specialty Group sales of $12.6 million versus $7.8 million last year.

Consolidated gross margin increased 80 basis points from a year ago to 35.9%; product margin net of shrink was up 50 basis points due to stronger sale-through at full retail, particularly in the month of February. Occupancy leveraged by 30 basis points.

Consolidated SG&A expense was 22.7% of sales which, as expected, deleveraged to 130 basis points from last year due to significantly lower incentive compensation cost from the prior year when our results fell short of our plan.

On a consolidated basis, fourth quarter adjusted net income increased 13.4% to $43 million, and EPS increased 14.5% to $0.87 as compared to $0.76 in fiscal 2013. With respect to cadence, comps were up 5.2% in December or softer in January down 6%, and February was our strongest month with comps up 14.8%.

On the category side, footwear comps were up 8.5%, while the softgoods comp was down 6.7%. Footwear ASPs increased 2.8%. Sales per square foot in Finish Line stores for the year continued the upward trend we've seen the last several years increasing almost 4% to $366.

Turning to the full year. Consolidated sales increased 15.7% to $1.67 billion. This increase was made up of Finish Line sales that were up 6%, sales associated with Macy's of $119.4 million, and Running Specialty Group sales of $50.2 million versus $27.6 million last year. Adjusted earnings per share for the year increased 12.9% to $1.66 compared to $1.47 last year.

We are very pleased with the performance of our business for the year as Finish Line store four-wall contribution margins improved over last year, digital operating margins expanded to the mid-teens, Macy's business was modestly accretive, and as expected, Running Specialty Group was modestly dilutive.

Moving now to our balance sheet. Inventory was up 25% on a consolidated basis driven by the increase associated with our Macy's business and store growth at Running Specialty Group. Finish Line inventory at year-end was up just slightly. The inventory turn at Finish Line for the year increased to 3.2 times.

Capital expenditures were $17 million in the fourth quarter and $83 million for the year, depreciation expense as $9.6 million in the quarter and $36.4 million for the year. We ended the year with $229 million in cash, up from $227 million a year ago.

During the quarter, we bought back (indiscernible) shares totaling $5.1 million. Year-to-date, we bought back one million shares totaling $22.6 million. For the year, we generated approximately $119 million in cash from operations, which funded our CapEx requirements, our acquisition activity and the cash returned to shareholders.

Our store activity for the year was a follows. For Finish Line, we ended the year with 645 stores including 22 openings and the same number of closings. Our year-end count for Macy's stores with branded shops was 185. For the Running Specialty Group, we ended with 48 stores including 15 that were acquired and six net new store openings.

Now, moving to our outlook for fiscal 2015. We expect full-year earnings per share to increase in the high-single-digit to low-double-digit range compared to the adjusted EPS of $1.66 in fiscal 2014. The following are the assumptions used in developing the full-year guidance, first with respect to sales.

For Finish Line we assumed a mid-single-digit comp range for the year. This full-year comp is expected to be driven by a low-single-digit increase in our brick-and-mortar stores and a high-teen increase in digital. We plan to open 15 new Finish Line stores and close 10.

We expect the Macy's partnership to generate approximately $175 million to $195 million in sales this fiscal year from both the brick-and-mortar stores and Macys.com. We plan to roll out branded shops in another 220 Macy's stores. Macy's is expected to be modestly accretive for the year.

And finally, sales from the Running Specialty Group are expected to be between $75 million to $85 million, driven by a combination of comp store sales growth plus the acquiring -- opening of approximately 15 to 25 new stores. We expect Running Specialty Group to breakeven for the year.

We anticipate that the effective tax rate will be 38.6% and that our fully diluted share count for the year will be approximately $48 million. We are planning our capital expenditures to be in the range of $90 million to $95 million. Breaking down more significant areas of CapEx further, approximately $26 million will be dedicated to Finish Line stores, primarily in new store openings and store repositions as well as some maintenance remodel capital.

Approximately $46 million will be spent in technology investments primarily to support the multi-year core systems upgrades and growth in our digital business, $15 million associated with building our shops in Macy's stores, and $5 million to support Running Specialty Group new store growth and other corporate maintenance capital.

Depreciation and amortization for the year is expected to be between $40 million and $42 million. With respect to quarterly cadence of our business in fiscal 2015, Q1 EPS is expected to be flat to up just slightly compared to adjusted Q1 EPS in fiscal 2014. Comps in March are up low-single-digits month today as we are currently comparing against the earlier Easter last year.

For the combined months of March and April, we expect Finish Line comps to be in the mid-single-digital range. For the balance of the year, EPS growth by quarter is expected to be in the range of high-single-digit to low-double-digit percentage increases over adjusted EPS in the prior year.

I'll now turn the call back over to Glenn for his closing remarks.

Glenn S. Lyon

Thanks Ed. So following a strong year for our company and the athletic footwear category as a whole, the product pipeline and consumer buying patterns indicate that industry trend should continue to move in our favor.

While a rising tide lifts our boats, it's really the hard work and dedication of our team that ultimately delivered these great results and distinguished our brand in the marketplace. That’s why we will continue to invest in our people and processes so this organization has the tools necessary to execute on our long-term vision for transforming Finish Line into the leading multi-divisional omni-channel retailer.

Operator, we're now happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Robby Ohmes from Bank of America, Merrill Lynch. Your line is now open.

Robby Ohmes - Bank of America, Merrill Lynch

Good morning, guys. Nice quarter.

Glenn S. Lyon

Good morning, Robby.

Robby Ohmes - Bank of America, Merrill Lynch

I'm going to start off by breaking the rule on the one question, I apologize. Actually, I have three. Hopefully they won't take too long, just three quick ones.

Glenn S. Lyon

We'll take two out of the three, Robby.

Robby Ohmes - Bank of America, Merrill Lynch

All right. Just quickly, detail on what drove the women's acceleration? That was impressive in footwear, maybe a little more color on that. The second, maybe Glenn, this softgoods down 6.7%, just what could make the apparel business improve for you guys and sort of what's going on there, because I think it's not just you that was challenged in the mall on that?

And then just last, I just wanted to clarify, the digital sales growth guidance to high-teens, so that would be an acceleration I think from what you put up this year. Could you just tell us probably what the key drivers to get that momentum to accelerate? Thanks.

Samuel M. Sato

Thanks Robby. This is Sam. I'll quickly go through those three questions. So women, as you know, our position in the marketplace is in the running category and in the women's running business is really strong. As you heard, our total running business was up low-single-digits, women was north of that and we're really thrilled with what's occurring in women's running. Additionally, there was a couple of more athletic casual styles in women that are resonating well. And so, we think that those are runway for continued growth as we move into this year.

Specific to softgoods, the fact of the matter is the results were disappointing. It was primarily driven by apparel. Our accessories business for the quarter was nearly flat and our branded apparel business was nearly flat. The big decrease nearly came out of our NCAA license business, which we just under forecasted demand for that category, and so that was a bit self-inflicted.

As we move forward, our focus in softgoods is going to be really, really important, and we're going to focus on a much more narrow offer. We're going to focus on key items going deeper and adding color multiples and really being an authoritative around those items that our customers come to us for.

And then specific to digital, a number of initiatives that we are focused on and they are all intertwined with our omni-channel strategy. But the mobile aspect of the business continues to grow and our ability to optimize our marketing spend, that includes mobile and being where the customer wants us to be, critical.

The Winner Circle piece of the business is getting a lot of traction not only in stores, and you heard Glenn's prepared remarks, but we're seeing a lot of our Winners Circle loyalty members that are accessing us via the internet as well as through their smart phones. And so that's a key initiative for us that has direct implications against the digital business.

And finally, as you know, it all starts and ends with product. We're being very purposeful about our product strategy and utilizing the digital space, if you will, to offer an even more broadened and comprehensive offer of product to our consumers that you can't readily find in our stores.

Robby Ohmes - Bank of America, Merrill Lynch

Got it. That sounds great, guys. Thanks so much.

Edward W. Wilhelm

Thanks Robby.

Operator

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

Bernard Sosnick - Gilford Securities Inc.

Good morning.

Edward W. Wilhelm

Hey Bernie.

Bernard Sosnick - Gilford Securities Inc.

Could you give us a little bit more color on the first quarter guidance given a nice expected same-store sales increase, why would you expect flattish EPS?

Edward W. Wilhelm

Pretty simple, Bernie. We have in this quarter, in this year; we've got a full rollout of Macy's shops. In fact, we've got shops installed in 20 Macy's stores already so far in the month of March and last year, as you know, we started very late in the quarter with the rollout of Macy's shops. And there's a lot of operational costs and investment to rollout shops in their stores including the hiring of a bunch of people to support the business.

So, we do expect as a result of that SG&A deleverage in Q1 and that's the driver of the flat-to-up-slightly EPS guidance.

Bernard Sosnick - Gilford Securities Inc.

Just a little clarification. Last year -- I must be mistaken, there were start-up costs for Macy's that were uncovered by sales because you hadn't really gotten going, but you needed an organization build-up. Why would expenses be that much greater this year?

Edward W. Wilhelm

The guidance that we're giving is on a non-GAAP adjusted basis, Bernie, and all of those start-up costs is about $7.5 million and is excluded from the adjusted EPS that I'm talking about.

Bernard Sosnick - Gilford Securities Inc.

Okay. Thank you very much.

Operator

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

Jeffrey Wallin Van Sinderen - B. Riley Caris

Good morning. Clearly you guys are taking market share, congratulations on that. Can you give us any more color on any geographic differences that you saw in trends? I know there was a lot of talk about whether at some of the other companies in your space impacting running does not seem to be the case with you, just wondering how you are thinking about that.

Glenn S. Lyon

This is Glenn, Jeff. The toughest part of the country was the Midwest and we battle that because Midwest is a big part of our business. Traffic significantly lower in the Midwest than it was in the rest of the country and that's pretty much throughout the quarter. That's the only effect that we really saw. Geographically, the rest of the country was really good, actually.

Jeffrey Wallin Van Sinderen - B. Riley Caris

Okay. And then also wanted to see if maybe you could just delve a little bit more into the women's business. It seems like there's kind of a strong underlying trend going on in women's fashion athletic. Maybe you can just touch on how you're thinking about that and maybe also how that plays into your Macy's business because of the female concentration there? Thanks.

Glenn S. Lyon

This is Glenn again, Jeff. Timing on the women's thing at Macy's is really good. These cycles, they change and they turn. A year ago we were up against really, really strong men's numbers. And a lot of the allocations of the new products a year ago were shoved into the men's end of it.

And typically with the brands they start with men's, they create demand -- they create demand strategies, supply strategies and women's comes after. So, I think a lot of it is them catching up on some of these initiatives, some of these product lines.

Free was good in women's right from the beginning, it was just undersupplied. And in the Macy's things, it works because the women's thing is such a -- women's is more than 50% of our business at Macy's and its less than 20% of our business at Finish Line. So, very opportune, a lot of support from the marketplace, full recognition by the brands, but a big part of the goal of the brands is to get this women's customer.

For us it's in footwear in general in the department stores, Macy's in particular, in the apparel business. So, women's very important to the department store and it is working out great for us.

Samuel M. Sato

Hey Jeff, this is Sam. I just want to add one piece to that. As we've stated part of our strategic work showed that the Macy's consumer is a different customer. We're seeing no cannibalization, as we stated in our prepared remarks and I think you have heard others in our industry make that same statement that the Macy's partnership is not adversely affecting the mall consumer.

We really see those as two different product, or two different consumer groups both having opportunity for growth largely because we believe that they have historically been underserved by the premium athletic brands and retailers.

Jeffrey Wallin Van Sinderen - B. Riley Caris

Got it. Thanks very much and good luck.

Edward W. Wilhelm

Thanks Jeff.

Operator

Your next question comes from the line of Camilo Lyon from Canaccord Genuity. Your line is open.

Camilo R. Lyon - Canaccord Genuity

Thanks, good morning guys.

Edward W. Wilhelm

Hey Camilo.

Camilo R. Lyon - Canaccord Genuity

Nice job on the quarter. I had a couple of questions, first on gross margins in the fourth quarter, pretty impressive result there. Was wondering if you could shed a little bit more color on the drivers of that gross mansion expansion on the merch margin side. And how we should think about merch margin opportunities in fiscal 2015?

Edward W. Wilhelm

So, as I mentioned in the prepared remarks, Camilo, we had a very strong February both topline as well as on the gross margin side. The merchant team worked really hard to accelerate as many receipts into February and they are continuing to do that into March and April to drive sales.

As we started to see sales strengthen, so in all of that as you can imagine was at full retail and at full margin. So, as we look to FY 2015, our expectations on the product margin side is that product margins will be up slightly compared to where we finished FY 2014.

Camilo R. Lyon - Canaccord Genuity

You're comparing against the period where you had to clear through a lot of that stale running product for the bulk of last year. So, there should be some favorability on that comparison if I'm remembering correctly, is that accurate?

Edward W. Wilhelm

Yes.

Camilo R. Lyon - Canaccord Genuity

Okay. And then if you could just discuss a little bit more on the occupancy side. I think you have decelerating expenses on that side? And just remind us where we think occupancy rates would be relative to last year?

Edward W. Wilhelm

Yes, so on the occupancy side looking again to FY 2015, our expectation is that we would be starting to leverage occupancy on mid-single-digit comp, maybe the high end of that mid-single-digit range. But a mid-single-digit comp as compared to a high-single-digit comp that it took in the year we just finished.

Camilo R. Lyon - Canaccord Genuity

Great. And then just lastly on Macy's, I think one of the bigger learnings that you had going into, or completing, last year was the assortment. You've talked about that particularly as you had to pre-buy a lot of the product before really understanding the consumer.

So, logically thinking that the buys going into this year should be much more aligned with what the consumer demand will look like. How do we think about the profitability ramp this year versus last year? And how quickly can you get to that high single-digit EBIT margin target that you have spoken about?

Glenn S. Lyon

From the very beginning, Camilo, we said three-year process before we got to the kind of operating productivity and product margins that we thought we could get to. We really went in blind with a bunch of inventory in the first couple of quarters especially and very tough to predict sell-throughs.

The margins that we achieved, the profits we achieved were very much on our plan, sales a little bit short of it. But we're going to more than double the size of the shops opened and that's where the real strength started to happen for us as we open more and more shops.

So, nothing has changed from the original. A little slower on the sales, the battle on profit plan and the learnings are going to continue to happen. This team has been together now, we put new leadership in there, put Ronnie Jefferson in there to run it, he's a long-term Finish Line person who also comes out of Nordstrom's, so understands the female customer and the fashion customer. So, we're going to get much better and we're okay now, so we are very optimistic.

Camilo R. Lyon - Canaccord Genuity

Is it safe to say that this year is the year that you are running kind of at that pace that you want to be at, or is there still more learnings to be had, and if so what are those learnings?

Glenn S. Lyon

This continues to be a learning year. Ed said that it's still modestly accretive and we said that at $250 million -- at the midpoint of $250 million to $350 million -- or let's use $300 million we would be in the high single-digit profitability and that has not changed.

Camilo R. Lyon - Canaccord Genuity

All right. Good luck. Thanks.

Edward W. Wilhelm

Thanks.

Operator

Your next question comes from the line of Kate McShane from Citi Research. Your line is open.

Kate McShane - Citigroup Inc.

Folks, good morning.

Edward W. Wilhelm

Hey Kate.

Kate McShane - Citigroup Inc.

I just had a theoretical question really. It's great to hear how successful Finish Line is being at Macy's, but I know the markdown and the coupons that you can use it Macy's cannot be used at Finish Line.

So, can you tell us at all how that the success is still happening even without the customer being able to use the coupons and do have any evidence of Macy's driving traffic to the Finish Line store?

Glenn S. Lyon

Well, Kate, this is Glenn. We said that our sales in malls where we have a Finish Line store and we've opened up a Macy's shop have actually done better than the rest of the chain. I can't totally explain that because I can't believe that the brand recognition has already spread from the Macy's customer back into the Finish Lines. But we can tell you it's not cannibalizing it. What was your other --?

Edward W. Wilhelm

Couponing --

Glenn S. Lyon

Well, just think of Nike and Adidas as the Gucci of athletics. So, yes, we do not participate in the couponing. We're putting in premium products, may not be luxury, but it's certainly premium into those stores. The customer is accepting them.

I would say to you on days when Macy's is not on sale, we do a little bit better than we do when they are in heavy promotional periods. But when it's all added up, it feels pretty good to us. And the customer is responding to the offering, especially when we put it under the Finish Line umbrella.

Kate McShane - Citigroup Inc.

Thank you.

Operator

Your next question comes from the line of Sam Poser from Stern Agee. Your line is open.

Sam Poser - Sterne Agee & Leach Inc.

Good morning. Thank you for taking my call.

Edward W. Wilhelm

Hey Sam.

Sam Poser - Sterne Agee & Leach Inc.

A couple of questions. Number one, when you look at the year, the flow of earnings, can we assume that it's sort of going to build, Q3 is still going to be that tough quarter just because of the revenue?

And then you're probably expecting a little more upside on the earnings into Q4, I mean -- maybe that would be the highest increase given that all of the initiatives for the year should be in place by that time?

Edward W. Wilhelm

Yes, if you're thinking about it from an earnings increased standpoint, Sam, Qs 2, 3, and 4, once we get beyond the flat to up slightly that I talked about in Q1, Qs 2, 3, and 4 will all have increases again in that high-single-digit to low-double-digit range over the prior year.

Sam Poser - Sterne Agee & Leach Inc.

So, they would be higher to get to that number, wouldn't they?

Edward W. Wilhelm

Yeah, they would be the higher end of that range, correct.

Sam Poser - Sterne Agee & Leach Inc.

And I would think that Q4 would probably be the highest just because of the way it sets up with no store openings going on there and so on offset by potential bonuses and things like that. Am I just thinking about that correctly?

Edward W. Wilhelm

Yeah, that's fair.

Sam Poser - Sterne Agee & Leach Inc.

Okay. Thank you. And then what kind of buybacks do you have worked in? I mean it looks like there's maybe a little bit into the guidance; can you give us some idea there?

Edward W. Wilhelm

Similar to what we did this year, Sam. We bought back 1 million shares this year and the expectation is that we'll do a similar program. Again going back to what Glenn talked about, a very important component of our capital allocation strategy is the return to shareholders both through increased dividends and a consistent buyback program.

Sam Poser - Sterne Agee & Leach Inc.

Okay. And then lastly, can you talk about the increased allocations in the -- have you been seeing good increase allocations in the basketball program? The basketball business has been growing. I would guess it's a larger percentage of your business this year than it was last year just given the increase. Can you give us some indication of where you are on the kind of increased allocations relative to where you might want to be?

Samuel M. Sato

Sam, this is Sam. I mean you've been in the business a long time and you know how that works. When you're talking specifically about those hot categories or more specifically within basketball those hot items, the market is going to be controlled in terms of supply and demand.

So, this is about a continued and consistent growth with our partners and the allocations appropriately needed to grow that business without over saturating the market.

Sam Poser - Sterne Agee & Leach Inc.

But I mean are you happy with what you're getting right now? I understand that -- but are you happy with where it is without hurting that demand --

Glenn S. Lyon

We're never happy. Nobody will ever be happy when it comes to that kind of thing. But I will tell you this; our sell-throughs have been very strong in basketball now. In fact, they have always been here. But right now our sell throughs are really strong whether it's Jordan or some of the Elite shoes and those things you can expect to see that we're going to grow those businesses. It's all based on sell-through. And as we're successful and as the markets -- as the consumer says we want more, that's how the brand -- and you know this, that's how the brands allocate the product.

Operator

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

Christopher Svezia - Susquehanna Financial Group

Hey, good morning, everyone. Nice job on the quarter. I guess first just your comments on comps to date in March. I guess at the end of the day, we're up against the Easter -- going into the Easter week here.

If you were to take that out of the equation, I would assume this is kind of a negative week at this point, certainly would be stronger than that low single and then obviously you get Easter to kick in into April, is that sort of how we think about that?

Edward W. Wilhelm

Yeah, as of a couple of days ago, Chris, we were in the mid-single-digit range. So, you're right we are comping against Easter build now and then Sunday being Easter, a year ago we get all that back. So, that's why we wanted to make sure that when we talked about the March business we framed in the context of March and April together and again that mid-single-digit comp range is where we're really tracking on a combined basis for March and April.

Christopher Svezia - Susquehanna Financial Group

Okay. Digital, even with the investments you continue to make as you think about the current fiscal year how do we think about EBIT margin and expansion if you're going to be growing high teens in terms of revenue growth rate, how do we think about EBIT margin expansion?

Edward W. Wilhelm

EBIT margins are going to continue to go up in that business, Chris. I mean a couple of years ago we were 8, then last year at 13, now at kind of mid-teens, so that business as we continue to grow topline is leveraging the fixed cost in the business, and we're continuing to see nice margin expansion in digital. So, on a high teen increase in digital for FY 2015, which is our expectation, I'd anticipate the operating margins to expand in digital.

Christopher Svezia - Susquehanna Financial Group

Okay. And then just two quick ones here. One just on SG&A, just kind of how do we think about obviously reference to get some deleverage in Q1. What's the cadence for the balance of the year and the year itself?

And lastly, product margin I think it's great because you are starting to show some improvement there. I know you were thinking about it you can see some nice -- some incremental increases, why couldn't that be stronger just given the product pipeline, clean inventories and call it almost eight quarters of degradation in product margin you have to be coming to that tipping point? So, I just wanted to get a little more color about that.

Glenn S. Lyon

Yeah, Chris, this is Glenn. Remember, we went through a fairly significant change in category strength, right. From two years ago when running was at the center, there was a changeover to basketball and we had to keep our inventories fresh and we did that and we generated gross profit dollars at the expense of some percent.

We think that for the coming year the market is kind of stabilized. There's been grumblings about is basketball slowing down, we don't see that. We also see that our support in the marketplace in the running category has continued to help us this year and we're thinking that that's going to be positive.

One of our big challenges continues to be the margins associated with softgoods. We got to grow that business and as Sam said, it's going to be a key item driven business with the best dozen items across our chain in depth with colors in size and that's what a good specialty store should do.

So, we've partnered up with the brands, narrowed the assortments and we think the margins will go up and that will help us elevate the margin. But we're also in a more stable category situation today in the footwear side of it, so that's part of the reason that we are confident we can get back to growth.

Edward W. Wilhelm

And Chris on your SG&A question, once we cycle past Q1, which has that Macy's comparison that I have talked about, the rest of the year is comparable quarter-to-quarter with SG&A. So, there aren't any anomalies to call out. And I'll just remind you that on a low-single-digit comp for Finish Line, we begin to leverage SG&A.

Christopher Svezia - Susquehanna Financial Group

Okay. All right sounds good. Thanks, all the best, guys.

Edward W. Wilhelm

Thanks.

Operator

Your next question comes from the line of Sean Naughton from Piper Jaffray. Your line is open.

Edward W. Wilhelm

Hey Sean.

Sean Naughton - Piper Jaffray

Hi, good morning. Thanks for taking the question. So, just quickly on the Macy's business, I think initially you were targeting about 450 branded shop-in-shops in FY 2015. Looks like we're going to be quite a ways below that number for fiscal 2015, just any color as to why the ramp might be a little bit slower on those branded shop-in-shops doors than you may have initially anticipated.

Glenn S. Lyon

Just the scheduling and trying to get it done. Look, we're highly motivated to get as many of these done as fast as we can because the success is really coming when we put our name up, when we put our badge up in the store.

So, we're highly motivated to do it. We want to under-promise and over-deliver. So, realistically, you can imagine the undertaking. Here's a company that we will have opened over 400 stores, and it is opening stores and hiring people and negotiating with Macy's for the best space that we can get.

So, there is a process here, a very challenging one which I think that by the way the work that we've done with Macy's, our team and Macy's team has been unbelievable. I mean these -- we're a bunch of A-type personalities going at it and they have done a great job.

Think about it, over 400 stores opened in less than two years. So, I think it's a pretty good accomplishment. If we can get it higher than that 405 number, we're going to do it if it's to our best interest.

Sean Naughton - Piper Jaffray

That makes sense. It does seem like a great opportunity. And then just one more question. It looks like one of the branded shop-in-shops might have closed for Macy's, any color there as to why that might happen given the capital you might've thrown into that one?

Edward W. Wilhelm

Not sure if you're talking about maybe a Macy's store that closed and our shop was inside of it?

Sean Naughton - Piper Jaffray

Okay. It just looked like that on the release, okay.

Edward W. Wilhelm

Yeah, that's all it was.

Sean Naughton - Piper Jaffray

Fair enough. And then one last quick question here, just on the systems side, it sounds like in RSG that you guys have implemented some of these new systems. When is that going to start rolling through the rest of the organization in FY 2015 and is there any drag on SG&A in FY 2015 outside of the D&A that we should think about and that may start to roll off as we move out into fiscal 2016?

Edward W. Wilhelm

Yeah, our implementation plan was to put the new systems as we brought them to our business into the Running Specialty chain first. So, that in a live environment we are in theory kind of testing that system on a much smaller business and it's live in Running Specialty now, our supply chain system is live in Running Specialty now. The expectation is that later this year, we would go live with that system at the Finish Line.

So, we're garnering learnings, looking at how it's performing in Running Specialty and applying those learnings to the implementation at Finish Line, which will be later this year.

And then other than the D&A reference that you talked about, the depreciation reference that you talked about, no other SG&A comparisons from year to year that we need to think about.

Sean Naughton - Piper Jaffray

Okay, great. Best of luck for the rest of the year. Thanks.

Operator

Your next question comes from the line of Paul Trussell from Deutsche Bank. Your line is open.

Paul Trussell - Deutsche Bank

Good morning. Just a question on the balance sheet and CapEx. Ed, I think you mentioned $90 million to $95 million in CapEx this year. Could you just remind me about how much of that are investments that will be made and completed this year and may actually roll off as we move into fiscal 2016?

Edward W. Wilhelm

Yeah, so FY 2015 is probably the third year of what I'd call our peak capital spending years, so the last of our peak years. So, we've been in the $85 million to $95 million range for the last couple of years and FY 2015 will be the last of those.

So, as we complete Macy's, which will be done in FY 2015, capital will step down and then we'll also begin in 2016 and 2017 to complete the core systems upgrade that we have talked about. So, there will be a further step down as that component of our capital spend gets completed.

You there Paul? Operator, can you take the next question please?

Operator

Your next comes from the line of Mitch Kummetz from Robert W Baird. Your line is open.

Mitchel J. Kummetz - Robert W. Baird

Yeah, thanks for taking my question. I just wanted to drill down into the guidance a little bit. When I go through the different revenue drivers that you mentioned whether it's on the Finish Line side or Macy's, or Run Specialty it kind of sounds like sales should be up 10% plus for the year, is that about right? Am I doing the math there the right way?

Edward W. Wilhelm

Yeah. That's close.

Mitchel J. Kummetz - Robert W. Baird

So, if I'm looking at sort of 10% and then earnings guidance is high-single to low-doubles, it sounds like operating margin should be sort of flattish plus or minus, right?

Edward W. Wilhelm

Correct, yes.

Mitchel J. Kummetz - Robert W. Baird

And on the Finish Line side, it sounds like the operating margins there will improve based on some slight increase in product margins; you get some leverage on a mid-single-digit comp on occupancy, SG&A leverage on a low-single-digit comp. So, those margins get better, it's just a bit of a drag on the Macy's and Run Specialty side, right, as those businesses become a bigger part of the mix. Is that the right way to think about it?

Edward W. Wilhelm

That's right, Mitch. That's exactly right.

Mitchel J. Kummetz - Robert W. Baird

Okay. All right. That's all I needed. Thanks, good luck.

Operator

Your next question comes from the line of Steve Strycula from UBS. Your line is open.

Steve Strycula - UBS

Hey, guys. Great quarter.

Edward W. Wilhelm

Thank you.

Steve Strycula - UBS

So, quick question on the modeling for Macy's. Can you help me -- Ed, can you help me walkthrough the revenue mix for branded versus non-branded shops in 2013 and how that dynamic changes in fiscal 2015 as you convert the majority of these stores to branded shops versus non-branded shops?

Edward W. Wilhelm

I mean the branded shops are much more productive. As we go in and we pull together the assortments under the Finish Line banner and put staff in place to service the customers, so that's why we're working as aggressively as we are to brand shops quickly. So, we see a significant increase in sales when we do that and then it gives us the capabilities, particularly with the staffing to drive increased productivity as we move forward.

So, -- and as we continue to brand stores through FY 2015, the mix of the business will shift more from the unbranded to the branded shops, which again is absolutely consistent with the strategy that we set out at the beginning.

Steve Strycula - UBS

Got you. And then a follow-up question just on the pipeline for next year. How do you think about your same-stores sales composition from whether it's a unit-based comp or it's more of an ASP mix and is that really driven by running or basketball in your view as you've highlighted I think that Under Armour is really picking up its innovation in footwear.

Edward W. Wilhelm

Yeah, we're planning increases in both running and basketball in FY 2015 and I would say that the increases will be driven consistently with what we saw in 2014 from a metric standpoint. We'll certainly see increased traffic online, we'll see flattish traffic in stores and the majority of the increase in overall sales, or another component of the increase will be in average dollars per transaction.

Glenn S. Lyon

Yeah, remember, Steve, the ASP going up when your kid's business is leading the charge is significant. So, if you just looked at an average pair of shoes by gender, we're doing better than 3%, but the mix with kid's getting to be a bigger percent brings it down a little bit.

I would say this to you; this market is a healthy market. We're healthy, the goods are flowing well now, we've made our mix appropriate to demand, so a lot of positives going on in terms of the mechanics, the behind-the-scenes stuff. Now, we just have to see, as always, how the customer accepts it.

Steve Strycula - UBS

Great. Thanks. Good quarter, guys.

Operator

Your next question comes from the line of Taposh Bari from Goldman Sachs. Your line is open.

Taposh Bari - Goldman Sachs

Hey guys, good morning.

Edward W. Wilhelm

How are you doing?

Taposh Bari - Goldman Sachs

Pretty good. I had a couple of questions. One was just on the fourth quarter results. So, I think your guidance was for $0.80 to $0.85 on EPS and a 3% to 4% comp. You beat the comp pretty nicely yet you hit the high end of your EPS range, just curious to see what it was. I would have expected some better flow through on that. That's my first question.

Edward W. Wilhelm

We're actually pleased with the flow through, Taposh, in the fourth quarter. We didn't give specific guidance on the fourth quarter. So, in the $0.80 to $0.85 range that's your set of numbers, not ours. But we were very pleased with the performance of our business in the fourth quarter and the flow through of the topline 6% comp down to the bottom line.

Taposh Bari - Goldman Sachs

Okay, fair enough. And the second question is for Sam just on product, I know that for the product pipeline you're excited about. We talk about innovation the SpringBlade, FlyKnit, it seems like it's very running centric yet when I strip out the success you had in women's it looks like the men's running business was flattish in the fourth quarter, just help me reconcile that. That's part one.

And then part two of that question is, just help us get a better sense of your confidence in the sustainability of this whole Jordan basketball trends. Jordans have been around forever, just curious to see why, what gives you the confidence that that is, in fact, sustainable during this environment.

Samuel M. Sato

Yeah. So, in running you're right, a lot of innovation is coming through that category. It's the largest category in the industry. And so you should expect to see a lot more innovation in terms of just quantity of items coming through the running category. That's not to suggest there isn't innovation coming in the other categories.

I think one of the drivers of the trend in basketball, especially around both Jordan and the signature players, is about the innovation that that category is bringing to market. And there is a lot of great basketball product that continues to drive our growth.

I had mentioned in the prepared remarks the category for us has grown 58% over a three-year period and that is driven by both fashion as well as from a performance innovation perspective. Running was, you're correct, in men's it was slightly down largely driven by the continued comp challenges we're having with Reebok. However, that business turned positive for us in February and the slight negative was offset, as you heard earlier, by the significant growth in our women's business.

Glenn S. Lyon

Taposh, its Glenn. I think it's worth mentioning that the Jordan brand is one of the true phenomenon. I've been around a few years and been here for 12 and we have not had a bad year with Jordan. The creativity, the intent that goes into the product quarter after quarter after quarter never ceases to amaze us.

There's also a bigger breadth of opportunity within their collections than they have ever had, cross categorical as well. And then there's another little hidden opportunity for us and that's an underdeveloped apparel business.

The Jordan brand apparel business, as we get more focused with it, we think we can double it. So, we're very excited about what they are doing in there and we're just as excited about the brand in total. It is one of the true phenomenas of the retail business I will tell you.

Taposh Bari - Goldman Sachs

All right. Thank you. All the best.

Edward W. Wilhelm

Taposh.

Operator

Your next question comes from the line of Jay Sole from Morgan Stanley. Your line is open.

Jay Sole - Morgan Stanley & Co.

Hi good morning. Thanks for taking my question.

Edward W. Wilhelm

Hey.

Jay Sole - Morgan Stanley & Co.

You gave a lot of great detail on your omni-channel efforts and your online capabilities. Can you talk about the areas for improvement in 2015 -- sorry 2014, what skills you still lack or you feel like aren't up to where you want them to be and how you're going to improve those this year.

Edward W. Wilhelm

I mean bringing the market new supply chain systems, Jay, are going to help us get faster deliveries to customers ultimately to both customers and stores. So, we have capabilities today, as you know, to ship from store, to ship from our distribution center here both to customers, but the new tools that we bring to market with this new supply chain system will allow us to get product combined in multiple shipments more effectively and get it to customers faster and more effectively than we are today. So, that's a big improvement.

Sam talked a little bit about on the digital side, on the mobile side what we're doing with mobile and we've got an app that's going to be coming to market in the upcoming year. Also improvements to the customer experience online and in checkout to help increase conversion and drive sales there as well.

So, I think there's -- we're talking about an investment of $90 million to $95 million this year and a lot of that is geared towards enabling our omni-channel strategy.

So -- and one of the other areas that you heard us talk about on the call was our Winners Circle program as we continue to grow that, and we are up to 9 million members now and it's over 60% of our total business.

We now are learning about those customers, know who those customers are and we can use that information to get more frequent visits and to help build the ticket of customers for those transactions both in-store and online.

Jay Sole - Morgan Stanley & Co.

Got it. That's very helpful. Thanks so much.

Operator

We have no further questions. I would now like to turn the call back over to our presenters.

Edward W. Wilhelm

Thank you all for joining today. And we look forward to talking to you next on our first quarter earnings release.

Operator

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

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