Shareholders in footwear retailer Finish Line (NASDAQ: FINL) have probably gotten used to an upward trajectory for the company's stock price, after a more than 120% gain over the past five years. So, 2014 has undoubtedly been a less pleasing experience, with Finish Line's shares down roughly 12% to-date. The decline is the result of a less-than-expected profit performance for the company in its latest fiscal quarter, due to weak sales of its basketball product offerings, which limited its growth in adjusted operating income to an underwhelming 0.6% gain, culminating in a subsequent double-digit drop for its stock price.
On the upside, though, Finish Line continued to post solid top-line growth, up 7.1%, providing hope for a rebound in profit growth in the future, a key ingredient in a higher market valuation. So, at its discounted price, is the company a good bet for investors?
What's the value?
Finish Line is a major player in the retail footwear space, operating a network of more than 600 namesake stores, complemented by a growing cadre of managed shoe departments in select Macy's stores. The company has anecdotally taken advantage of growing consumer interest in fitness, which has helped it to post consistent comparable store sales growth and operating profitability over the past five fiscal years, averaging roughly 5% and 8%, respectively. The net result for Finish Line has been solid cash flow, funding its growth initiatives, including niche acquisitions of smaller, running-focused competitors that have strong customer followings in regional markets.
In its latest fiscal year, it was more of the same for Finish Line, highlighted by a 4.2% comparable store sales gain at its namesake store base that propelled a 15.7% overall top-line increase. While the company's gross margin was negatively impacted by higher promotional activity, down roughly 50 basis points, Finish Line did a good job of limiting growth in its overhead cost structure, which allowed it to maintain an adjusted operating margin above 7%. Consequently, Finish Line enjoyed a solid increase in its operating income during the period, up 16.6%.
Looking into the crystal ball
The question for investors is whether Finish Line can continue to post profit growth going forward, thereby providing a solid foundation for a higher market valuation. On that score, things are looking fairly good, judging by the company's 7.9% increase in adjusted operating income in FY2014. That being said, Finish Line's sales momentum has clearly downshifted from the level in the prior-year period, evidenced by a 1.5% comparable store sales gain for its namesake store base in its latest fiscal quarter. In addition, with the company's namesake store base having plateaued out in recent years at 600 plus stores, Finish Line's future profit growth seems to hinge on the success of its partnership with Macy's, a seemingly risky proposition, given the company's obvious lack of control as a provider of outsourced services.
A better way to go
Given the uncertainty surrounding Finish Line's near-term growth prospects, the likely factor behind its recent stock price sell off, investors looking for gold in the footwear sector should probably stick with an industry player that has continued to deliver generally better-than-expected profit growth in the current selling environment, like Foot Locker (NYSE: FL). The company has shown few effects from the promotional environment that is affecting some of its competitors in FY2014, reporting a 60 basis point increase in its gross margin. Just as importantly, Foot Locker continues to generate strong productivity from its store base, evidenced by comparable store sales growth of 7.3%, a performance that allowed it to post a strong gain in its adjusted operating profitability during the period, up 100 basis points. The net result for the company was a solid increase in operating income, providing the capital to invest in its growth initiatives, including a larger presence in the running-focused specialty store area, a direct challenge to Finish Line's ambitions in the space.
The bottom line
Finish Line is certainly cheaper than it was at the start of the year, after a decline that has its stock price sitting near the lows for the year. That being said, there seems to be a good reason for the decline, given the company's downshift in profit growth compared to the prior-year period. While Finish Line doesn't seem overly expensive with a current P/E multiple of roughly 15, management's current forecast of high single digit profit growth will likely not be enough to propel the company's stock price back to its former heights and investors should probably avoid the story.
