The Finish Line F3Q08 (Qtr End 12/1/07) Earnings Call Transcript

Jan. 6.08 | About: The Finish (FINL)

The Finish Line, Inc. (NASDAQ:FINL)

F3Q08 Earnings Call

January 4, 2008 8:30 am ET

Executives

Kevin S. Wampler – Chief Financial Officer & ExecutiveVice President

Steven J. Schneider – Chief Operating Officer

Alan H. Cohen - Chairman of the Board & Chief Executive Officer

Analysts

Jeffery Van Sinderen – B. Riley & Company

John Shanley – Susquehana International Group

Virginia Genereux – Merrill Lynch

Brad Cragin – Goldman Sachs

Operator

Good morning. My name is Latasha and Iwill be your conference operator today. At this time I’d like to welcome everyone to The Finish Line’s thirdquarter earnings conference call. Alllines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be aquestion and answer session. (OperatorInstructions) I would now like to turnthe conference call over to our host Mr. Kevin Wampler, Chief FinancialOfficer. Mr. Wampler please go aheadsir.

Kevin S. Wampler

Good morning and thank you for participating inour conference call pertaining to thethird quarter earnings press release which went over thewire Thursday, January3rd atapproximately 4:15 eastern time. Thiscall is being recorded and can beaccessed by calling 706-645-9291 conference ID# 25979417. Therecording will remain active for two business days. You may also access this recording as well asa copy of our Q3earnings press release on theweb at www.FinishLine.com.

We ask that you remember that some of the comments made byFinish Line management during this call may be considered forward lookingstatements that involve risks and uncertainties and therefore actual resultsmay differ materially from those statements expressed or implied bymanagement. Such risks and uncertaintiesinclude but are not limited to costs, potential liabilities and other eventsrelating to the company’s merger agreement with Genesco, Inc. and the relatedlitigation, product demand and market acceptance risks, effective economicconditions, the effective competitive products and pricing, the availability ofproducts, management of growth and other risks detailed in the company’s January3rd press release and in its SEC filings.

I’d now like to turn the call over to Steve Schneider ourCEO who will review the results discussed in yesterday’s release. Alan Cohen or CEO will follow with someadditional color on the quarter as well as provided a few comments on theGenesco litigation and our business plans going forward.

Steven J. Schneider

For Q3 which ended December 1st consolidated netsales from continuing operations decreased 4% to $268.7 million from $280million last year. Total company compstore net sales for Q3 decreased 3.6%. By concept Finish Line comp sales decreased 3.2% and Man Alive compsales decreased 9.8% compared to the same 13 week period last year. Comp store sales by month for our Finish Linestores were as follows: September increased .2%; October decreased 7.5%; andNovember decreased 3.2%. For the quartercomp store footwear sales decreased 1.5% and soft goods decreased 9.5%. For the quarter Man Alive stores posted a9.8% decline in comp store sales. Bymonth September comps decreased 15.3%, October decreased 6.3% and Novemberdecreased 7.4%.

For Q3 the company posted a loss from continuing operationsof $13.8 million or $0.29 per diluted share as compared to a loss fromcontinuing operations of $1.8 million or $0.04 per diluted share for Q3 lastyear. For Q3 the company posted a nonGAAP loss from continuing operations per diluted share of $0.17. This non GAAP loss excludes $0.12 per dilutedshare for expenses incurred in connection with the pending merger with Genescoand the related litigation.

The gross profit percentage for the quarter declined 190basis points versus Q3 last year to 26% even of sales. This consistent of a 130 basis point increasein occupancy costs along with a 60 basis point decrease in productmargins. The deleveraging of theoccupancy cost is primarily related to the negative sales for the quarter alongwith increased occupancy costs for the Man Alive division. The decline in product margins was primarilya result of markdowns in the Finish Line division as the company worked toimprove the quality of inventory as we entered Q4.

SG&A expenses for the quarter were 31% of sales which isa 210 basis point increase compared to 28.9% in Q3 last year. The increase as a percentage of sales wasprimarily related to the deleveraging of expenses based on the negative compstore sales, higher store payroll costs, increased marketing costs as well asincreased freight and depreciation expense.

Interest income was $223,000 for Q3 versus $21,000 ofinterest expense for Q3 last year. Theincrease primarily reflects the higher average invested balancesyear-over-year. The effective tax ratefor Q3 was 39.6% as compared to an effective tax rate of 37.3% for Q3 lastyear. Diluted weighted average sharesoutstanding were 47.2 million for Q3 and 46.9 million for Q3 last year.

For the year consolidated net sales decreased 1.3% to $894.4million versus $904.2 million for year-to-date last year. Comp sales decreased 4.1% year-to-date ascompared to a 5.8% decrease reported for last year. Year-to-date the company posted a loss fromcontinuing operations of $9.5 million or $0.20 per diluted share as compared toincome from continuing operations of $14.5 million or $0.30 per diluted sharefor year-to-date last year. The non GAAPyear-to-date loss from continuing operations per diluted share was $0.07. This non GAAP loss excludes $0.13 per dilutedshare for expenses incurred in connection with the pending merge with Genescoand related litigation.

During Q3 the company opened seven new Finish Line stores,remodeled three existing stores and closed three stores. As of the end of the quarter the companyoperated 701 Finish Line stores compared to 692 one year ago. In addition, Finish Line store square footageincreased 1% to 3,875,000 as compared to 3,854,000 at the end of Q3 lastyear. The company opened one new ManAlive store and remodeled two existing stores during the third quarter. Man Alive operated 96 stores as of the end ofthe quarter compared to 88 stores one year ago. That’s an increase of 9%. Inaddition, Man Alive store square footage increased 15% to 332,000 square feetcompared to 288,000 square feet at the end of Q3 last year. The company has completed its fiscal 08expansion plan which included the opening of 18 Finish Line stores and 11 ManAlive stores. The company also remodeled18 existing Finish Line stores and two Man Alive stores. For the year the company has closed sevenFinish Line stores and one Man Alive store.

Merchandise inventory on a consolidated basis were $338.7million at quarter end compared to $356.9 million at the end of Q3 lastyear. On a per square foot basisconsolidated inventory decreased 5% and Finish Line store merchandise inventorydecreased 3% compared to one year ago.

The capital expenditures for Q3 were $5.3 million and $25.3million year-to-date. The amount ofdepreciation and amortization expense in Q3 was $9.8 million and $31 millionyear-to-date. Our capital expenditure projectsfor the full fiscal 2008 are estimated to be $27 to $30 million. Depreciation for fiscal 2008 is estimated at$41 to $43 million. We expect to reportsales for Q4 which will end March 1st on Thursday, March 6th.

I’m now going to turn the call over to Alan for someadditional comments.

Alan H. Cohen

Good morning and thank you for joining us. Steve has taken you through our sales andfinancial performance for the quarter so my comments will focus on the resultsand trends by category and concept.

Comp sales for the Finish Line stores decreased 3.2% for thequarter. The soft goods category wasdown 9.5% while footwear declined 1.5%. In footwear men’s comped up low single digits, women’s declined lowdouble digits and kids was down low single digits. For the quarter we experienced strong demandfor premium products from brand Jordan,Air Force One and Nike Shox Running. Ourfootwear average selling price for the quarter was down 2.3% but increased inboth October and November versus last year. Taking out our sandal business for the quarter average selling pricewould have been flat versus last year.

During the third quarter in performance running offeringsfrom Nike Shock continued to lead the way especially in the men’s departmentwith sales up 20% and average selling price up $5. TechRunning also continued to build in importance and we saw our sales momentumincreasing. Key brand contributorsduring the third quarter included Nike, Adidas, Asics, Brooks and Mizuno.

In performance basketball during the quarter we continued toexperience robust sales from brand Jordan Retros and other Jordanpremium products including the Finish Line exclusives. With the Jordanbrand for the quarter comp sales, product margins and sell throughs all improved. Other basketball highlights included a strongNike LeBron release and Adidas Team Basketball.

In sports style footwear in the quarter comp store saleswere down primarily due to soft classic sales and also low profile sales. Nike Sport Culture lead by Air Force Oneremained strong in both sales and sell throughs. Other positive performers where the ChuckTaylor Canvas and also the Lacoste brand. We’ve been pleased with the results we’ve seen in several new brandintroductions into our stores like Pastry’s, Crocs and the nautical inspiredfootwear Silhouettes that we’re now carrying. We still believe that sports style will remain about 20% of our men’sfootwear business and 40% of our women’s business on a go forward basis.

Our kid’s footwear was down low single digits as we begin tocomp against strong Heelys’ sales from last year. We continue to sell Heelys’ product, actuallymore units versus last year but at a reduced average selling price and productmargins. Also in the kid’s area brandJordan and Shots Running are selling well and we are building our inventory inthese styles to support the demand.

Our soft goods comp sales declined 9.5% in the quarter. Both apparel and accessories werenegative. However, inventories were downand product margin was up. In apparel wecontinued to expand the Under Armour in our stores and we remained pleased withits performance. Our NCAA licensebusiness also continues to grow in both men’s and women’s and aside from brand Jordanbasics other branded apparel underperformed. In accessories our core sock and shoe care business did well. Headwear, bags and other branded and licensedaccessories remained challenging.

We continue to growour direct-to-consumer business through www.FinishLine.comand our catalog. Q3 sales increaseddouble digits and we will continue to invest inthis segment of our business. ManAlive stores comp sales declined 9.8% inwhat continues to be avery challenging environment for urban retail. As I previously announced ManAlive is under new leadership with Lou Spagna as president. Lou is inthe process ofevaluating our merchandising strategies, marketing initiatives and consumerdemographics in orderto develop a new visionfor this business. www.ManAlive.com which launched inQ2 this year performed above expectations inthe third quarter andwe anticipate continued growth for ManAlive in thischannel. As I have previously said thereare no new ManAlive stores planned as Lou and his team work to stabilize this business

Before I turn to our plans and expectations with regards tobusiness in Q4 and beyond let me provide some comments on the Genesco litigation. As you know the Chancery Court in Nashvilleissued a ruling last week requiring The Finish Line to complete the acquisitionof Genesco subject to the New Yorklitigation. While we are disappointedwith the ruling I want to emphasize that this is not the final decision.

First, we are studying the court decision and consideringour options including the possibility of an appeal. Further, the litigation concerning UBS’commitment to finance the Genesco transaction is pending in New York and this litigation must be resolved prior tothe closing. In fact, in holding thatThe Finish Line is required to close the merger with Genesco the Nashvillecourt expressly reserved for determination by the New Yorkcourt whether the merged entity would be insolvent, if the New York court so holds the merger would be impossible. As this litigation is ongoing however, thereis not much more we can say at this point and we would ask that you keep yourquestions today focused on our results. We will keep you updated on the litigation as best we can. While the litigation with Genesco proceedsand the legal team moves forward with their work I and the rest of theexecutive management team are continuing to operate our business in theordinary course including implementing our product and brandingstrategies.

Going forward in Q4 and beyond Finish Line kicked off theholiday season with the next iteration of our be heard marketing campaign whichwas initially launched during the back to school selling season. The newest part of the campaign was calledwhat I want and continues to position Finish Line as the destination for alltypes of athletic footwear from performance to sports style and for licensedproduct especially NCAA apparel. We feelthe campaign connected with our customers, vendors and employees and helpeddifferentiate our stores in the mall.

In running Nick Shox will continue to lead the way with newproduct and more new Finish Line exclusives. We are increasing our inventory investment in the Tech Running categoryincluding Nike Bowerman and other plus enabled products also Asics, NewBalance, Brooks, Adidas and Mizuno will be key focus brands for thissegment.

In basketball we will be focusing on our total Jordanbusiness which is one of our healthiest and it’s increasing as a percentage ofour total basketball offering. Thisproduct clearly crosses over from performance to lifestyle and we’re workingwith the Jordanteam to find ways to expand our assortments into additional categories.

In Q4 we’re looking forward to some new and excitingreleases. The Air Jordan Forcecollaboration which is the fusion of Jordanand Air Force is to be released on January 5th. The first of the Retro two packs from Jordancombining two retro shoes adding up to the number 23 the first release is setfor January 19th and a new Jordangame shoe scheduled for a February 23rd release.

With respect to our sports style offerings we are enhancingour assortment of premium sports style products from brands including Nike,Puma, Lacoste, Chuck Taylor, Sperry, Crocs, Ed Hardy, Pastry and more tocome. Additionally, we remain focused onoffering a relevant compelling assortment in trending categories like nauticalinspired footwear, boots, sandals and skate. We are working on some exciting initiatives with vendor partners thatwill launch during mid next year. Webelieve we are making progress towards our goal of offering the most completetrend relevant product assortment for our customers.

In kid’s we’re working on getting our Heelys’ inventory at abetter ration to sales and should be in pretty good shape in the springtime. At the same time we’re buildingour inventory in other products including brand Jordan,Nike, Adidas Bounce, Pastry and Crocs and other new sports style brands andcategories.

In soft goods we’re working to stabilize our business. Our goal continues to be to improve productmargin in terms. We expect the inventorymix to remain focused towards licensed product especially NCAA. License for Q4 should approximate 50% of oursoft goods business while the other 50% will be split between branded andprivate labeled product. Under Armourremains a key brand for us and we are partnering with them on a number ofinitiatives to enhance and expand our assortment to satisfy the needs of ourcustomers. Another initiative with UnderArmour is scheduled during Q1, actually a May 3rd launch and it willbe an exciting new footwear launch focused on training. Finish Line will be the exclusive mall basedathletic specialty retailer to partner with Under Armour on this launch and itwill be supported with very compelling in store elements.

In footwear and apparel we are continuing to evolve ourproduct assortment towards more premium offerings. As I have said before this is not just about pricepoints but being best in class whether it be running, basketball, classics,outdoor or sandals. We will continue totry new brands and assess our offerings to ensure Finish Line has the bestpremium products in every category that resonates with our key consumer. We remain committed to our heritage ofperformance athletic products. Sportsstyle is still projected to be about 25% of our total footwear assortment withgrowth opportunities in both performance and sports style.

As for business to date in Q4 Finish Line comps are runningdown mid single digits. However, productmargins have improved for the same period versus last year. Now, I’d like to open up for questions andagain as that you keep questions focused on Finish Line operating and financialperformance as there’s not much more that I can say with regard to the pendinglitigation at this point in time. Operator, we can now take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jeff Van Sinderen of B. Riley.

Jeffery Van Sinderen– B. Riley & Company

I was just wondering if you could offer any additionalcomments on the business sales trends in December, what the promotion cadence washow the month tracked week-by-week?

Kevin S. Wampler

It was an unusual December. The cadence of sales during the month really seemed to vary. We started off the Thanksgiving weekend therewas a lot of hype there was a lot of excitement there was a lot of promotiongoing on. We saw really good traffic inthe malls and we had what we thought were pretty good sales. Business slowed down and then as we gotcloser to Christmas which seems to be the trend that’s magnifying each andevery year now that the closer we get to Christmas the more shopping and themore excitement that there is. I thinkthat pretty much held true and after holiday again, the trend seems to be likeit’s been the last few years more excitement more shopping.

Again, I’ve talked about down mid single digits in TheFinish Line but we’re really pretty pleased with the performance especiallywith regard to product margins. We hadbetter product margins. I don’t want toquantify any more than that because certainly the periods not over and thequarter’s not over but, when I say better I don’t mean slightly better I meanreally significantly better product margins.

Jeffery Van Sinderen– B. Riley & Company

With your comps tracking down in the mid single digits I’mwondering how you see that shifting or if and when you see that shifting backto trending flattish or maybe even positive at some point? I know it’s hard, you never know but it seemsthat on the last couple of calls you were very optimistic that your businesscould improve and I’m just wondering how you see that or what you see drivingthat to happen at this point?

Alan H. Cohen

Well, really our footwear business is again, is really notthat bad. Even in Q3 footwear was downabout a point and a half I think. So,it’s the soft goods end of our business which is what we’re really strugglingwith and I think that’s going to continue to be the problem for us. We feel really very good about our productmix in footwear on a go forward basis. We are building inventory in key products things like brand Jordan, Shoxand also we’re doing a very good job of bring in new brands and new productsespecially within the sports style arena that are much, much more relevant on ago forward basis this year than what we were able to do last year. We really feel that our merchants are gettingahead of the trends now rather than being so far behind the trends especiallyagain with regards to sports style products. So, going into our stores I think even today you’ll see a lot of brands,you’ll see a lot of exciting products. You’ll see a tremendous amount ofproducts dedicated to performance especially Tech Running which is reallyturning into a very positive program for us building a lot of momentum with alot of new and different brands as well as the offerings for Nike Shock andalso from Nick Bowerman and other performance products.

Again, I feel that our footwear business is going tocontinue to build momentum and I feel good about our footwear business. It’s the soft goods end of our business thatI think we’re just going to continue to struggle with. It just doesn’t feel like or it doesn’t seemlike we’re able to find anything really hot or compelling to the consumerthat’s able to create the kind of excitement in our soft goods business that wehave when licensed product is released - three, four, five years ago whenlicensed business was really strong or even years before that when the brandedapparel was really strong.

Steven J. Schneider

One thing that I would add to what Alan said is that themonth of December is the biggest month of the year in terms of soft goods salesfor us. So, the fact that soft goods isreally where our weakness is gets exacerbated in this month and that’scertainly added a lot to that negative mid single comp loss as we get in toJanuary and beyond just the mere mix of sales will help us in the comps becausefootwear is doing much better than apparel.

Alan H. Cohen

Let me add two things. Even when I talk about soft goods I do want to point out that whereassoft goods so far in Q4 the numbers haven’t been good the margins have beenmuch better and this is really something that we’re focusing on. We’re tired of simply driving sales and notgetting the kind of product margins and the kind of results out of the productmargins and that’s really been a focus for the merchants. We want the sales that we do have in the softgoods to become profitable and I think they are doing a good job withthat. One other item that I wouldmention on a go forward basis that there’s a lot of excitement about is ourUnder Armour program. We’re doubling thenumber of stores that are going to have Under Armour apparel so that in and ofitself is pretty exciting to us.

Jeffery Van Sinderen– B. Riley & Company

Then let me ask you if we can shift a little bit to ManAlive and just wondering there how much of the loss in the quarter came fromMan Alive and how you see that chain getting profitable?

Kevin S. Wampler

We haven’t specifically broken out Man Alive from anearnings perspective but obviously they did lose money for the quarter. They historically have made money in Q4 andtypically lost money in the other three quarters. They were part of the loss that we did incurbut we haven’t quantified it. As far aswe know we are under new management there, Lou and his team are looking at thestores, spending a lot of time in the market place in the stores themselvesgaining an understand of where Man Alive is at and determining what the nextsteps are. And obviously, a big part ofthat is determining from a fashion standpoint which direction to go as in thestreet fashion business there’s been some changes over the last couple of yearsand we may probably be lagging behind that a little bit. We’ve got some work there but we feel it’s incapable hands and we’ll have more to report as we go forward.

Jeffery Van Sinderen– B. Riley & Company

So we should anticipate losses in Man Alive then in Q1 andQ2?

Kevin S. Wampler

Yeah, I think that’s a reasonable assumption.

Jeffery Van Sinderen– B. Riley & Company

I know you guys said it’s hard to comment on the legalsituation but I’ll throw at least one question out there. When you model the combined entity, thecombined Genesco Finish Line entity when do you see running into a liquidityissue? How far out is that in yourmodel?

Tom

That’s an ongoing operation right now as far as looking atthat. Obviously, that’s subject to thelitigation that will be going on in New Yorkso beyond that there isn’t a whole lot we can say. There’s a lot of moving pieces there.

Operator

Your next question comes from John Shanley from SusquehanaInternational.

John Shanley –Susquehana International Group

So we can look at things on an apples-to-apples comparisonbasis regarding the Finish Line operation can you give us an idea of what thecomps for Finish Line in the third quarter would have been without theinclusion of Internet sales and hopefully you can give it to us by bothfootwear and apparel so we can get a sense of how that may be affecting yourbusiness overall?

Alan H. Cohen

I just don’t know. Dowe have that Kevin?

Kevin S. Wampler

I don’t know that I have that with me. In fact, I do not have that with me at themoment so I will have to get back to you on that.

John Shanley –Susquehana International Group

Maybe you can share with us what the revenue for Internetwere so we could just back out our model how much that could have impactedsales for the quarter for The Finish Line chain.

Kevin S. Wampler

We’ve never given out the actual revenue of our direct toconsumer business on a standalone basis at this point. It’s just not something that we’ve given outto the public at this point.

John Shanley –Susquehana International Group

Well maybe if you can do some work and let us know somewheredown the road what the comps would have been. That seems to be a real active growing component of The Finish Lineoperation overall in terms of Internet sales contributions.

Steven J. Schneider

One thing I would say, my recollection is that it affects itby a little over 1% but I don’t have the exact number.

Kevin S. Wampler

We’ll have to verify that.

John Shanley –Susquehana International Group

Again, the comps on the Man Alive chain have been downpretty steeply almost 10%. When do yousee a turnaround in this business in terms of when it may start to turnpositive in terms of comps? And, do youhave any further flexibility if this thing doesn’t seem to be working out interms of some of the fashion changes that have occurred in the apparelcomponent of the Man Alive chain. Obviously, you’re fighting a change in termsof fashion direction pretty steeply. Doyou have the flexibility in your lending agreement with UBS or your otherlending agencies to be able to consider alternatives to this business includingpossibly shutting it down somewhere down the road?

Alan H. Cohen

I think the approach that we’re taking now is that we’revery excited about Lou. He has a verystrong apparel background and he has a nice history even actually in thisparticular arena of apparel. He’s a veryupbeat positive guy. He’s spending a lotof time – he’s only been around for 30 or 60 days now but he’s visiting as manystores as he possibly can, he’s visiting as many markets as he possibly can andreally getting to know his people. Hisnear term priorities which I think are important are stabilizing the business,getting the inventory under control and then developing the right merchandisingmix. After that certainly there’s goingto have to be longer term goals and he’s going to have to come up with a planand we want to hear and get that from him and then I think we’ll be in a muchbetter position to start passing on more of a long term view about what’s goingto be happening and what we think can happen with Man Alive. But, right now to be fair to Lou he’s reallyjust trying to focus in on those short term goals that I mentioned and I thinkthat’s really what’s most important.

As far as the business from 30,000 feet it is a changingbusiness. It’s a very dynamicbusiness. We’ve known that. It really has dramatically changed over thelast couple of years. I do think thebusiness is becoming less competitive. There’s people that are leaving the business, that should present someopportunity we’re not sure exactly how much opportunity that’s going to presentand I think that opportunity we still have to do it right or we’re not going totake advantage of that opportunity. Wewant to keep an eye on that business. Wewant to give Lou and his team all of the assistance and help we can but, again,we certainly know that we need to see results and we have to see some positiveresults in a relatively short period of time.

John Shanley –Susquehana International Group

I know you don’t want to talk about the legal or financialramifications of the Genesco transaction but, the stock down 85% in calendar 07and down 81% since the Genesco deal was announced in June 07 a lot of investorsreally have a lot of surrounding questions I guess is the best way of puttingit. Can you tell us whether or not UBSis still your investment banker? And,are they still willing to go ahead with funding this transaction while thelegal issues can be resolved?

Alan H. Cohen

Well again there is a litigation going on and litigationinitiated by UBS up in the New York District Court dealing with the solvencyquestion. As you know, the TennesseeCourt, the Chancery Court in Tennessee ruled butbasically said that the solvency question has to be decided because of thelawsuit that had been initiated by UBS – that the solvency question has to bedecided up in New York. To me, commenting beyond that I think wouldbe premature. Let’s wait and see whathappens in the New York Court. Let’s seewhat happens in regard to a determination of solvency and then our position isgoing to be as I talked about. We wantto continue to review all of our options. Our legal teams are looking at all options including appeals if in factnecessary or appropriate. We will makedecisions and go from there. Our concernand we are very concerned about what’s happened with the stock. We’re very concerned about what’s happeningto our stakeholders and our shareholders and to our employees. This is not what we had in mind. This is not what we planned. This is something that we’re faced with andwe’re trying to deal with as our shareholders are trying to deal with. The best way I think we can deal with it isto try to keep our people here focused on our business. I do think they’re doing a great job ofremaining focused and really taking The Finish Line to a better level and to adifferent level and at the same time we have our legal teams and certainlycertain people here that are very focused on what’s going on with the Genescomatter and our goal is to absolutely do what’s in the best interest of ourshareholders and what’s in the best interest of the company.

Steven J. Schneider

One thing that I would add is that on a standalone basisright now although we’re not satisfied by any means with our Finish Line andMan Alive results year-to-date we are sitting as we speak with over $75 millioninvested and no debt. And, ourinventories are down quite a bit here in December so we’re heading in the rightdirection there. We need to get thisbehind us what’s going to happen with litigation but, we have to find out whatthe results are going to be there and it’s hard to speculate at this point.

Alan H. Cohen

Let me just add again, keep in mind and I’m not certainlynot trying to portray The Finish Line as a victim in any way, shape or form butwe’ve not filed a lawsuit anywhere. Wewere sued in the Tennessee courtand we responded and defended ourselves. And now, we’ve been sued in the New York courtand again, we’re going to respond and do whatever we have to do in New York. So, we’resort of tracking along here and trying to do the best we can under thesecircumstances of this situation and try to do the right thing for the long termbenefit of our shareholders and that’s a very difficult situation at this pointin time.

John Shanley –Susquehana International Group

I can understand that Alan but, again investors want to knowwhat the course of action likely is going to be if all of your appeals to the Tennesseedecision and if UBS is unsuccessful in the litigation in Federal Court New Yorkfails to come to the conclusion that insolvency may be an issue. What are you planning on doing? Is there a game plan? Are you looking at alternative funding shouldUBS refuse to go ahead with the agreement they made with you?

Alan H. Cohen

A lot of that – it would be premature for me to speculate onsome of those specifics. I think themost important thing we can do is focus on the litigation that is takingplace. I will say, and this should notsurprise anybody we’re going to do anything and everything we can to complywith whatever existing court orders exist. Certainly, with what the Chancery Court in Tennesseehas ordered us to do. We’re going to doour best to meet all of our obligations as set forth by that Tennessee Court’sopinion. But, at that same time we’realso reviewing the opinion to determine if there is other courses of action weshould take to protect ourselves.

It’s hard for me – there are so many different scenarios andI understand the concern and the confusion that’s out there. But, I can’t respond to each and everypotential scenario because there are so many. The thing that is troubling to me to some extent is there’s no lack ofopinions that are out there on the streets that are being written in theblogs. Half of them make no sense to mebut it doesn’t make sense for us to try and respond to each and everything thatgets written or said. I think what we’retrying to do is focus on the litigation and focus on our business. We really feel those are the important thingsand everything’s going to move forward and we’re going to get through this andwe’re going to have a continuing strong ongoing Finish Line company and that’sreally the plan. We’re going to dowhatever we have to do to protect our company, to protect ourshareholders. That’s the direction we’regoing.

John Shanley –Susquehana International Group

I appreciate that. IsUBS still your banker and lender or not?

Alan H. Cohen

Yes, they are.

Operator

Your next question comes from Virginia Genereux with MerrillLynch.

Virginia Genereux –Merrill Lynch

Can you guys give us a sense if sort of current trendscontinue the way they are – can you give us a sense for what you think eitherEPS will be or the operating margin erosion in the February quarter? I’m asking if this is the quarter where youguys are going to generate sort of all the profit of the year? Could you help us with that a little bit?

Kevin S. Wampler

We don’t give guidance anymore. You have some information to go on. You’ve got a comp number for December for themost part and the fact that margins are up. But, realistically we just don’t give guidance anymore so I’m not surethere is a whole lot of help we can give you.

Virginia Genereux –Merrill Lynch

How about this – can you expand sort of the – can you holdmerchandise margins flat for the quarter you think? Or is something kind of weird going on inDecember?

Kevin S. Wampler

No I think we believe – obviously, one of our focuses allyear long has been to keep inventory clean and it’s been a challenge and we’vetaken some hits along the way. But, Ithink the merchandising group is very focused on this fact and it’s our goallonger term is to operate this business on less inventory and again, shouldhopefully increase turns and increase margins. No guarantees but that’s our goal. I would think that the merchandise margins shouldn’t be any worse thanflat realistically.

Virginia

How about SG&A Kevin? I think SG&A this quarter was up kind of 600 year-over-year. Does closing Paiva – could SG&A be heldsort of flat or maybe even down? Paivacouldn’t – you still have open stores so that’s probably.

Kevin S. Wampler

It will be hard to leverage SG&A as long as comps arenegative. I mean we really need to getour comps, our productivity back up to where we are flat to positiverealistically. Obviously, we’ll continueto look at SG&A. Obviously, we’re inthe process of budgeting for next year right at this point in time so we’regoing to look at every line item and try to squeeze as much out as we can on ago forward basis and that will be our goal.

Virginia Genereux –Merrill Lynch

Okay. But, in sort ofabsolute dollar terms Kevin, SG&A up $600,000 in the third quarter I thinkis that kind of representative maybe of the year-over-year trend that you canhold for a few quarters here?

Kevin S. Wampler

It may be possible. Obviously, we won’t be opening as many stores on a go forward basis sothat will help a little bit. But, togive an absolute dollar amount is pretty hard to do right now especially whenwe’re in the process of budgeting the next fiscal year.

Virginia Genereux –Merrill Lynch

On cap ex if I could ask I think sort of all the formatsKevin are sort of running $500,000 in terms of on a capital basis so that wasgetting me to kind of maintenance cap ex 20 to 25. I mean if you shut – where could you guystake cap ex if you just took it as low as you could take it and didn’t opensort of any stores?

Kevin S. Wampler

I mean if you look at this year we’re talking about cap ex this year of $27 to$30 million in a year where we opened 18 Finish Line stores and 11 Man Alivestores. Realistically if we opened nostores, I mean you’re always going to have some technology cap ex, you’re goingto have maybe a few remodels and things like that could you get it down to $10or $15 million? Probably but, we willcontinue to open some Finish Line stores next year so while we haven’t given anumber yet for next year I don’t think it will be that $10 to $15 million. I think it will be a little bit higher thanthat.

Virginia Genereux –Merrill Lynch

Lastly, are any stores – do you have any stores that arecash flow negative? If so, could youtell us how many? I mean, is that anoption for you guys? Closing someunderperformers?

Kevin S. Wampler

Well, we absolutely review the under performing stores andwe will go through that process here in a few weeks now that we’ve gone throughthe holiday period in time. And, we willreview all of our store base basically and do we have some that are potentiallycash flow negative? Sure. I think every retailer does for the mostpart. We’ll look at those and determineif they need to be impaired or not. Historically if you look over the last five years I think three out ofthe five years we have had an impairment charge in the fourth quarter. So, it’s a normal process that we’ll gothrough and we’ll have more to say on that probably next quarter.

Virginia Genereux –Merrill Lynch

Okay. Kevin, I wasthinking more like outright closures where the lease obligation where the cashflow were more negative than the present value of the lease obligation or whatit would cost you to close them. Do youthink you have any of those situations?

Kevin S. Wampler

I think that is all part of the process. When we look at the impairment processthere’s two ways to go. Just impair thestore and continue to operate it or impair the store and decide you’re going toclose it and we’ve had some of both over the years. That’s all part and parcel of that process.

Alan H. Cohen

Let me add that I think these are all important points thatyou’re raising especially with regard to the evaluating of our stores and arewe going to keep them open or not keep them open. And, I think that is even more critical todaythan its ever been in that we’re going to look at it with a much more focusedeye than we ever have before. Maybe, Iguess what I am saying is the test is going to be stricter and harder. We’re going to be more apt and more likely towant to close stores that before we might have said, “Well, let’s give itanother year.” Or, “Let’s continue totry and make it work.” I think we’vereached the point in this industry and I don’t think I’m just speaking for usother people in athletic specialty where we have to face up to the reality thatthere’s just too many stores out there and not enough compelling importantproduct to fulfill all those stores. So,we are going to do our part and not because we want to be benevolent toeverybody else but because we think it’s the prudent thing to do. If stores aren’t going to be productive forus we think the best think to do is cut on them and get out of them and let’smove on and that’s the approach we’re going to take more aggressively than everbefore.

Virginia Genereux –Merrill Lynch

That’s great Alan. Personally, I think that would be so good for the entire industry andcould really result in another positive cycle. You sound great Alan and keep up the positive outlook. I wish you guys the best of luck.

Alan H. Cohen

Thank you very much Virginia. We appreciate that.

Operator

Your next question comes from Brad Cragin with GoldmanSachs.

Brad Cragin – GoldmanSachs

Can you just put in perspective some of your apparelbusiness for us? The space that’sdedicated to that product in your stores it looks like that is getting a littlebit smaller. Where are you in thatprocess and how much farther do you think that maybe able to contract?

Alan H. Cohen

That’s an interesting point Brad. I say soft goods, soft goods really consistsof apparel and accessories and together last year they ran about 19% or so ofour total sales and actually that numbers coming down maybe another percent ortwo this year. Your observations areabsolutely correct. I think it’sconsistent with what I’ve been talking about we’re going to become much morefocused in the soft goods business meaning that we’re not going to chase saleswe’re going to chase profits. We want tohave tight specific programs that are important, that are meaningful, where wecan make a statement in our store and make money on the apparel or the softgoods area that we choose to be involved in.

What this is probably going to mean is programs like Under Armourwhere we’re able to sell product at full margin and get very nice turns – we’rebuilding a good business there with Under Armour in the apparel end of theirbusiness. A lot of that has to do withthe fact that it’s not in a lot of different places being [inaudible] and discountedand all these other kinds of things that tend to happen. Also I think where we’ll focus is on basicprograms whether it’s fleece, whether it’s tees, NCAA, some basic shorts. Things like that where we can take aposition, make a stand and we know that we can sell product and sell productvery profitably.

But, I think your observation is right. It’s probably going to be less of apercentage of our total business and that’s not necessarily all bad. It allows us to focus more on footwear andcreate more exciting presentations of footwear whether it’s performance or it’ssports style. So, you’ll probably seemore footwear not only on the walls but also on the floor, being highlighted onthe floor with some exciting POP and some exciting in store presentations.

Brad Cragin – GoldmanSachs

Can you just draw any parallels to what’s happening in softgoods in Finish Line and your experience at Man Alive? Clearly, they’re different products anddifferent product trends but is the way you’re managing those businesses sortof have any common themes that you’re addressing that might help bothcollectively?

Alan H. Cohen

Well just again managing inventory I think and becoming moreproductive with inventory is really a focus in both Man Alive and The FinishLine. The product is very, verydifferent with very little cross over with the product that’s in Man Aliveversus the product that’s in The Finish Line. And, I assume you’re talking about the apparel ends of thebusiness. Again, the apparel end of theFinish Line business I’ve told you it’s about 18 or 19% and probably about 7%of that is accessories. So, we’retalking about 10 to 12% of our total sales is really done in apparel in theFinish Line store. Whereas, if you lookat a Man Alive store it’s 90 to 95% of their business is done at apparel andreally very, very little cross over if any in the different brands that we’llcarry in each of the stores. But, thetheme is the same, the theme is we want to become more productive. We want to turn the inventories faster. We want to operate at better margins.

If you’re living in the malls today, if you’re a retailer inthe malls today with the way that costs are escalating you really do have tofocus on the things that I’m talking about focusing on. It’s not necessarily all about sales. You better get better margins because that’sreally what’s going to be important.

Steven J. Schneider

One other thing that would be a common theme we’re lookingat productivity from a size standpoint. The stores that we opened this year were smaller than the prior year andeven the few that are on the books that are ready for next year they are goingto get even smaller so we can generate higher productivity.

Brad Cragin – GoldmanSachs

That leads me to one more question if I may. As you think about productivity of yourstores and sales per square foot in light of your prior comments about storecounts across the industry can you just give some perspective on where your salesper square foot today relative to the past? I mean it certainly has been at lower levels historically. With comps continuing to trend down for thetime being what gives you confidence that you might not revisit lower levels ofproductivity still going forward?

Steven J. Schneider

Kevin, I think we’re probably under $300 now per square footisn’t that right?

Kevin S. Wampler

Yeah it’d be right around there.

Steven J. Schneider

And we have had as high as $350 $355 and as low as I canremember what $250? Something like that?

Kevin S. Wampler

About $260.

Steven J. Schneider

$260? So, surely fromthat standpoint when we were really at the low end we had average size ofstores were even bigger because there was a time that we had a number of storesthat were from 15 to 25,000 square feet. We’ve gotten out of most of those that were unproductive so I think thathelps us. But, I think as we open thesenewer stores and continue to concentrate on the square footage – as we remodelstores as well we’ve been bringing the store size down. So, I don’t look for us to get down to thosehistorically low levels by any means. Isthere a potential that we can continue to go down from $300? Sure there is but, I think we’re trying to dosome things that will prevent us from going down that low and I think theapparel side of the business is going to be one of those keys. We’ve got to get that stabilized. As Alan said we are much more optimistic onthe footwear side.

Alan H. Cohen

Just to reiterate a point that Steve made I think it’simportant again, the idea that I think you’re going to see store closings notjust in Finish Line but you’re going to see other athletic specialty storeclosings. And also from our perspectivepart of getting the stores to be more productive is make the store smaller. That I think is certainly something the waywe’re approaching this business is with smaller stores we think we can dopretty much the same presentation. Wehave to become more efficient in the way we show product and the way we storeproduct and things like that but, with smaller square footage, smaller storeswe still think we can drive the same total volume or close to the same totalvolume. And, if we can do that, we cancertainly increase our per square foot performance which is going to be the keyand which is going to be very important.

Operator we have time for one more call.

Operator

Currently there are no further questions in the queue atthis time.

Alan H. Cohen

Very great. Thank youvery much all of you for your time and attention this morning and hopefully allof you have a happy New Year. Thank you.

Operator

This concludes today’s Finish Line third quarter earningsconference call. You may nowdisconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!