The Finish Line's (FINL) CEO Glenn Lyon On Q1 2015 Results - Earnings Call Transcript

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 |  About: The Finish Line, Inc. (FINL)
by: SA Transcripts

Operator

Good morning. My name is Ryan, and I’ll be your conference operator today. At this time, I’d like to welcome everyone to the Finish Line First Quarter Fiscal Year 2015 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’ll now turn the discussion over to Glenn.

Glenn S. Lyon

Good morning and thanks, Ed. Welcome to everyone joining us. Fiscal 2015 is off to a very good start, driven by the strength of our core business, combined with an increasing contribution from our Macy’s partnership. Our first quarter results are a clear indication that the Company remains on a solid growth trajectory.

Since our inception, Finish Line is strived to provide customers a premium experience as they shop for the leading branded athletic footwear and apparel in the marketplace. While our industry in the broader retail world have gone -- undergone significant change in the 38 years since we opened our first store, our mission has not. It continues to be rooted in fulfilling the needs of our customers by delivering great product and great service, which today entails doing so seamlessly across all channels of business.

Over the past several years we’ve made key investments in major areas of the Company, including technology, supply chain, stores, digital and of course in our people. In combination, these investments have strengthened our vendor relationships and given us the tools to successfully connect with today’s tech savvy consumers. Our commitment to be the destination of choice for athletic footwear is stronger than ever, and the path to growing our total business is clear.

Our first quarter performance underscores the progress we’ve made executing our omnichannel strategy to better serve our customers whenever, wherever and however they choose to engage with our brand. As we’ve said for sometime, the barriers between our Finish Line brick-and-mortar and digital businesses are gone. They’re truly symbiotic and fuel each other. Together, they grow -- they drove a mid single-digit comp increase in the first quarter with stores performing on plan and digital slightly ahead of plan.

The integration of stores in digital has reshaped the way we look at our geographic footprint. The proliferation of technology in the sales and marketing process means we could be more effective in pinpointing the optimal number of stores in each trade area. As we gather more detailed information on consumer demand, you will see us continue to open new stores, while closing and relocating existing locations to best position our store fleet for maximum productivity.

We’re also continuing to enhance the in-store experience, primarily through expanded functionality of handheld devices that provides store associates the ability to better serve our customers. This includes helping locate our out of stock product in other stores or in our distribution center speeding up the checkout process and enrolling loyalty club members.

The work we’ve done repositioning our store base and elevating the omni-channel experience is paying dividends, evidenced by ComScore gains in all regions as well as strong growth in our digital business.

I can’t be more pleased with how our digital team is executing under the leadership of Daniel (indiscernible) who we appointed to head this division last year. With a stronger suite of tools from recent technology investments, we’re becoming smarter and more visionary in how we connect with customers, which is driving strong gains in traffic to our site and in turn to our brand.

Our digital business is also more effective than ever. Thanks to back office and supply chain improvements that increases speed of delivery to customer, reduce the shipping costs and thus enhancing profitability.

On top of our core business, our partnership with Macy’s is also performing very well and quickly becoming a meaningful growth driver. Following the initial rollout of Finish Line branded shops and Macy’s a little over a year-ago, we’ve been busy ramping up to 400 shops and 262 of their stores as of today and fine tuning the model.

While there will continue to be further adjustments as there is in any business, we feel we’ve the right staffing model in place and we’ve made great inroads getting the merchandise mix where the Macy’s customer wanted to be, both in the stores and online.

The results in Macy’s stores that have shops are dramatic compared to a year-ago. In total, sales from branded shops are up significantly and tracking ahead of plan. Obviously, we want to convert the remaining locations as soon as possible and in fact we’re ahead of our original schedule which calls for all 400 Macy’s stores in our program to be completed by the end of October.

Now that we’ve a higher level of comfort operating our Macy’s business, we’ve begun to focus on additional opportunities within this venture to further boost revenue. This includes expanding penetration of our kid’s offering, which is currently only available on a handful of stores.

We’d also like to apply aspects of our omnichannel strategy to this business starting with providing Macy’s customers access to all branded shop inventory on Macys.com. We are working towards this for next year.

Now turning to Running Specialty Group. As we announced in late April, we increased our ownership in the joint venture and appointed former Finish Line Board Member Bill Kirkendall as President. Bill has assumed control of RSG’s day-to-day operations and we’re confident he is the right person to lead our specialty running platform to the next level.

As we roll up different operators, each brings individual characteristics that are unique to their success and specific to their community. Our task is to leverage the Finish Line infrastructure to realize economies of scale, while optimizing the best practices of these operators. We want to enhance the local feel of the stores and strengthen the close relationships they’ve each established with their loyal customer bases.

During the quarter, we added another top retailer to our portfolio with the acquisition of Running Fit, an eight store operator in Michigan. We also opened two new stores including a flagship location in Cherry Creek, in Denver.

Our long-term vision for RSG remains intact. We believe there is a significant opportunity for us in the Specialty Running Channel and in the broader active lifestyle arena. Overall, we’re very pleased with where our Finish Line business is at this point of the year.

At the same time, we’re executing more proficiently at Macy’s which is fueling better than expected sales and profitability. Adding to our optimism about the future are the strong industry tailwinds and the plethora of great product in the pipeline.

Now to provide you with more color on merchandise trends and breakdown our category performance, I’m proud to turn the call over to Sam.

Samuel M. Sato

Thanks, Glenn. We’re pleased with the strength exhibited by our core business during the first quarter. Footwear sales on a comparable basis increased mid-single-digits. Men's was up mid-singles, women's up low-singles, and kid's up low-teens. Our kid’s business remains strong and has comped up double-digit each of the last three years and we’re up to another great start this year. This quarter also marked the third quarter in a row where men's, women’s and kid’s were all positive.

In terms of category performance, Running was driven by continued strength from Nike, led by the Air Max and Free platforms. The innovation we brought to market during the quarter continued to generate excitement and demand, reinforcing our marketplace leadership in Running.

Adding to our success was another exceptional performance from SpringBlade by Adidas, which has quickly become a meaningful contributor to our Running business. SpeedForm from Under Armour sold extremely well and continues to gain traction with consumers, as does our portfolio of fashion technical styles by Brooks.

During the quarter, we saw a clear migration from performance silhouettes to casual running styles driven by strong sales of Nike’s Roshe Run in both men’s and women’s. This trend had a measurable effect on our lifestyle business and overall comp performance, although it did negatively impact our Running comps which were down just over 1% in the first quarter.

Other strong lifestyle footwear included Nike Air Force 1 as well as retro classics from brands like New Balance and Converse. Basketball again comp positive and was on plan for the quarter, up mid single-digits. We continue to experience strong growth with this segment of our business, which as I mentioned on last quarter’s call has grown 58% on a three-year stack basis.

Having said this, we continue to see significant opportunities for expansion of this business. Beginning with Nike, signature products from both LeBron and KD were stand outs in the quarter and performance products particularly HyperRev sold extremely well. Within brand Jordan, demand was once again strong for the brand’s line up of both retro and performance products.

As I mentioned earlier, kid’s maintained its recent trend by comping up double-digits. Nike and brand Jordan continue to drive this business with Adidas also fueling the strong top line performance. Like last quarter, New Balance and Under Armour posted significant gains over the prior year as new product introductions continue to resonate well with our younger audience.

Now to softgoods which delivered a marked improvement compared to the fourth quarter. Comp sales declined less than 1%, which strengthened accessories partially offsetting some continued softness in apparel. While the performance of apparel isn’t yet where we wanted to be, there were some bright spots from the quarter as we continue to execute against our strategy.

These bright spots have us more optimistic about the categories performance in the back half for the year and we saw great response to several new product introductions as we focused on delivering key items that are important to our customer. These included leggings and tank tops for women and fleece shorts for men.

Equally important, apparel inventory was down at the end of the quarter as we edited under performing merchandised classifications and prepare to further amplify key items as we get into back-to-school and move towards the holiday season.

As much as the product assortment is key to our success, our digital marketing efforts continue to play a pivotal role in cultivating stronger and more personalized consumer connections. This in turn fuels loyalty and drives traffic to our brand across all channels. It starts with our 9 million Winner Circle loyalty members who today represent approximately 60% of our total transactions.

Our CRM capabilities allow us to tailor fit the content of our interaction based on past order history and other mined data and deliver this targeted message regardless of how our customers prefer to engage with us. Our omnichannel strategy continues to keep us focused on the consumer experience, be at in-store, through their desktop or as we’re increasingly seeing via smartphones and tablets.

Digital traffic was again up strong double-digits in the first quarter with mobile representing more than 30% of the total. We expect these burgeoning trends to continue as we further invest in our digital platform and refine our marketing strategies to ensure we’re moving in step with our consumers and able to fulfill their needs in this constantly evolving retail environment.

In terms of our Macy’s partnership, it’s very exciting. As Glenn said, this business performed very well in the quarter, driven by the locations where we have our branded shops and staff in place. We’ve made great strives over the past several months, adjusting the merchandised offering in our shops and on Macys.com in order to better meet the needs of the Macy’s customer.

At the same time, we’ve refined our service model as we’ve gained more experience executing this business and are now in a better position to extend the premium shopping experience we’ve cultivated over the years at Finish Line to Macy’s.

Looking ahead, we’re excited to build on our current moment at Macy’s by converting additional locations to shop, further improving the merchandised offering and pursuing additional growth vehicles within the partnership such as broadening the availability of kid’s and integrating our branded shops with Macys.com to drive a more seamless shopping experience for consumers.

In terms of the current product pipeline, we will continue to bring a lot of excitement to market over the remainder of the year. Starting with Nike, which is introducing new colors and materials of Air Max and Max Knit products as well as new color waves of their recently launched Free Knit. This will be followed by the launch of the Air Max 2015 which features an exciting and great looking new upper.

In addition, Roshe will continue to be a key growth driver. Thanks to an expanded offering. Meanwhile, Adidas has evolved SpringBlade and Under Armour is building on its initial success in running with the latest introduction of their newest shoe Spine Clutch that is doing extremely well.

Additionally, we’ll introduce our customers to new versions of Under Armour’s SpeedForm this coming back-to-school and Holiday as well a very exciting visible technology platform. As the market leader in running, we’ve got -- 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 has us very excited, including several retro and non-retro Jordan styles and some great off-court models as well as key items from Under Armour and Nike. Our great brand partnerships and leading omnichannel capabilities are combining to create a premium experience for consumers and advance our position as the destination of choice for athletic footwear and apparel.

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

Edward W. Wilhelm

Thanks Sam. My comments will focus on results that exclude the asset impairment charges in the first quarter of fiscal 2015 as well as the Macy’s start-up costs in the first quarter of fiscal 2014. Please see the financial tables in our news release which reconcile these non-GAAP results to GAAP.

For Q1, consolidated sales were up 15.8%. This increase consisted of Finish Line sales that were up 5.2%, sales associated with Macy's of $43.8 million versus $13 million for our partial quarter last year and Running Specialty Group sales of $17.3 million versus $10 million last year.

Consolidated gross margin decreased 40 basis points from a year-ago to 31.7%; product margin net of shrink was down 70 basis points due to higher markdowns to clear some excess and aged inventory at Running Specialty Group. This was partially offset by favorable product margins at Finish line. Occupancy leveraged by 30 basis points.

Consolidated SG&A expense was 26.8% of sales, which leveraged 80 basis points from last year due to expense leverage associated with the 5% comp increase, disciplined expense management and a shift of approximately $2.5 million of technology related project expenses primarily to Q2.

On a consolidated basis, first quarter adjusted net income increased 37.5% to $13.6 million and EPS increased 40% to $0.28 as compared to $0.20 in the prior year. With respect to cadence, comps were up 3.7% in March, 4.2% in April and 8% in May.

On the category side, footwear comps were up 5.6%, while the softgoods comp was down just slightly. Footwear ASPs increased 3.3%.

Moving now to our balance sheet, inventory was up about 1% on a consolidated basis as we continue to drive inventory productivity and increased inventory turns at Finish Line. Capital expenditures were approximately $21 million in the first quarter and depreciation expense was $9.6 million. We ended the quarter with $197 million in cash, about flat year-over-year.

During the quarter, we bought back 700,000 shares totaling $18.7 million and 3.2 million shares remain outstanding on the current Board authorized buyback program. For Finish Line we ended the quarter with 645 stores including three openings and the same number of closings. Our first quarter account for Macy’s stores with branded shops was 262. For the Running Specialty Group, we ended with 58 stores including 8 that were acquired and 2 new store openings.

Now, moving to our outlook, we’re reiterating the outlook for fiscal 2015 that we provided in late March. This calls for full-year earnings per share to increase in the high single-digits to low double-digit range compared to the adjusted EPS of $1.66 in fiscal 2014.

In reviewing the analyst consensus models for the rest of the year, we’re comfortable with Q2 EPS estimates. However, as previously stated, SG&A expenses in Q2 are expected to be higher due to the shift from Q1 and that will be offset by an improvement in product margins that’s expected at Finish Line.

Comps to date in June are up low single-digits and we believe July and August will be stronger due to improved product line up for back-to-school. We believe that consensus models for Q4 are somewhat optimistic. As a reminder, gross margins were unusually high in the fourth quarter last year and therefore we’re expecting Q4 product margins this year to be down.

Having now provided all of the commentary in our outlook, given the strength of our Q1 performance, we’re more comfortable with the upper end of our annual guidance range for the year.

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

Thanks Ed. We’re very pleased to have carried our solid momentum from fiscal ’14 in to the early part of the New Year. With the customer firmly at the center of everything we’re doing, we’ve developed a clear roadmap to expanding our total business using our leading omnichannel capabilities and our multi divisional strategy.

As we continue to fine-tune our execution, we’re confident that we can grow market share in a manner that benefits the operating margins through better expense leverage and delivers double-digit annual earnings growth on a consistent basis.

Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jay Sole from Morgan Stanley. Your line is open.

Jay Sole - Morgan Stanley

Thanks so much. The first question is just on the guidance and secondly on Macy’s. Let me ask the Macy’s question first and you talked about integrating more with Macys.com. What does that mean in terms of operationally? What can you do that the consumer will tell or how does that impact margins? And secondly, where do Macy’s margins stand overall now and where do you see that trending through the rest of the year?

So Jay there is twofold on the Macy’s deal. One is the leverage of higher sales productivity, because you’ve minimum coverage in the stores and we provide open to close coverage. So every additional sales dollar goes to the bottom line. Secondly, what Sam and the team, Ronnie Jefferson and his team have accomplished over the last six months in the assortment planning and the execution with the brands -- see the brands are now in. They’ve confidence, they see the results, they see the sell through, so we’re getting more and more access to bigger allocations of product and that’s strengthening our business. So that’s really what’s driving our optimism there.

Edward W. Wilhelm

Jay, I’ll take the margin part of that question. So like we see on the Finish Line, when we were able to open up our store inventory to that customer on finishline.com, it improves the productivity of the inventory, the turns of the inventory and it helps margin, because we’re able to liquidate markdown product at a better rate. So we want to achieve that same thing within Macy’s is open up that shop inventory to that Macys.com customer and by doing so, it will improve the productivity of that Macy’s inventory and help gross margins over the long-term.

This is a program that Macy’s is working on corporately. So we’re part of it and obviously we’re urging them because we have 10 years of history in the program.

Jay Sole - Morgan Stanley

Got it. Thanks. And if I could just sneak in one more on Run Specialty, now with Bill in charge has there -- what’s the progress on margins in that business as well? You talked about some gross margin impact this quarter, can you describe that and maybe talk about what you see going forward for margins in the Running Specialty business?

Yes, clearly as you acquire these specialty guys, their inventory management is not their greatest skill. Their connectivity to the customer is their greatest skill. So we’re going to flow inventory better, turn inventory better, have deeper assortments. One of Bill’s first observations is that we’ve got to narrow this assortment by about 25%, be in stock, in size and color and have the key -- there are go to styles in this business, both in apparel accessories and in footwear. So just fine tuning, deepening the assortment, it’s not changing it, it’s just reassorting it. And that’s the first observation that we have. Faster turns obviously will create better margins.

Jay Sole - Morgan Stanley

Great. Thanks so much.

Operator

Your next question comes from the line of Eric Tracy from Janney Capital. Your line is open.

Eric Tracy - Janney Montgomery Scott

Hey, guys. Good morning. Congrats on nice quarter.

Thank you.

Eric Tracy - Janney Montgomery Scott

So I guess, maybe first for Sam, if you could speak to the trend that you mentioned. You said a pretty significant kind of shift from performance in the more casual product? As we look forward into -- to back-to-school and Holiday in the pipeline, does that trend sort of continue in terms of the brands fulfilling that or is there potential sort of switch back, just maybe speak to that dynamic that you’re seeing?

Samuel M. Sato

Thanks, Eric. This is really about when you think about the target customer of Finish Line from a style and fashion perspective. So the major platforms like Free and Air Max continue to resonate well with our customers. We’re seeing more casual running silhouette. So I mentioned Air Force 1 in some other retros -- retro styles from other brand, that’s really a trend. But in terms of the Running category specifically, we’re seeing casual running shoes, especially from Nike and in their language Nike Sportswear that we just don’t report in our performance Running segment. But the Running category in total is healthy. In total we posted 5% comp in footwear. Running those a little bit of a shift to casual running shoes or Nike Sportswear, but in totality we see that just been a part of our trend based business. And as far as the future product pipeline, it’s as exciting and as innovative as I’ve seen in the last couple of years. It’s really good.

Eric Tracy - Janney Montgomery Scott

Okay. And then maybe Glenn, for you kind of the bigger picture, Nike last night talking about their own digital evolution and continue to push that platform. Talk through again just how you view Finish Line five years out from now in terms of where you all stand relative to some of these brands going direct. How do you sort of ensure the sustainability of that digital platform is differentiated and gives you your sort of piece of the pie?

So Eric, we got to do a great job. Nike is committed to the segmentation of their business and they’re committed to continuing to enhance the brands presence. So their ability to do business digitally or even in brick-and-mortar is not today inhibiting our business and as long as we’re a positive driver to their revenues and profits, which is what we get up in the morning to do. We’re going to be great partners. They’ve been on this track for a while and our business continues to grow. Our -- it is important to us to create the right customer experience for the brand as it is for them to do it directly and we’re in lockstep with them all the way on those initiatives. So the segmentation strategy is clear and it was not clear in other industries that you might even think about, I always refer to the electronics business that sold through in all channels all the same product. We’re trading at the pinnacle parts of their line and we feel good about the short-term as well as the long-term future as we’re an athletic specialty especially critical to Nike’s ultimate success.

Eric Tracy - Janney Montgomery Scott

That’s really helpful. And then maybe last just for you Ed, on the margin, I just wanted to make sure it was clear in terms of the go forward. So in this quarter, it was really just Running Specialty sort of inventory pressuring the product margin, Finish Line product margin is decent and the expectation on a go forward, I think you said that the Finish Line product margins would improve, first did I just hear that correctly. And secondly, if that’s …

Edward W. Wilhelm

Yes, so felt coming into the year, Eric that we had an opportunity to grow product margins in our business in total, and we are still believing that. In the first quarter we did absorb some markdown costs related to Running Specialty exclusively. Finish Line product margins were up inline with our plans. As we look to the rest of the year we expect Finish Line product margins to continue to be strong except for that fourth quarter that I called out where we had particular strength the year ago. But particularly in Q’s two and three, we’ve got an opportunity to show some nice strength in our Finish Line business on the product margin side. Inventories are in great shape both from a quantity and a quality standpoint. And as Sam has talked about, the outlook for new product is very good. And again if that comes through as expected that selling all at full retail, so that’s got the ability to help the Finish Line product margins as well.

Operator

(Operator Instructions) Your next question comes from the line of Robby Ohmes from Bank of America. Your line is open.

Robby Ohmes - Bank of America, Merrill Lynch

Hi. Good morning, guys.

Glenn S. Lyon

Robby.

Edward W. Wilhelm

Robby.

Robby Ohmes - Bank of America, Merrill Lynch

I am going to break the rule and ask a quick follow-up and then one other question. Just on the …

Glenn S. Lyon

We will let you go Robby.

Robby Ohmes - Bank of America, Merrill Lynch

Thanks. On the digital, sorry if I missed it. Can you give the growth in your digital business in the quarter, and then just maybe some quick comments on what sells well on digital versus the stores? And then my second question is just that, the women’s business I think decelerated this quarter. Can you guys talk a little bit about what's going on in women’s and what the outlook is for the women’s business? Thanks.

Samuel M. Sato

So, I’ll give the digital. Digital business for the quarter was up over 20% Robby.

Glenn S. Lyon

Yes, Robby I continue to talk about the blurred lines and about how the way we run the business today. We have to look at the comps in total. The traffic going into the web is now 50% higher than the traffic coming into the stores, 50% higher. Those customers are going on to the web to get information to go into the stores. We need to convert better in the stores with less traffic, because the shopping pattern is more purposeful. So, the KPI’s the people have used over the last 10 or 15 years, we think are becoming less and less relevant. So, hence we were very conscious in the script not to separate the two. We beat plan in digital. We made the plan in the stores. The stores are low singles. The digital is up in the 20s. So, I’m going to continue to effort to make that less of a point as we communicate with you guys, because we think it's less relevant, that’s the only reason.

Samuel M. Sato

And Robby in terms of your question about the women’s business, it is continuing to grow both footwear and although we had a slight decrease in apparel, the women’s branded apparel business was actually up high single digits. So, in total the women’s business for us continues to grow. We are being very, very purposeful about how we grow that opportunity. We obviously are taking an aggressive approach to the women’s footwear business at Macy’s albeit a bit of a different target consumer. Nonetheless we see this opportunity across all of our footwear genders to grow that business. But in particular the women’s business across both footwear and apparel in athletic specialty, there is some opportunities for us to grow that business. We are at the lower end in terms of our penetration in our stores compared to where we’ve been historically, and so we think the time is right and we’re going to continue to focus our product and service effort to capture a greater share of that business.

Robby Ohmes - Bank of America, Merrill Lynch

Great. Thanks so much.

Glenn S. Lyon

Thanks, Robby.

Operator

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

Kate McShane - Citigroup Inc.

Thanks. Good morning.

Glenn S. Lyon

Kate.

Samuel M. Sato

Good morning, Kate.

Kate McShane - Citigroup Inc.

I just wanted to go back to your commentary Sam on the casual running business. I just wondered if you could walk us through what that business is like in terms of, are there the same opportunities for innovation or just newness as there is in the performance category and are they lower price points versus performance, I would assume they are. But do you see faster trends in casual as well?

Samuel M. Sato

Kate, here’s how I’ll answer it. So, when we think about casual products especially coming out of Nike it's really their sportswear business, and so today the hot item is Roshe Run which is at a lower price point. But obviously there’s a lot of products that come out of Nike sportswear that are from technology base platforms like Air Max that are at higher price points, but still come out of their sport culture, their sportswear group. So, today what we are seeing -- no different than what we’ve seen in the past is, trends to more fashion forward casual sneakers nonetheless happen to be -- the hot one happens to be at a little bit lower price point than our total offering in running. But the fact is our ASPs in footwear were up 3.5%. So, around things like Roshe Run we’re still continuing to grow the performance part of our business both across running and basketball categories.

Glenn S. Lyon

Kate, you can imagine that we’re always pushing the brands to strengthen our position in the hottest products. And Roshe is one more example of a product that’s been in the marketplace about a year now, that it is strong. It is good and it's all positive. So on trend.

Kate McShane - Citigroup Inc.

Thanks you.

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.

Glenn S. Lyon

Good morning, Bernie.

Bernard Sosnick - Gilford Securities Inc.

At the outside of the Macy agreement, you were kind of looking for sales to reach $250 million to $300 million in about three years, then you kind of lowered your guidance to about $250 million. Your comments today seem to indicate that you feel more encouraged with the sales outlook. Am I reading too much into that?

Edward W. Wilhelm

No, you’re right on point there Bernie. So, our long-term goals when we started with Macy’s were to reach $250 million to $350 million. So, and then for this year our target was $175 million to $195 million. I’d say that, what we’ve seen so far based on the first quarter we’re tracking more towards the high end of that annual guidance range for this year and we’re feeling very bullish about the Macy’s business with new opportunities like Kids, like putting shop inventory online at macys.com which, again over the long-term are going to drive us certainly towards the high end of that long-term range or even higher. So, we’re feeling very good about our Macy’s business.

Bernard Sosnick - Gilford Securities Inc.

Glenn, mentioned better than expected profitability from Macy, and I thought this first quarter was expected to be in the red because of your opening schedule being very heavy. What did you mean by profitability?

Edward W. Wilhelm

So, for this year with that annual guidance range on the sales side we expected Macy’s to be slightly accretive, so slightly profitable for us this year. And while we’re not going to comment on quarterly performance we’re tracking ahead of that annual range. So, we’re tracking ahead of that slightly profitable number based on our first quarter results.

Bernard Sosnick - Gilford Securities Inc.

Okay. Thank you very much.

Edward W. Wilhelm

Okay.

Glenn S. Lyon

Thanks, Bernie.

Operator

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

Jeffrey Van Sinderen - B. Riley & Co.

Good morning. I just wanted to clarify something on the discussion on the running product. Were you saying that the, I guess you’re calling it sportswear or sports product that’s not part of performance running, that that’s not included in the minus 1 comp, I just wanted to clarify that.

Edward W. Wilhelm

That’s correct, Jeff. The casual running sneakers that Sam has been referring to, so the Air Force 1’s, the Roshe’s are not included in the running comp that we reported that was down slightly. I mean obviously if we would have adjusted that for those running -- those casual running sneakers we would have been up mid, even high single digits.

Jeffrey Van Sinderen - B. Riley & Co.

Okay. And so, sort of as a follow-up to that, I mean does this mean that you need to shift your assortment or you feel like you have the assortments set right as we head toward Back to School, any other color you can share on that?

Samuel M. Sato

Yes, this is Sam. It's an ongoing shift. This isn't unique to our business where, if you pull out category performance this is really there is a hot shoe in the market right now called Roshe Run and we’re going to position our inventory purchases against that item. So, this is no different than what we do season in and season out. And we feel like the product pipeline we’ve got on order including Roshe Run we’re in a great position to deliver our intended results this year.

Jeffrey Van Sinderen - B. Riley & Co.

Okay, great. And then, just wanted to see if we could follow-up a little bit more on the Macy’s business wondering what you’re seeing happen in the women’s part of that business, any particular drivers and maybe where you’re over indexing?

Samuel M. Sato

Yes, so as you recall our strategy to develop this partnership with Macy’s was really around two things. One is, their customer being a slightly different in terms of their target customer than what we currently service in the mall, and then secondarily a part of that is a high penetration in the women’s business. Today our business at Macy’s is about 60% women’s which is where we believe it should be. There’s probably a little bit more opportunity in terms of percent to total. But we’re right on strategy in terms of how we’re addressing both the male and female consumer at the Macy’s stores.

Jeffrey Van Sinderen - B. Riley & Co.

Okay. Good to hear it. Thanks very much and continued good luck.

Samuel M. Sato

Thank you.

Glenn S. Lyon

Thank you.

Operator

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

Steven Strycula - UBS Securities LLC

Hi, guys, good top line quarter. Quick question on the overall basketball category; what really drove the deceleration this quarter relative to past quarters? And then as a follow-up for 2Q, you guys hinted at that comps are tracking in the low single digit range but should improve in July and August. What dynamics are really going to lift that up in the second half of the quarter? Thank you.

Edward W. Wilhelm

Yes. So, Steve on the basketball question, the big driver was a shift in release from Q1 to Q2, and that will also play a role in the impact of our July and August business compared to our current June trend.

Steven Strycula - UBS Securities LLC

Got it. So on an adjusted basis you think about basketball still trending as the double-digit category?

Edward W. Wilhelm

Yes, I believe so.

Steven Strycula - UBS Securities LLC

Okay, great. Thank you.

Operator

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

Ben Shamsian - Sterne, Agee & Leach Inc.

Hi, it's Ben Shamsian for Sam. Thanks for taking my call. I had a question on the basketball business and specifically the Marquee launch business as LeBron’s and Jordan’s. Has your allocation in that space gotten any better and what are you seeing going forward in terms of allocation?

Glenn S. Lyon

So, I wouldn’t say they’ve gotten better. Our allocations have always been very good and based on both what the brands want to put in the marketplace as well as how our brand continues to deliver against the expectation from a consumer experience perspective. If our sell-throughs continue to be robust, we continue to work every day with our brand partners around allocations. What I’ll tell you is, again if you think about our three year stack rate of basketball obviously we need more products each and every year to continue to post those kinds of results and so, we’ll continue to work hard to get a larger share of allocation, recognizing that there is some constraints around the supply and demand strategy that our brands have.

Ben Shamsian - Sterne, Agee & Leach Inc.

Okay, great. And can you just provide us the ticket traffic conversion data?

Samuel M. Sato

Yes, so in the quarter traffic in total was up. Digital driving really strong traffic that we talked about and stores down was just slightly, and ticket was up in both stores and digital.

Ben Shamsian - Sterne, Agee & Leach Inc.

Okay, great. Thank you.

Samuel M. Sato

Okay.

Glenn S. Lyon

Thank you.

Operator

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

Mitch Kummetz - Robert W. Baird & Co.

Yes, thanks. On the Macy’s business, you guys talked about accelerating your banner conversion there, it sounds like you’re little ahead of schedule on the quarter. Can you just kind of give us the cadence of how you expect that to convert over the balance of the year and kind of what store count you expect to end up with?

Edward W. Wilhelm

So we’ll do about 30 a month Mitch, and will end in October sometime with a little over 400 Macy’s stores that will have Finish Line shops in them.

Mitch Kummetz - Robert W. Baird & Co.

Okay. And then on RSG, I think you had been previously been saying sales this year is $75 million, $85 million is that still the plan and what was the comp on the quarter?

Edward W. Wilhelm

Yes, so for RSG the guidance is $75 million to $85 million, we’re probably at this point tracking more towards the lower end of that range given what we’re seeing and comps in the quarter were down high single digits as we’re working through the management transition and also the effort that’s being done on the assortments, the work that’s been done on the assortments to narrow the assortments and get in stock in key style. So that business was tracking a little behind expectations in the first quarter.

Mitch Kummetz - Robert W. Baird & Co.

Okay. And then lastly, just to reconcile the footwear comp, so footwear were up mid single singles, running was down one, basketball was up mid singles, I know Roshe Run is not in the run comps. So, is there another big bucket that you can call out and give us the comp on that whether it's casual, athletic or sportswear or however you define it?

Edward W. Wilhelm

So Kids was up double digits, and then our casual wear athletic business which is where we put things like Roshe Run and Air Force 1’s was up high double digits.

Mitch Kummetz - Robert W. Baird & Co.

Great. Thanks a lot. Good luck.

Edward W. Wilhelm

Thank you.

Operator

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

Chad Sutherland - Goldman Sachs

Hi, this is Chad Sutherland on for Taposh. Another follow-up on the Roshe Run, I just wanted to know if, how you guys feel about that going into the back half, and then given that it's maybe a more democratic price point. How you feel about exclusivity in that style?

Edward W. Wilhelm

In terms of our position going into the back half of the year and into spring of next year we feel great where we are. Nike continues to innovate against what they’re doing there and continue to bring a lot more styles and colors to market. I am not sure of your question around exclusivity.

Chad Sutherland - Goldman Sachs

Sure. I guess, do you think you’re getting better allocation of run casual versus your competitors since you guys are like the destination for running?

Edward W. Wilhelm

Candidly I don’t really think about that. I look at what the demand is from our consumer and how we want to bring the best most relevant products to market first and how we’re working with our brand partners whether it's Roshe Run or any other allocated products to ensure that we’re satisfying the needs of our customers. I can’t get information on other retail competitors, so I don’t really worry about it.

Chad Sutherland - Goldman Sachs

Understood. And then on systems, can you talk about the SG&A shift into 2Q just give us a little more detail and then maybe just walk us through the different systems, initiatives that you have ongoing and the type of impact you think they might have maybe when that impact might materialize? Thanks.

Edward W. Wilhelm

So the shift in that we talked about in the first quarter was just a shift from what we had planned to do on some of these technology project expenses related to stores, digital and then our core systems transformation projects. So that’s just, it was planned for the year but it was planned in Q1, it will now happen in Q2. So, coming into the year we thought that SG&A would deliver slightly on a full-year basis, and I talked about the fact that I now -- we now are more comfortable with the upper end of our annual guidance range. The upsides I would say that we’re seeing right now in our business are twofold. Macy’s which we talked about tracking to the higher end of the range, and then the other upside is on that SG&A line where we now think we can get close to flattish to maybe even slight leverage given the strength that we’re seeing on disciplined expense management and what we’re seeing on our top line.

Chad Sutherland - Goldman Sachs

Thank you.

Operator

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

Christopher Svezia - Susquehanna Financial Group

Good morning, everyone. Nice job on the quarter.

Glenn S. Lyon

Thank you.

Samuel M. Sato

Thanks, Chris.

Christopher Svezia - Susquehanna Financial Group

I guess first, just on the digital platform, I think beforehand you said high teens growth this year or you did better than 20 in Q1, can you just talk to what your thoughts are for the year, you’re still talking high teens or it seems like there could be some opportunity there, and also just on the margin, on the digital business, I mean EBIT perspective, maybe some color in and around that as well?

Samuel M. Sato

Yes, so coming into the year we thought high teens, we outperformed that in the first quarter. We feel very good about our digital business, about our digital team and about the initiatives that we’re undertaking there. I mean one of the key ones are that we’re going to have a mobile app that’s going to launch later this summer, that’s going to help us convert that mobile traffic more effectively than what we are today. So, there’s a lot of good things going in the digital business and we feel very good about our ability to at least deliver that high teen growth or better. And then with that, that business is converting at the same rate that it has been. So, we’re going to continue to grow the EBIT margins in our digital business which have expanded significantly over the last several years and are expected to grow again this year.

Christopher Svezia - Susquehanna Financial Group

Okay, good to hear. The other question I have here is just on, your comment about product margin, particularly in and around the fourth quarter, and I guess the thought process is, could you paint a scenario whereby you can actually have some level of improvement in the fourth quarter given where your inventories are, the improvement in turns, and just given the fact I think you were down a 100 basis points in the prior fourth quarter than you were up 50 basis points, and then just all the thought about what's going on at apparel? So, just trying to think about, you’re just looking at that and saying well it looks kind of tough or can you paint a scenario which actually have some level of incremental improvement given what's going on in the business?

Edward W. Wilhelm

So in the prepared remarks I talked about the strength of last years fourth quarter product margin at Finish Line. We had a 15% comp in February which was driven by a lot of new product that came to the market place plus we’re also accelerating deliveries that were due to be received in March into February to continue to fuel that comp, and of course all that is at full retail. So, it draws particular product strength -- product margin strength in that fourth quarter and that’s what we’re up against. Now could we paint a picture to do better in the fourth quarter? Of course, I mean driving top line with help getting apparel business turned around and getting turns and getting that inventory productive is going to, it would help our product margins in Q4 because as you know the apparel business could have better margins than product margins in the footwear business. So, then certainly we could paint a scenario by continuing to execute as we are, and you know that’s what we are working towards.

Christopher Svezia - Susquehanna Financial Group

Okay. Well the stacks are -- the chips are stacked against you there Sam. So, all the best of luck to you in the fourth quarter.

Edward W. Wilhelm

Sam is taking the challenge on.

Glenn S. Lyon

He’s up to it. Thanks (indiscernible) you know that Chris.

Christopher Svezia - Susquehanna Financial Group

All right, sounds good. Well, all the best to you guys. Thanks.

Edward W. Wilhelm

Thank you.

Operator

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

Paul Trussell - Deutsche Bank

Yes, good morning. Congrats on a good quarter.

Samuel M. Sato

Thanks Paul.

Paul Trussell - Deutsche Bank

Just two follow-up questions really, if maybe we can just go back and Sam if you can give some color on, what drove the three plus percent gain in ASP this past quarter, and just how you think about that going forward especially given this clear shift into products like Roshe Run or preference for a Jordan 1 instead of a Nike Air Max and kind of the slowdown in performance running, which seemed like ASP would likely slow as we go throughout the year. And then second, I apologize if I’ve missed this, but could you just give us some color at on what the core Finish Line EBIT margin performance was, if we exclude Macy’s and Running Specialty?

Samuel M. Sato

So, Paul here is, let me start by saying this. I don’t want you to think that there is, first a major slowdown in running. There is a shift in certain silhouette that are moving to more casual running from a fashion perspective. Our key platforms within running, Shocks, Air Max and Free continue to grow. So, this is about a fashion shift which has always been a part of our business since we developed the Finish Line. ASPs are really being driven by the totality of our business. So, while there are items like Roshe Run that are $75, we’re also selling a heck of a lot of Air Max at $150, and Free at a $120, and Jordan at $175. We’ve got some key items there, be it Air Force 1’s at 100 bucks or as you put it Jordan 1’s and Roshe Run’s that are below some of those other areas. Adidas Springblade is 150 bucks, SpeedForm and some of the other Nike Under Armour products come in the market are above a 100 bucks. So, the hot items today that we’re talking about really are items and while they are in fact driving some growth in our business we still have some very strong platforms that are at the upper end of the price range.

Edward W. Wilhelm

And Paul on the core Finish Line EBIT margins they were up over last year in the quarter year-on-year driven by stronger product margins and SG&A leverage.

Paul Trussell - Deutsche Bank

And Ed, just on the Running Specialty business that I know Macy’s is supposed to be a little or slightly accretive this year. Is the running business still expected to be slightly dilutive or close to flat?

Edward W. Wilhelm

Yes, we’re working really hard to get at there, Paul.

Paul Trussell - Deutsche Bank

Okay, great. Thanks a lot guys.

Operator

Your next question comes from the line of Matt McClintock from Barclays. Your line is open.

Matthew McClintock - Barclays

Hi, good morning and congrats also on the quarter.

Glenn S. Lyon

Thanks, Matt.

Matthew McClintock - Barclays

I was just wondering, Glenn you talked about making inroads in terms of merchandizing at Macy’s, and I was just wondering if you can elaborate on that a little bit. You also talked about getting better allocations. Is a lot of strength that you’re seeing today a function of better allocations there or are there real merchandizing or product decisions that you’ve seeing that are -- or changes that you’ve made that are more appealing towards that core Macy’s customer? Thanks.

Glenn S. Lyon

Both. So, think about it, we started 15 months ago, and the initial assortments that we put into the stores where with no information and honestly we stole some goods from other allocations to put in there to get the stores opened as we were opening them. So, we were in a full court press. We put the team together, we gave them some more information over the last 15 months and you can imagine that decisions are better. Then you get the market place to start to, instead of support you, believe in you. They see the results and things start to happen in a positive way. So, there’s a whole bunch of dynamics behind this. The Skechers doesn’t exist in the Finish Line stores. Skechers is a big part of the Macy’s deal and that’s something the customer got used to at Macy’s and it performs, turns, high margins very desirable products in that channel. Skechers is number two brand in Macy’s. We didn’t know that was going to happen to tell you the truth. So gearing it up, and I am making sure we’re in stock on all their grade initiatives is appropriate for that channel. So, lot of good energy and that will continue to elevate. And Ronnie and the team are finding out things everyday and just as importantly the brands are finding out. So, you can sense a very positive thing going on here right now relative to that.

Matthew McClintock - Barclays

Seems like it's been a great job. Thank you.

Glenn S. Lyon

Thank you.

Operator

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

Camilo Lyon - Canaccord Genuity

Thanks, and nice job, guys. Two quick questions. One is just a clarifying question on the quarter-to-date trends. Did I hear you correctly, Sam in saying that the deceleration on the tier basis in the June period was a function of timing of basketball releases?

Edward W. Wilhelm

Yes.

Camilo Lyon - Canaccord Genuity

Okay, and so that normalizes in July and August?

Edward W. Wilhelm

Correct.

Camilo Lyon - Canaccord Genuity

Okay. So will you net above last year from a release perspective or equal to last year?

Edward W. Wilhelm

Above.

Camilo Lyon - Canaccord Genuity

I have got a question on pricing, particularly as it relates to the new Flyknit Free that came in at $120. Have you seen the commensurate uptick in unit sales now that it seems like that price point is more attainable for that consumer as opposed to what it was introduced at, at a $160?

Edward W. Wilhelm

Yes, as you know the whole free ecosystem has been a really strong performer for us over the last three, three and half years. The introduction of not just Flyknit Free but certainly its innovation has moved that platform again to a pretty good place. So, between our 3.0 distribution, our 4.0, our 5.0 and now Free Flyknit we have an incredibly inspiring offering in the stores and that business just continues to be meaningful for us and really, really resonating well with our consumers.

Camilo Lyon - Canaccord Genuity

Great. And then just finally on Macy’s; are you seeing any sense of cannibalization in the business, Ed or Glenn, or is that still totally accretive when you’re in the same mall?

Glenn S. Lyon

Totally accretive. As we’ve said for quarters now, it was somewhat of a surprise but those stores continued -- the ones we open up shops continue to outperform the malls that we don’t have shops open yet. So, we think that this has been like seamless, it's been incredible. And what we’ve said all along, different customer base right to a great, great extent and it gives exposure for our brand. How many places can you open up 400 new stores in less than two years? So, pretty exciting stuff for us.

Camilo Lyon - Canaccord Genuity

And is it helping those Finish Line stores too?

Glenn S. Lyon

I don’t know if it's helping them, but sure it doesn’t look like it's hurting them. And we believed that ultimately that part of our initiative was to expand our brand awareness. And I can’t imagine that’s happened in just 15 months, but I think we have some things to look forward to.

Camilo Lyon - Canaccord Genuity

Great. Good luck with the balance of the year and nice job guys.

Glenn S. Lyon

Thanks, Camilo.

Operator

Your last question comes from the line of Scott Krasik from Buckingham Research. Your line is open.

Scott Krasik - Buckingham Research

Hi, thanks for taking my question. Two follow-ups. First on the merchandize margin. I think RSG was about 4% of sales, but it drove the whole decline or more than the whole decline. So what was the merch margin decline in RSG and how do you feel that that’s going to recover so quickly?

Edward W. Wilhelm

Yes, so the merch margin decline in RSG was significant because of the cost of cleaning up that inventory of narrowing those assortments like Glenn talked about. So our belief is what we’re seeing today is that was one time to get the inventories in the right shape and then going forward we won't have that same drag on our merch margins coming from Running Specialty Group.

Scott Krasik - Buckingham Research

Okay. And then in terms of Macy’s following up, of the 262 locations that you’re in, how have you experienced the shops in their, C, D, E lower productivity doors and how does that compare to the first 100 or 200?

Edward W. Wilhelm

So, where across those shops obviously there’s a range of performance outputs but the branded shops in total are comping up triple digits in total. And obviously there’s a range within those 262 stores, but it's clear that they’re all performing significantly better than they were a year ago. And now what we’ve got to do is figure out ways to take those shops that are performing at the lower end up to a higher production output.

Glenn S. Lyon

Scott, let me just add one anecdote and we usually don’t do this, but this one is an exciting one for me. Macy’s Herald Square will be the number one Finish Line in the country. And actually women’s Macy’s will be the number one business for Finish Line in the country. If you’re in New York go to Macy’s on a Saturday and go on to the shoe floor, it's one of the great -- it's one of the most exciting things you’ll see. Shoulder to shoulder people grabbing on to all the newest, latest and greatest. So, we’re pretty pumped up about all of that.

Scott Krasik - Buckingham Research

Okay. No, it's very busy. Thanks you guys.

Edward W. Wilhelm

Thanks, Scott.

Glenn S. Lyon

Okay. Thanks everyone for being here today. I noticed the couple of people off on Friday’s, little early holiday and certainly we wish you a good summer and a great fourth and we will be back to talk right after the Back to School season here in September. So, have a good week. Bye-bye.

Operator

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

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