Finish Line: Turnaround In Progress

| About: The Finish (FINL)

Summary

FINL appears to be making progress in turning its business around with modest improvement in comps and in-line margin.

E-commerce remains a notable growth area and will be a key driver of sales going forward.

Elevated inventory level and supply chain improvement are key areas for improvements.

Finish Line (NASDAQ:FINL) appears to be making progress in turning its business around with a modest improvement in comps and in-line margins. The company has been investing in hiring talent with the recent senior management additions, remodeling its stores, improving its merchandise and ramping up on e-commerce. All these efforts could pay dividends overtime but investors lack patience and may not be willing to wait to see the full turnaround. In addition, the disruption in the supply chain remains a drag on margins and inventory so a near-term turnaround is unlikely to be this year. That said, I remain cautious on the name but certainly the outlook is turning positive in the wake of the recent earnings.

Revenue of $454m, +2.3% y/y, is largely in-line with consensus with comps at 1.5%, a modest improvement but still lags behind consensus 3-5%. Comps remainsa mixed bag with March up +2%, followed by a flat April and May up +2%. While slow mall traffic continues to impact the comps, running and basketball products continue to sell well, particularly that of the Nike and Adidas brand footwear.

A notable area of improvement is in e-commerce where mobile capabilities have been ramping up nicely with low single-digit comp increases in digital orders. Interestingly, mobile traffic now accounts for over 60% of total digital traffic and this segment will likely to continue grow due to the structural increase in e-commerce and the decline in mall traffic. I note that apparel has now become the largest category in US e-commerce and I do not expect anything to hinder this trend.

Although the company has made good strides in certain areas, there are still areas where it needs to focus to expedite the turnaround strategy. First, the supply chain headwind continues to weigh on margins with gross margin down 50bps y/y. Product margin continues to be dragged down by increasing inventory levels from last year's supply chain disruption. While I was encouraged by FINL's effort in fixing its supply chain judging by the decline of the cancelled orders and the improvement in delivery time, I'm puzzled by the delay in the new warehouse and order management system that the management does not expect to yield full benefits until the second half of FY17. Finally inventory level remains high and with a +9% y/y growth this quarter due to Macy's and JackRabbit. The elevated inventory level could further weigh in on gross margins as the company works through this issue.

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