Squeeze Me, Come On And Squeeze Me: Why Finish Line Rallied Over 20%

| About: The Finish (FINL)

Summary

Shares of Finish Line rallied over 20% as the company reported strong Q1 results.

Management is executing on improving the operational side of the business.

Fashion trends are a tailwind for Finish Line.

The short interest doubled in May, causing an epic short squeeze.

I'm staying long shares with a fair value of $27.

Shares of Finish Line (NASDAQ:FINL) rallied over 20% on the market's darkest day of the year as the company reported better-than-expected sales results and kept guidance in tact in light of horrible guides from fellow mall-based retailers. Long-time followers know that I've been bullish on the company, calling it my best idea for 2016. I still think shares look inexpensive, and I think the new management team demonstrated that they have a much greater sense of urgency than the prior management team.

On the surface, a company rallying over 20% on 2.3% y/y sales growth sounds ridiculous. But it's not. The surge was driven by a combination of a new management team showing promise of strong execution and an old fashion short squeeze. Overall, Finish Line's share price has only recovered to its March highs, and I believe shares have more runway.

Management shows promise of execution

Previous CEO Glen Lyon was undoubtedly a legend in retail. For whatever reason, he never seemed to properly motivate the company and put the proper focus that was needed on both execution and merchandising. Lyon was also slow to make changes to adopt to online competition.

Even though he was a core part of Lyon's senior management team, new CEO Sam Sato has shown little patience with the supply-chain issues that plagued that company and has worked aggressively to push the company greater into omnichannel retail in his limited time on the job.

Frankly, most of Lyon's biggest disasters came from operational execution rather than merchandising. When the company attempted to revamp its website in November of 2012, the site crashed, didn't work particularly well, and overall, it was a complete failure. It cost the company millions of sales on Black Friday. A similar experienced occurred in last year's third and fourth quarters again cost the company millions of dollars in lost sales and profits.

In the wake of these disasters, Sato has invested heavily in improving these areas. In 1Q'17, Finish Line saw its fulfillment rate in the first 24 hours jump from 80% to 90%, indicating increased efficiency. Click-to-door, fulfillment rates, and cancellation rates are all improving.

Additionally, the company is in the midst of revamping many of its Chicago stores a nationwide remodel program likely on the horizon. Rival Foot Locker (NYSE:FL) performed a similar nationwide remodel over the past few years, and I think improving the stores will carry at least an ROIC in excess of Finish Line's cost of capital. The new stores that will be part of a leaner footprint should lead to a better and more consistent consumer experience.

Another positive during the quarter is the hire of long-time Nordstrom (NYSE:JWN) executive John Hall. Hall will take over as Chief Merchandising Officer from the fashion forward department store, and I suspect he will greatly improve Finish Line's ability to spot trends for casual offerings.

On top of management's execution, Finish Line was greatly aided by fashion trends. I alerted investors back in December that the trends shaping up for Finish Line's FY17 were retro running, retro, casual running, Jordan (NYSE:NKE), and Curry (NYSE:UA). All of these products have been on-trend thus far in CY16. Adidas (OTCQX:ADDYY) has also been a standout performer thanks to strong sales from the Ultra Boost and Yeezys augmenting a revival in the core Stan Smith and Superstar lines.

The consensus opinion about Finish Line's product assortment was fundamentally wrong. Sell-side banks have been warning investors about slowing signature basketball product sales from the likes of Kobe Bryant, Kevin Durant, and LeBron James. This was completely, 100% accurate. The problem is, Finish Line already had lower exposure to these categories, and I've seen them move SKUs of the slow-selling basketball product exclusively to online to make sure there was ample selling space in stores for saleable product. To further emphasize the point, Finish Line doesn't even carry Nike's Kobe Bryant signature line, and it has far fewer LeBron SKUs than Foot Locker.

What did Finish Line have on their shelves? Nike retro product like Air Maxes, Prestos, and Huraches., Jordan retro product that continues to sell phenomenally well, adidas and its stable of hot-selling SKUs, and finally, Finish Line had strong exposure to Under Armour's Curry line. Finish Line's buyers came through ahead of 1Q'17, and I think they will also come through for at least the duration of the year.

Squeeze Me

Settlement Date

Short Interest

Avg Daily Share Volume

Days To Cover

6/15/16

7,436,933

843,741

8.814237

5/31/16

7,120,919

1,522,961

4.675707

5/13/16

3,888,215

1,013,069

3.838055

4/29/16

3,487,362

719,881

4.844359

Click to enlarge

Source: NASDAQ

The other driver of Finish Line's strong share price performance was more of a supply/demand dynamic. As you can see in the chart above, the short interest doubled in May, concurrent with the negative sentiment from sell-side banks. I suspect the buyside whisper for comps was flat-to-down, when in reality, Finish Line delivered growth of 1.5%, while reiterating its forecast for 3-5% same-store sales growth in FY17. Shares of rival Foot Locker even closed flat yesterday, as I think investors are better attuned to the fact that footwear is the one area of traditional retail that has remained insulated from Amazon (NASDAQ:AMZN).

Should you sell the pop?

It is certainly enticing to sell the pop. My position is now up roughly 25% on my cost-basis in just a few months, but I think there is more upside to come. Finish Line is one of the few bright spots in retail, and I think its clean balance sheet and strong secular trends keep it on the radar of private equity buyers. I continue to believe shares are worth about $27. I will be collecting dividend checks while I wait for more positive catalysts to push shares towards their intrinsic value.

Disclosure: I am/we are long FINL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.