The Finish Line, Inc. (NASDAQ:FINL)
Q1 2017 Earnings Conference Call
June 24, 2016, 08:30 AM ET
Ed Wilhelm - CFO
Sam Sato – CEO
Camilo Lyon - Canaccord Genuity
Robby Ohmes - Bank of America/Merrill Lynch
Mitch Kummetz - B. Riley
Edward Plank - Jefferies
Jonathan Komp - Robert W. Baird
Tiffany Kanaga - Deutsche Bank
Chris Svezia - Susquehanna Financial Group
Susan Anderson - FBR
Erinn Murphy - Piper Jaffray
Jay Sole - Morgan Stanley
Tom Nikic - Wells Fargo
Pallavi Bakshi - Credit Suisse
John Kernan - Cowen and Company
Esteban Gomez - JPMorgan
Good morning. My name is Carol, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fiscal Year 2017 First Quarter Earnings 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.
I would now like to turn the call over to Mr. Ed Wilhelm, Chief Financial Officer.
Good morning, everyone, and thank you for joining us.
On the call with me today is Chief Executive Officer, 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. In addition, we refer to certain non-GAAP adjusted metrics on this call, explanation of these metrics, and reconciliations to the nearest GAAP metric can be found on the earnings release filed earlier today.
I'll now turn the discussion over to Sam.
Thanks, Ed, and welcome everyone joining us today. The first quarter played out much like we expected despite the difficult retail environment. Finish Line and JackRabbit comparable sales were up low single-digits. Our Macy’s business increased in the low 20% range and EPS was $0.23.
Importantly, we made further progress addressing the temporary challenges that have impacted our recent performance and started working on fortifying the foundational strength of the company to drive improved results near-term and position Finish Line to compete and succeed long-term.
On today’s call, I’m going to begin with a review of the state of our supply chain and then provide an update on the four key priorities of our fiscal year '17 management agenda. Then I’ll discuss the trends within our Q1 category performance and what the product pipeline looks like over the remainder of the year.
Ed will then review the financials and update our outlook. Starting with our supply chain, we further improved our performance in the fiscal quarter and are now above or close to historic levels on all key metrics. Direct to consumer fulfillment rates in the first 24 hours hit 90%, up from 80% in Q4 as inventory accuracy and out-of-stock rates have continued to improve.
Meanwhile fulfillment in the first 48 hours, cancellation rates, and click to door delivery times are now surpassing previous high watermarks as we've started to realize the benefits of our new warehouse and order management system.
We're pleased with the progress we’ve made towards optimizing our supply chain, but there is still work to be done to ensure that all the kinks have been worked out ahead of our highest volume periods.
Turning to our management agenda for the year, as a reminder the four key priorities are; one, strengthening engagement with the Finish Line consumer. Two, driving the performance and contribution of our Macy’s and JackRabbit businesses; three, establishing a great leadership team; and four, creating an operating model that drives profitable growth and generates shareholder value consistently over the long term.
Starting with strengthening engagement with the Finish Line consumer; as is always the case, we're laser focused on strengthening our offering to ensure that we have the right products that meets our customer's preferences and needs. In addition, we're working closely with our brand partners to communicate the newest styles and innovation that comes to market through compelling merchandise stories, both in stores and online.
To bolster these efforts and bring a first rate consumer experience to our stores that differentiates and drives preference for the Finish Line brand, we recently commenced our most ambitious store remodel program in years.
The focus is on making innovation the hero and inspiring the consumer through key item and brand story telling in collaboration with our vendor partners. We're on schedule to debut our new store design next month, predominantly in several Chicago area locations with plans to update a significant portion of our store fleet over the next three years including 50 to 60 this year.
At the same time, we continue to execute our store optimization strategy with the goal of having a smaller, more profitable brick and mortar footprint. During Q1, we closed six locations, which follows 54 closures in fiscal year '16. The plan is to close another 20 this year and up to 150 underperforming stores in total.
We're also strengthening customer engagement by creating a best-in-class service model that complements our high quality merchandize offering to further enhance the shopping experience at Finish Line.
We're in the process of rebuilding the store service culture that drove Finish Line’s earlier success and recognize the importance of dedicating the time and resources to providing best-in-class service regardless of what channel consumers choose to engage with our brand.
We've stepped up our customer-centric approach by fulfilling more in-store demand even when a location is out of stock on a specific product and size. Utilizing our Omni-channel capabilities, store associates can search our entire inventory position to locate the item and have it shipped directly to the customer. Sales through the program were up 8% in the first quarter.
Another sign of the progress we're making to improve service is the fact that average dollars per transaction increased 3% compared with a year ago. Next, we're leveraging our Omni channel and enhanced CRM capabilities to improve customer engagement and drive sales to the Finish Line brand.
Recent technology investments, especially our MobileFirst strategy, have us directly aligned with how our customers are using their devices to search for the products they covet while our store base and digital sites provide them the ultimate flexibility to execute their purchases when and where they want.
We continue to see a positive impact of our MobileFirst strategy. For Q1, mobile comprised 62% of our total digital traffic increasing 21% year-over-year. We also know that mobile continues to positively influence our offline sales and we are using a variety of tools and methodology to understand the full impact of mobile on our online and offline sales.
As we learn, test, and innovate, we have and we will continue to optimize our marketing mix to lead with mobile and be relevant to our customers and their evolving need.
In addition, we've been more aggressive in our effort to expand our Winner Circle loyalty program across digital, social and brick-and-mortar. We increased membership by almost 720,000 growing our total active base to 10.5 million.
We also grew total member transaction penetration rate to nearly 60% which is important as we know they are our most valuable customers spending approximately 16% more than non-members.
Finally we are building on the success of the Epic Finish brand position campaign through three new campaigns launching for back-to-school that center on key cultural moments and further establish Finish Line's as the destination for the latest and greatest sneakers.
Moving to our next priority driving performance and contribution of our Macy's and JackRabbit businesses. Our Macy's business has performed well to start the year driven by the success of our shop expansion and relocation efforts and growth in digital sales through Macys.com.
Since inception, we repositioned 88 shops and are currently working on another 50 shops this year to drive further growth under this program. At the same time, our kids business posted a solid gain and now represents roughly 10% of our Macy's sales up from approximately 60% a year ago as we've increased the number of shops carrying kids to 165. We remain on track to offer kids in over 200 shops by the end of this fiscal year.
While kids currently represent a small percentage of our Macy's business, we believe we can aggressively grow this category over the next few years. We remain confident in our ability to deliver the fiscal year 2017 targets we have established from Macy and exceed the high end of our long term goal of annual sales of $350 million.
Turning to JackRabbit, sales comp positively for the second quarter in a row led by strong gains in the brand digital business. That said, there is a lot of work ahead of us to improve profitability before we consider reaccelerating our expansion of this concept.
Turning to management priority number three, establishing a great leadership team. During the quarter, we further strengthened our executive team with the appointment of John Hall as Division President and Chief Merchandizing Officer. John joined us following a long and distinguished career at Nordstrom. During his 30 years with the company, he held a number of senior roles mostly in footwear including Vice President, national merchandize manager of men's shoes and Vice President footwear brand manager for the Nordstrom product group, supporting men's, women's and kids.
At the Finish Line, John's focus will spend across all consumer engagement touch points including stores and digital operations, merchandize and strategies involving the company’s product vision and consumer experience. John will drive our brand growth strategies working closely with our brand partners and lead the creation and evolution of the brand vision. In addition to being a great merchant, John is a fine leader and we are thrilled to have him on board.
John's hire follows other key changes to our leadership structure from earlier in the year. As you recall, we promoted Melissa Greenwell, the Chief Operating Officer in February and appointed A. J. Sutera as our new Chief Information and Technology Officer in March. And last month we hired Debbie Fortnum, as Senior Vice President of Supply Chain. Our executive leadership team is now in place and squarely focused on improving execution and strengthening the fundamentals of the business.
Last but not least, management priority number four, creating an operating model that drives profitable growth and generates shareholders value consistently over the long term. As I outlined on our last call, we are focused on a number of areas to leverage sales growth to achieve this critical goal. First the overarching focus throughout the organization is around discipline, cost management including our approach to store real estate and managing both fixed and variable expenses.
Second, we are just starting to leverage the technology and infrastructure investments made over the last few years to drive returns on invested capital. And third, as we always have, we continue to place a high premium on returning cash directly to shareholders through our dividend and increase share repurchases.
Turning to our category performance, our focus continues to be on providing our customers with a broad selection of the trend-right assortment they are looking for. In Q1 this meant we improved our position with the best retro running and basketball shoes along with the latest causal running styles from several grand partners. For the quarter, both running and basketball comps increased low single digit.
In men's, which posted a low single digit comp increase sales were led by Nike Running featuring new retro iterations of Huarache, Max Air, and Presto and the newest version of Nike Free.
At the same time, we continue to experience explosive growth in our Adidas business. This is true across casual and performance led by superstar Stan Smith, NMD and Ultra Boost. Men's basketball was highlighted by sales of Curry 2 from Under Armour. We continue to enjoy healthy allocations of this signature product and we are very excited about what the future holds for this iconic platform. Meanwhile, retro and retro-inspired product once again dominated our brand Jordan business.
Moving to women's, comps increased high single digit, casual styles continue to resonate extremely well with our female customers. This included key products such as Pegasus, Roshe, Juvenate and Huarache from Nike, Chuck Taylors by Converse and Adidas Superstars and Stan Smith. We are also seeing great excitement in our Puma business fueled by classics along with hot new style Fierce and Fenty by Rihanna.
Kid's footwear increased mid single digits on a cost basis driven by Jordan Retro and sportswear and Adidas Originals. Like men's, kid's sales of Under Armour's, Curry basketball shoes were also explosive.
Soft goods comped down double digits in the quarter driven by softness in apparel and accessories. We are working hard to narrow our assortments and align our offering with customer demand. Soft good now represents approximately 10% of the total Finish Line brand sales.
Many of the same trends that fueled our first quarter business have carried into the second quarter. As we approached the summer Olympics in August, new innovations in running such as Nike's Zoom and Lunar platforms will fuel consumer excitement which we expect will translate into accelerated sell-throughs for the category as the year progresses.
Based on the work we are doing with our vendor partners to evaluate our product offering, we believe we will be well positioned to capitalize on the renewed excitement in running and the strong trends in casual and retro footwear during the key back-to-school and holiday selling season.
It's still early in the year but I’m confident that we are making progress in the right direction and a positive change is underway. We are taking the necessary steps to position Finish Line to deliver on our near and long term goal. Our commitment to creating sustained profitable growth and increase shareholder value has never been stronger.
I’ll now turn the call over to Ed.
Thanks Sam. For Q1 consolidated sales increased 2.3%. These increase consisted of Finish Line comparable sales that were up 1.5%, sales associated with Macy's of $73.1 million, up 22.8% compared to last year, and JackRabbit sales of $23.5 million, down 2.2% compared to last year. The decrease in JackRabbit sales was due to the fact that we operated five fewer stores than a year ago. As Sam noted earlier, JackRabbit comps were up low single digit.
With respect to cadence, comps for Finish Line were up 2% in March, up 0.2% in April and up 2% in May. Comp sales for June month-to-date are up low single digits at Finish Line. Consolidated gross margin decreased 50 basis points from a year ago to 30.8%, primarily due to product margin as we continue to work through higher inventory levels caused by the recent supply chain disruption.
Consolidated SG&A expense was 27.5% of sales compared to 23.6% of sales a year ago. The 120 basis of deleverage was primarily driven by approximately $2 million or 50 basis points of incremental supply chain expenses, increased depreciation and higher credit card cost. These increases were partially offset by expense savings resulting from disciplined expense management.
Our effective tax rate was lower than last year in Q1 as a result of incremental tax credits realized in the quarter. On a consolidated basis, net income was $9.6 million or $0.23 per share compared to net income of $13.9 million or $0.30 per share last year.
Moving now to our balance sheet, inventory was up 9% on a consolidated basis at the end of the first quarter with Finish Line owned inventory up low single digits, Macy’s inventory up double digits, but below Macy’s sales growth and JackRabbit inventory was up double digits.
We still have work to do to bring inventory in line with sales growth at both Finish Line and JackRabbit, which will create similar margin headwinds for us in Q2. Capital expenditures were $15 million for the first quarter and depreciation expense was $11.5 million. We ended the quarter with $85 million in cash and no interest bearing debt.
During the quarter we were aggressive in buying back stock repurchasing 1 million shares totaling approximately $21 million. The company has 1.3 million share remaining on its current Board authorized repurchase program.
For Finish Line, we ended the quarter with 586 stores including one opening and six closings. Our first quarter count for Macy’s stores with branded shops was 392. For JackRabbit, we ended the first quarter with 71 stores after closing one unprofitable store.
Now moving to our outlook for fiscal 2017; we continue to expect earnings per share for the year to be in the range of $1.50 to $1.56. As we talked about in March, we expect product margin headwinds and SG&A deleverage to continue into Q2 with opportunities for product margin improvement and SG&A leverage in the back half of the year.
The SG&A deleverage in Q2 is inclusive of incremental supply chain costs, which are expected to be approximately $2 million. The challenging retail environment is making us a bit more cautious about near-term trends; however, we continue to feel good about our prospects for growth in the back half of the year, based on the many initiatives that we outlined today.
Carol, we’re now ready to open the call for questions.
Thank you [Operator Instructions] Your first question comes from Camilo Lyon from Canaccord Genuity. Your line is open.
Thanks guys. Good morning. Ed, I wanted to get your sense as to, if you could just describe a little bit more of the composition of the Finish Line inventory and how we should think about, you talked about the incremental pressure we should expect in Q2 as you start to right size your inventory.
Can you just tell us what that is and then how that trends into the evaluation of your product mix whether by brand or by category as close -- as one of the trends are shifting what the stronger categories have been over the past couple years?
Yeah, so Finish Line, we ended the quarter with inventories up low-single digits like I talked about, that's a little better than where we were at the end of the year. We were up mid-single digits as we finished the fourth quarter a year ago.
I would say that we’re sitting here with the quality of the inventory, Camilo below being pretty good, meaning that we don’t have all the inventory that we're carrying over, the ageing continues to look very good to us.
We just have more quantities than what our sales trends are suggesting. So we’ve got some work to do in Q2, which we'll do to bring inventory growth at Finish line back in line with sales growth, expected sales growth at Finish Line.
Again Sam talked about it in his prepared remarks, the assortments continue to improve as we’re getting more of the retro styles and the casual styles into the mix and that’s going to continue to get better for us into Q2 and then certainly as we get to the back half of the year. So we remain bullish as we get to the back half of the year around our ability to show product margin improvement and also SG&A leverage.
And then Sam, maybe if you could just articulate a little bit more detail around what you're seeing from the brand perspective. It does seem like there is much more emphasis being placed by the consumer on the strengthening Adidas categories whether it’s the NMDs or the Tubulars or some of the other more retro styles.
Are you shifting your allocation, your shelf space to that brand and are they helping that effort with increased allocations of products, so that you’re able to meet more of that demand and where the offset is coming from that?
Yes sure. Good morning. Camilo. As we’ve always talked about our commitment to ensure that our assortments are on trend and relevant for our consumer, we'll always be the focus of our merchant organization and we’ve been working hard to make progress on that.
I’m confident as Ed just commented that the work that we’ve done will ultimately pay off for us as we get to the back half of the year as I think our team has made really great progress there.
The other thing I’ll add is we’re seeing the trend shift to running and there’s a number of indictors we see. I’d mentioned in my prepared remarks, Nike Free, again we’re excited about it, but we’re excited about it for a couple of reasons.
One, is the innovation that that team is bringing to market is really terrific; and two, the early read on the three to four new styles we've delivered to market since April have been resonating well. So that gives us positive indicators as we go into the Summer Olympics and what we believe could help catapult us into the back half of the year.
Specific to Audi, couple of things that I think are important to note, one is that the Audi brand itself has a ton of momentum. The excitement around that brand globally is very high and it’s no different here in the State.
We’ve been working really closely with them across multiple categories as I -- again, as I’ve mentioned in my prepared remarks and the plans that we have with Audi strategically from a product perspective and a go-to-market perspective is very robust and we think that the business will continue to grow with them in a significant way for the remainder of the year.
Your next question comes from Robby Ohmes from Bank of America, Merrill Lynch. Your line is open.
Hey, good morning, guys.
Good morning, Robby.
Hey, a couple of quick questions. First, sorry if I missed it, but can we get the traffic in ASP comps for Finish Line for the quarter?
Yes so ASPs were flat for the quarter. We talked about back in March where our expectations for ASPs for the year to be up 1% to 3%. We still expect ASPs for the year to be up 1% to 3% and traffic in the stores flattish and traffic online up obviously driven by mobile.
Thanks. And just a few follow-up questions, Sam, on the explosive Audi growth, how do you feel about say relative to Nike then getting you as you go into back-to-school enough product and enough exclusives and how are they set up to drive your business relative to the fantastic Nike machine?
Yes so Robby, I won’t comment relative to Nike. What I’ll tell you is the product pipeline from Audi is extremely strong. The work that team is doing and has done to set up the U.S. business and specifically as we've worked with them around the Finish Line strategy is really terrific across the Board product, go-to-market, and go-to-market from a holistic perspective, how we bring it to life in stores, how we bring it to life through our digital and owned social platforms, I feel really confident about what they’re doing as a brand and obviously where we’re positioned with them.
Got you. And just one more, is the quarter-to-date trend, did you benefit from the Memorial Day shift is sort of one question and then also why keep the 3% to 5% comp guidance, if you’re not really tracking that range yet?
Yes, so, I would say there is no significant impact of Robby in the month-to-date trend around Memorial Day and the reason that we’re going to -- that we maintain the 3% to 5% comp for the year, remember when we get to Q3, we've got a very easy comparison.
So a year ago because the supply chain disruption we were down six and change in year three -- in quarter three, we talked about when we gave our original guidance that we expected that quarter in particular to be the anomaly with a strong comp, high single, low double. So that has the impact of bringing the year into that 3% to 5% range.
Your next question comes from Mitch Kummetz from B. Riley. Your line is open.
Yes thanks. I’m not sure if you guys gave the footwear comp on the quarter. I think you kind of ran through gender and categories. I don’t know if you give an overall footwear comp?
Yes, it’s up low single digits.
Okay. And then in terms of the Q2 outlook and I think you made the comment that you’re a little more cautious on the near term, you’re running low singles through the early part of the quarter.
My recollection is that the compares get easier over the balance of the quarter. I think you were kind of mid single through the early part of last year and then the overall comp was I think 1.5%. So kind of what are you seeing over the next couple of months that gives you a little bit more caution on the quarter?
Yes. So Mitch I would say first off the retail environment and I mentioned in my prepared remarks, you’ve heard from a lot of other retailers that have reported. So there is that overlay of kind of the macro effect.
You're absolutely right in terms of the comparisons that we have through the second quarter. For last year, our comp for the second quarter was up 1.5%, but June was the strongest month of the quarter. We were up 7.9% a year ago in June. So up low single-digits this year against that 7.9% a year ago is a good compare on a two-year stack.
Our comps in July and August get easier. We were down slightly in July and then we were down 1.5% I think in August a year ago. So comparisons do get easier as the quarter unfolds, but we’re focused as Sam said on the fundamentals of the business improving execution and that's where our efforts are.
Okay. And then Sam could you talk a little bit about the Signature Basketball business, I know that it’s been challenging for certain of the athletes, but there are some new shoes that are kind of in the process of coming out. I know the KD 9, you guys get that I think July 1. What is your outlook for Signature over the balance of the year?
Yeah, I think that as we’ve shared in the past and I think what the market has seen couple of Signature athletes in particular have slowed. At the same time, there is in totality, at same time there is others like Steps that remains very robust.
There is items that we remain excited about like KD as you mentioned. Brand Jordan continues to be really good business for us. So I think in totality the basketball business will be challenging largely driven by a couple of big Signature athletes footwear, but I think in totality we’ve got some opportunity with some key items as we move into the back half of the year.
Your next question comes from Edward Plank from Jefferies. Your line is open.
Hey, thanks for taking the question. Good morning, guys. I guess to the extent that you can talk about with the stores that you've closed so far, do you have any sense of how much of the lost sales you’ve been able to recapture, either online or the locations through The Winners Circle Program, just kind of want to get a sense of how it’s tracking towards you kind of outlined a couple months ago?
Yes so, Eddie we've closed 60 doors -- 60 stores to date in our store closing program. So 54 last year. Six this year. Still early in the analysis of the sales transfer calculations that we’re doing, but I would say we’re tracking towards our goal.
Part of this benefit remember comes from just redistributing the allocated products that these stores were previously getting and redistributing them to the rest of the chain and that's a pretty easy transfer that we will get.
The more difficult transfer is the Winner is retaining and transferring Winner Circle customer and we’re being -- we’re very successful in transferring our most loyal customers, our communications with them prior to the closing of the store increases and we’re providing incentives for them to shift their behavior both online and to sister stores in the marketplace.
Obviously, we are lot more effective in being able to transfer sales when we have sister stores and close proximity of the store that's closing. So when we’re in a 10 mile or less radius, we are lot more successful with transferring that winter circle customer to that sister store but we continue to increase our efforts and focus on this and we are progressing towards our goals.
Great, that's very helpful. And then Ed, did you say how much product margin was down in the first quarter? I apologize if I missed it.
Yes, so it was the entire driver of the gross margin decline. So 50 basis points, occupancy was flat.
Great. Thanks a lot. Best of luck going forward.
Your next question comes from Jonathan Komp from Robert W. Baird. Your line is open.
Yes, hi, thanks. Maybe first just back on the inventory and gross margin question, if you could maybe, Ed, just talk a little bit more. It's not entirely clear to me, it sounded like maybe back in March you were more hopeful that as you got to the second quarter the growth of the inventory for Finish Line would be closer to sales and that some of the assortments could drive maybe some positives on the gross margin or product margin front.
So I guess it's not entirely clear what's changed or has some of the inventory workdown just gone slower or any more perspective there?
Yes, I would say that that's the case the inventory workdown has been a bit slower. We were a little bit more optimistic in March that we would have inventories that Finish Line back in line with sales growth and we are close, we are off to a couple of percentage points.
So we just – it's taking us a little longer. We’ll get there through the second quarter pre back-to-school and back-to-school selling seasons. The larger amount of work that we got to do is on the JackRabbit side where we've got inventory growth well in excess of sales growth and that team has a plan and they're focused on that plan and again we are confident we are going to make meaningful progress on that front in the second quarter as well.
And it will translate as I mentioned in my prepared remarks to some gross margin headwinds, the product margin headwinds that will extend for us into the second quarter but then as we get to back-to-school, turn the corner on the half of the year and get to the back half, we've got opportunity with improving assortments and inventories back in line with sales growth that will drive product margins benefits for us and help to contribute the EPS growth.
Okay. Great. And then maybe one more on the monthly sales cadence. It looked like April was a low point in the quarter and you've seen better trend since then. Do you think the environment has gotten any better in the last couple of months or any other drivers to that improvement in May and June?
Yes, was up a tick, so we were up slightly in April, up 2% in May. We are up low single digits in June so I think again you heard from a lot of other retailers as they've reported about their caution around the consumer and mall traffic in the environment and we share that and we’re just a little more cautious near term but very optimistic in the back half of the year.
Your next question comes from Paul Trussell from Deutsche Bank. Your line is open.
Hi, this is Tiffany Kanaga on for Paul. Thanks for taking our questions. Are there any early comments you can make on the remodels that you're testing in terms of how they are different and what sort of sales and traffic lift you think they can drive?
Yes. So there is about 15 stores that we are currently under construction and remodeling as we speak with 8 of those being in the Chicagoland market as Sam talked about, that's where the predominant test will be.
Those stores will not reopen until next month and we’ll start to get some learnings but this is very much test, learn and iterate as we go. So we will take the learnings from these stores when they reopen and they will have the full back-to-school season sales available to us. We will analyze those sales, look for sales trend, shifts, lifts.
We'll also get consumer feedback and we’ll have our brand partners out with us looking at these stores. All of those learning's will be applied to the future remodels that we do in the back half of this year and then beyond.
So nothing to-date but when we get together again in September in our second quarter call, we’ll have some update on that.
All right. Thanks so much.
Your next question is from Chris Svezia from Susquehanna Financial Group. Your line is open.
Good morning, everyone. Thanks for taking my questions. I guess first, Ed for you just a clarification here on the second quarter, just to be clear, I guess you would expect a low single-digit comp increase similar with your annual guidance with third quarter being the strongest, but you would expect merchandized margins still be down a similar level in Q1 and SG&A deleverage somewhat at similar level to Q1 is a characterization.
Okay. And then I guess Sam for you, a two part question one, just on the inventory and I know you kind of continued talk again got inventory inline, when can we firmly expect that? Is that -- could that be in August as you inflect into back-to-school and from a product flow perspective, you guys have been talking about this for a while in terms of getting the right product and really crossing that bridge or, when specifically can we expect that?
Is that as you come out of the second quarter, can we have that by the time you get back to school, just any clarification on the timing of those two factors inventory and product flow.
Yes. So Chris I'll answer both. So inventories, our expectation at Finish Line is that yes, we'll in fact be in line with inventories at Finish Line in line with sales trends as we finished the second quarter in August.
I can’t say with confidence that JackRabbit will quite be there, but I can say with confidence that JackRabbit is going to make significant progress in getting their inventories back down in line close to sales trends as we finish August.
With respect to assortments improving, we talked about, we’re going to see continued improvement again as we get through the second quarter and then when we get to the back of this year beginning in our third quarter with the work that the merchant team has done with the brand partners around, retro and casual style sneakers, we’re going to be in a good place as we get to the back half of the year.
Okay. Thank you.
Your next question comes from Susan Anderson from FBR and Company. Your line is open.
Hi, good morning. Congrats on a good quarter in a tough environment. I was wondering if you could may be give a little bit more color on traffic, I think you flattened the stores, which is obviously beating the trends that I guess what are you guys doing to battle the declining mall traffic as we go throughout the year and as your expectation that it remain flattish?
And then one follow-up on the ASPs, I think you said flat this quarter, but you're still expecting that to grow 1% to 3% the rest of the year. Just a little bit more color on the inflection that you’re expecting. Is it all innovation coming out of one pick? Thanks.
Yep, so on the traffic side, Sam talked about with our Winner circle members, how we're growing our customer base, how we're using messaging to the Winner circle customers to drive traffic, both online in stores and that continues to help us specifically.
So as we leverage these CRM capabilities that we're developing, that will help drive traffic both to stores and online. And with respect to ASPs, again we still feel confident that ASPs will be in the 1% to 3% range. As we get -- as we get the assortments improved and get to the back half of the year as we get stronger sell-through at full price, that’s going to help drive ASP increases and offset any impacts that we're feeling on the shifts, the category shifts.
Great. That’s helpful. And then one last follow-up on the women’s business, so a nice inflection this quarter from last quarter. Have do you guys -- do you guys think that can continue to kind of outperformance we go throughout the rest of the year? Is there enough newness coming out? Thanks.
Yeah, the women’s part of the business has been a strong category for us and we see continued opportunities to grow that part of the business. We’ve got a lot of work we’re doing with our brand partners and believe that the upside for the women’s business will continue as we move through this year.
Great. Good luck next quarter.
Your next question is from Erinn Murphy from Piper Jaffray. Your line is open.
Great. Thanks. Good morning. I just had a question on the Macy’s top three locations, can you just remind us what the uplift that you see is whether its traffic or ticket when you make those relocation and then after this year, how many more reloads are still kind of at your finger steps for Macy’s.
Yes, so we did 88 last year and we see strong double-digit growth in topline and we also see a significant benefit on the bottom line. So we talked about the fact in March that the profitability as we reposition and expand and remember reposition and expand means one of better place inside of the Macy’s store where we've got stronger traffic and we also get better, which allows us to show more of our assortment to their customer including the inclusion of kids.
So strong double-digit topline growth and a doubling of the bottom line from those repositions. We’re planning for 50 more of those this year and Erinn I would say as we look forward that we will have hit the majority of the opportunities.
So opportunity for next year I would say at least as we’re thinking today would probably be a smaller number than 50, but I can’t get any more specific than that because we really haven't planned a thing.
Got it. That’s helpful and then just on inventory within Macy’s, you said it was up double-digits as well, but low that of sales growth. Is that kind of the cadence we should anticipate as we get into the back half of the year for that?
Yes, Macy’s sales again up almost 23%. So the inventory is less than the sales growth and helping fuel that top line.
Got it. And then just last as a clarification on the ASPs as you think about hitting that 1% to 3% for the year, how does the mix, just remind how the mix impacts that basketball versus running. You guys have been obviously very bullish on the running side of your business?
Yes, so basketball sneakers in general have a little higher price points than running. So that mix works against us a little bit, but what really drives ASP increases for us is our ability to sell through at full retail and as we start to see increasing sell-throughs at full retail, that’s what will drive our ASP increases for us.
Got it. Thank you, guys.
Your next question comes from Jay Sole from Morgan Stanley. Your line is open.
Hi, good morning, thanks for taking my question. It seems like inventory across the channel is very high. How is that impacting your ability to work down inventory? You talked about it's a little bit, slightly bit longer than you expected. Can you just talk about the industry in general and how that's impacting your business?
Yes Jay I would say we’re not affected by the industry in general. This is within our control. We have the ability to bring these inventories back in line with sales. We've made progress with Finish Line in the quarter. Didn’t quite get to the goal that we had set for ourselves, but I remain confident that the work that the merchandizing team is doing that we’re going to have inventories back in line with sales growth for Finish Line as we finish the second quarter. So there is no excuses, there is nothing in the industry that's preventing us from making this progress.
Okay. And then maybe just on Macy's, just with the sales growth being as strong as it was and you talked about relocations, can you just talk about some other factors that were positively impacting the Macy's business. Was the brand performance there similar to the core Finish Line stores? Anymore detail there would be helpful.
Yes, so Sam talked about kids. Kids is a big driver at Macy’s. So it was 6% of total sales at Macy’s a year ago. It's up to 10% and remember Finish Line, kids is over 20% of our mix. So we have the opportunity to continue to drive significant kids increases in Macy’s and we’re doing that by including more and more of kids in the mix and getting the space in the store to be able to do that.
Another big driver of our topline at Macy’s was our online business at Macys.com. Continues to grow significantly/ It’s a huge opportunity. We're still underpenetrated, relative to where we think we can take that Macys.com business and remember we have full Omni channel capabilities with our Macy’s.
So we have the ability to fulfill not only from our distribution center here in Indianapolis, but we have the ability to fill orders from the 390 Finish Line shops that fit inside of Macy’s and that’s helping show more of the assortment to that Macys.com customer and it also shows all of our markdown product to that Macys.com customers.
So it drives topline and it also cleans up our inventory and helps improve our overall gross margins at Macy’s because we're able to sell that product to the online customer many times before the second and third markdowns are required.
So lots of momentum in the Macy’s business. We feel good about it not only this year’s goals, but we feel good about our ability to get through our long-term goals at Macy’s.
Okay. Got it. Thanks Ed.
Your next question comes from Tom Nikic from Wells Fargo. Your line is open.
Hey guys, thanks for taking my question. Just a quick clarification, sorry if I missed it, did you guys give the comp breakdown brick-and-mortar versus digital?
No, I didn’t. Comps were up low single digits in both channels, stores and digital and I’ve got to put an asterisk around the digital comp. So there were some actions we took that worked against the digital business in the quarter.
Two things, one is we allocated more of the launch product to our stores, again just to mitigate the potential risk with our supply chain and our ability to sell through this product and that was versus a year ago where we didn’t have any supply chain risk that we were managing.
So that had the effect of shifting about seven percentage points of sales out of digital and shifting it to the stores and then when we went live with our new supply chain systems, we made it more convenient for our customers to return product to our warehouse as opposed to previously where they were taking more of this product back to the store and that difference in how returns are affecting our sale had an impact of about three percentage points, 300 basis points on the digital comp.
So, adjusted for those to normalized digital business would have been up double digit for us, that obviously would have affected little negatively our store business, but all-in-all, the combined comp of 1.5% was what it was driven by both channels.
All right. Is that like a Q1-specific thing or…
So the returns impact will be through Q3 and then Q4 to normalize because that’s where the system comparisons will be the same. We’ll see how we go with the retro -- with the retro launch product.
We’re going to be a little bit more cautious and still probably send more to the stores in Q2, but as we talked about when we get to the back half of the year, we now believe that the supply chain system is going to start to work to our advantage and start to provide benefits for us. So, I would expect that the product distribution of the launch product will be normalized as we get to our third quarter.
All right. That’s helpful. Thanks guys.
Your next question comes from Christian Buss from Credit Suisse. Your line is open.
Hi, this is Pallavi on for Christian. Can you talk about how digital profitability is evolving and anything around the drag you're currently seeing on overall margins? Thanks.
Yes. So our digital margins are mid-teen profit margins and as we continue to grow the digital business topline double digits, which is our plan, we'll get expansion of the digital profit margins primarily through SG&A leverage and I’m sorry the second question?
So the second question was just any more color on the drag that you expect.
So, for the year, we're EPS growth of about $1.50 to $1.56, so we haven't commented specifically on the components around that other than to say for the first half of the year expect product margin pressures and some SG&A deleverage, but that turns to an advantage for us in the back half of the year.
So from a long-term basis, what will help our operating margins expand are continued growth in our Macy’s business. So as Macy’s grows to $350 million and beyond, at that level it will be a high single-digit operating margin business and that business for us this year based on our original annual guidance was to produce 3% to 4% operating margin. So we’ve got opportunity to expand operating margins with our Macy’s business.
As we continue to execute our plan at Finish Line through the four pillars that Sam talked about, we’ve got opportunities to expand our operating margins at Finish Line and specifically that will come from improving assortments, which will drive product margin benefit being disciplined in our expense management and getting expense leverage and then closing our underperforming stores, which will lower our occupancy leverage point and give us the opportunity to leverage occupancy at a much lower level that what we have historically.
And then finally with respect to the third business JackRabbit, as Sam talked about, we’ve got very specific metrics for that business that we're measuring regularly and will get to a decision point and either decide to begin to invest in that business again and that’s where we're headed with that business.
Okay. That’s great. Thanks so much.
Your next question comes from John Kernan from Cowen. Your line is open.
Hey, good morning guys. Thanks for taking my question.
Just to go back to the point you just made on occupancy, it sounded like occupancy as a percent of sales within the gross margin line was flat. When do you think that we start to see improvements in that metric? Is at the back half of the year? Is it next year? But, I think you said…
Yeah, John we said coming into the year that it was going to take a 4% to 5% comp to leverage occupancy. We obviously did better than in that in the first quarter, but we still believe for the full year, our leverage point for occupancy at Finish Line is in that 4% to 5% range.
I would say normalized when we get the underperforming stores out of our mix, that leverage point will come down to 3-ish comp that’s required to leverage occupancy and so that will take another year or so before we get to that point, but I would expect continued improvement in lowering the leverage point of occupancy for us and that will be driven primarily through out program to optimize our store base, close our underperforming stores and then to reinvest back into our remaining stores through the remodel upwards that will improve productivity there.
Okay, that's helpful. Thanks. Then just there's been a lot of noise around Nike's pricing certainly around signature basketball. Their ASPs in general and footwear in North America have come down a bit and actually declined for the first time in a while.
So what do you think stabilizes or gets Nike's ASPs going again within specifically within your store? And is there still at least three-quarters of total sales, so when can we expect Nike pricing to be a benefit to your comps again? Thank you.
John, I think couple things, just philosophically what we’ve learned over the years is that across all categories, if the products are priced with the appropriate intrinsic value that the consumers recognize, it’s not an issue.
Having said that, its fair to say that some of the headwinds I think that have challenged the basketball business are due to the fact that certain styles got a bit too expensive relative to how the consumers value them and again stylistically I think that there were some work to be done there.
When products are right and I think if you look at items like Steph Curry and some other things within brand Jordan, you'll see that while there are sharper price, the consumer sees the value in those products.
At the same time, I think that within some of the new innovation that Nike is bringing to market and other brand quite frankly and more specifically within the running category, there certainly appears to be a movement towards running and certainly more innovation being brought to market and as our quarter suggest, our running comps up low singles as that trends continues to migrate to the category, we think that both the product pipeline, the value that is associated with those products will resonate well with the customer.
That's helpful. Just one kind of maintenance question, can you give us, I'm not sure if you provided this in the prior call, but just CapEx guidance for this year as we try to model free cash flow and some of the shareholder return potentially in the back half of the year?
The CapEx guidance for the year is $55 million to $60 million, and we’re right in line with that after Q1.
Okay. Thank you.
Your final question say comes from Matthew Boss from J.P. Morgan. Your line is open.
Hey guys, this is Dustin on format. Thanks for taking my question. I just wanted to dig in a bit on the SG&A cadence for the year, particularly in the second half when you begin to lap some of these supply chain issues. In 3Q last year you spoke about part of the $5 million to $6 million in the incremental supply chain investment being related to freight, labor and shipping costs that I imagine wouldn't recur.
So if you can maybe parse out how much of this is reoccurring? Because based on current SG&A trends it seems like the third-quarter dollar growth could potentially be flat, so any color you could provide on this.
Yes so clearly when we get to the third quarter in particular, the incremental SG&A spend around supply chain, is not expected to recur. So when we get to the back half of the year, we actually expect and what's embedded in our guidance is that supply chain starts to deliver on the benefits that we expected from that system when we implemented it, and just as a reminder those benefits are speed of delivery to customers and speed of delivery through our warehouse and out to our retail stores and doing that at a lower cost.
So there will be not only customer experience improvements resulting from the new supply chain, but lower cost and financial benefits as well.
Some of the headwinds that I spoke about in March around our SG&A cost for the year, we've got increasing depreciation as we’ve started to depreciate the new supply chain system that we installed and that will carry with us through the first three quarters and then it will start to normalize in Q4.
We’ve got increased incentive compensation cost built into the guidance for this year as we’ve assumed that we’ve got normalized incentive cost, -- incentive compensation cost versus a year ago where we didn’t perform and we didn’t pay out incentive compensation cost.
And then the other component of SG&A pressure is coming from increased wages in certain pockets of the country resulting from increased store wages, resulting from minimum wage pressures that we’re feeling and again I talked about that in March, it's built into our guidance and that's creating a bit of a headwind for us as well and that will be persistent throughout the year.
Offsetting this is our focus on being very disciplined in expense management across the Board. So we’re looking across the Board at opportunities to manage our expenses more effectively and it’s a focus and dedication of this management team and that will offset some of these headwinds we talked about.
Got it. And then I'm not sure if you commented on this, but can you give us an idea of where some of the excess inventory at Finish Line is concentrated from a category perspective? Is it basketball…
I would say that apparel is an area where sales trends are off as Sam talked about in his prepared remarks and we've got inventory level, inventory work to do there. Outside of that, I would say spread in the footwear side, spread is across the categories.
Great. Thanks. Good luck, guys.
Well, thank you everyone for joining us today and this concludes today’s call and we look forward to speaking with you again on our Q2 call in September.
This does conclude today's conference. You may now disconnect.
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