Anticipating Finish Line's Next Share Buyback Plan

Jul. 7.14 | About: The Finish (FINL)

Summary

Finish Line is growing EPS and revenues faster than its peers.

The company's drivers of revenue growth are sustainable long term.

Finish Line's balance sheet is in pristine condition.

The company's financials, in conjunction with higher expectations from the analyst community, should force the board to approve a new share repurchase program.

Shares of the popular specialty retailer Finish Line (NASDAQ:FINL) have been on a tear over the last year, up almost 50% from their lows as the company continues to impress both shareholders and analysts with their execution. However, the stellar results that Finish Line has reported lately have led to increases in analyst expectations. These new estimates may soon be seen as an impediment for the stock's future performance, but first take a look at what has been going right for Finish Line.

Growth

Finish Line has been a strong grower of both earnings and revenue over the past fiscal year. According to the company's most recent annual report, revenues for fiscal 2014 were $1.67B, representing growth of 15% when compared to the previous year. The strong revenue growth was spurred by three drivers:

  • Same store sales growth
  • Increase in digital traffic
  • Partnership with Macy's (NYSE:M)

Pertaining to the first driver, same store sales growth was up 4.2% in 2014 compared to 2013. This positive growth was confirmed in the company's Q1 2015 conference call which reported Q1 2015 comp growth of 5%, driven by higher demand for men's, women's, and kid's shoes. Basketball shoes are also continuing to gain traction as they have for the past few years (sales attributed to basketball shoes are up 58% over the last three years). The only weak spot in terms of same store sales arose from the company's apparel division (down <1%).

In terms of digital traffic, the company reported last quarter that they are slightly ahead of where they would like to be, with digital traffic growing double digits in the first quarter. The company also reported that 30% of the traffic could be attributed to mobile platforms. Finish Line has been able to leverage their digital footprint through data mining. This allows the retailer to get to know customers' shopping habits and spending patterns, enabling them to generate more repeat orders from their customers.

Perhaps the most exciting of Finish Line's drivers takes the form of a partnership with one of America's most iconic retailers: Macy's. Currently, Finish Line has created 262 partnering locations with Macy's over the first year of the program and plans on adding an additional 138 locations. This partnership generated $43.8 million for the specialty shoe retailer in the first quarter of 2015. This was up from $13 million in the same quarter last year (albeit it was only a partial quarter). The future of the program looks promising for Finish Line as they plan to expand on their kid's line and also make their inventory available on Macy's website in the near future.

Balance Sheet

Finish Line's balance sheet may soon prove to be just as important to its earnings and stock price as any of the growth drivers mentioned above. The company has done an outstanding job creating a clean balance sheet that presents itself with no interest bearing debt and $229.1 million in cash and cash equivalents. This de-levered position enables the company to increase shareholder value through stock repurchases and dividend increases.

In 2014 alone, Finish Line bought back 1 million shares of its stock, costing the company ~$22.4 million. The buyback reduced the company's outstanding share count by 2%. In addition, Finish Line increased its dividend $.04 to $.29, creating a yield of ~1%. As for the first quarter of 2015, the firm appeared to accelerate their stock buyback plan, repurchasing 700,000 shares at a cost of $18.7 million. This leaves $3.9 million remaining on the company's board approved share repurchase program.

Analysts

According to Yahoo Finance, analyst consensus currently estimates Finish Line's 2015 revenues will be reported at $1.85 billion with earnings per share of $1.87. With the drivers in place, and a few strong quarters of growth behind them, it is not unreasonable to expect a repeat performance from Finish Line in terms of sales growth. Assuming they can repeat their strong performance from 2014 (up 15% year over year), then revenues should be expected to outpace analyst estimates at $1.92 billion.

However, presuming Finish Line maintains the same margins as the previous year (4.6% of revenues converted into net income), one could expect net income to be reported at ~$88.2 million. If Finish Line chooses to repurchase approximately 130,000 shares using the residual $3.9 million left on the company's approved buyback program, the number of outstanding shares would total 47.67 million by year's end. By these calculations, this translates to EPS of $1.85 a share, just shy of analyst expectations.

New Buyback Program

Given the company's aggressive buybacks over the previous quarters, resurgence of recent growth, and pristine balance sheet, I believe there is a new buyback plan in the works. In my opinion, this plan will be constructed to keep pace with the 700,000 share repurchase made in the first quarter of 2015. Stretching the plan out over the rest of the fiscal year and continuing into 2016, it is not irrational to hypothesize that the supplementary plan will be reported between $85 and $105 million, with between $12 and $15 million in stock repurchases occurring each quarter for the next 7 quarters.

If this thesis proves to be correct, and Finish Line repurchases $15 million worth of stock in each of the remaining three quarters, then the company's float would be decreased by 2.5%, or 1.5 million shares by year's end. This in turn would allow for artificial EPS growth of 3.2% ($.06) to $1.91 for the year, eclipsing analyst estimates of $1.87.

Risk Factors

An investment in Finish Line carries more risk than most investments in stocks due to the volatility that small cap stocks incur. As for the business itself, Finish Line faces risk stemming from the overall economic conditions within the United States. Since Finish Line is a retailer, it makes sense that the consumer increases or decreases spending depending on the economy and their overall financial well being. The company also faces risk due to the consumer's discretion for shoes, making inventory management essential to Finish Line's future success.

Conclusion

Finish Line's strong, sustainable revenue and EPS growth, as well as pristine balance sheet, allow me to place a buy rating on the stock at current levels. The risk associated with the stock, stemming from the summation of the company's stock repurchase program, is minimal. Given that I am anticipating a new share repurchase program comparable to the one outlined above, I recommend buying the stock in anticipation of the new plan. I believe the stock will see a noticeable increase in share price when the new plan is released.

However, I would not sell on the initial "pop" the stock receives from the news. This is because the next repurchase program will allow Finish Line to beat analysts' estimates for 2015, creating more long-term value for shareholders. In addition, due to the company's strong financial position and steady cash flows, I am also expecting a dividend increase by the end of the fiscal year comparable to the $.04 increase that occurred earlier this year. Currently, my price target for Finish Line is set at $34.00, representing 12.5% upside from the stock's current levels. For these reasons, I advise being long Finish Line.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.