Finish Line (FINL) announced first quarter earnings last week and while same-store sales were up 6.5%, net sales were up 6%, and earnings were up 20%, the stock sold off 8%. The stock has seen significant price appreciation this year and was up almost 35% heading into Q1 earnings. Perhaps further influencing the post-announcement sell-off in the run-up to Q1 earnings the stock eclipsed its all-time high that was set back in April 2005. The sell-off post earnings was attributed to a top-line miss. With the Street looking for revenue $301mm, FINL printed $299.5mm for the quarter. While that is more of a rounding error than a miss investors often want and require out performance.
Now that the dust has settled it makes sense to take a look at the company and its trajectory.
FINL has a market capitalization of $1.2 billion and, with $299mm of cash and no debt, has an enterprise value of $900mm. FINL trades at 6.4x trailing EBITDA versus Foot Locker (FL) at 7.0x, Dick's Sporting Goods (DKS) at 9.6x, and Hibbett Sports (HIBB) at 10.8x. FINL also pays a $0.05/share quarterly dividend representing a yield of 0.91%.
On the conference call Chairman and CEO Glenn Gyon articulated its use of its balance sheet cash indicating that over time they would allocate 50% of the cash to investment out of their core (e.g. new geographies, new formats), 25% of the cash for opportunistic share repurchases, and retain the remaining 25% of the cash to maintain financial flexibility.
"I'll recap that strategy for you again this morning. First, we will use cash generated from operations to fund growth within our existing business as well as our quarterly dividend. Next, we expect to invest up to half of our cash over time on growth outside our core business to provide future sales and earnings increases through format extensions and/or geographic expansion. Third, a quarter of our cash will be available for more aggressive share repurchases. And finally, the remaining quarter will be retained on our balance sheet to preserve financial strength and flexibility."
There are several important data points that are relevant to the overall FINL story going forward.
- In the Q1 earnings announcement the company provide a June 2011 sales update indicating same-store sales for the first 3 weeks of June (from May 29 through June 19) were up 14.5%. This is on top of a 6.8% increase for the same period a year ago.
- FINL's internet sales continue to show excellent growth. Internet sales in the first quarter grew 55% year-over-year after having increased almost 30% in fiscal 2011. For fiscal 2012 the company expects them to grow at a similar rate but given the first quarter performance this seems conservative. Further, internet sales have a positive impact on margins.
- Nike's (NKE) earnings yesterday were consistent with the FINL growth story. Most relevant to FINL Nike showed 20% growth year-over-year in North American footwear. Of course this is backward looking. On a forward looking basis Nike reported that "NIKE Brand athletic footwear and apparel scheduled for delivery from June through November 2011, totaled $10.3 billion, 15 percent higher than orders reported for the same period last year. Excluding currency changes, reported orders would have increased 12 percent." (Link to Nike earnings press release). Nike's North American reported future orders were up 14%. Of course this is marginally useful information to assess FINL given that FINL is one of the entities placing the orders with Nike but it does support the overall fact pattern of growth.
Street consensus for the fiscal year ending May 2012 (FY 2012) is $1,297mm of revenue, $155mm EBITDA, and EPS of $1.53/share. This implies EV/EBITDA of 5.8x and a forward P/E of 14.3x.
The 6.5% same-store sales in the first quarter and 14.5% for the first 3 weeks of June bolstered by the current growth rate of internet sales makes the Street's revenue number which represents growth of only 5.5% seem light.
Management has stated a goal of returning sales/square foot to $352 (note that internet sales are included in the same-store sales calculation). The Q1 conference all Chairman and CEO Glenn S. Lyon stated:
"When it comes to growing our existing business, productivity is the key word. We are pursuing better productivity in many ways, including through technology such as labor scheduling and our new planning and allocation system. In terms of sales, our goal in our stores is to drive sales back to the highest historical level of $352 per square foot and more. We will continue to invest in key initiatives to drive the top line."
In FY 2011 sales per square foot for comparable stores was $317/square foot. The goal of $352 represents an increase of 11%.
FINL is firing at all cylinders and has a lot of different paths to success. The reaction to the Q1 earnings was profit-taking and barring a real and prolonged economic slowdown FINL is reasonably priced given the run-way in front of the company.