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

The Finish Line, Inc. (FINL)

F3Q08 Earnings Call

January 4, 2008 8:30 am ET

Executives

Kevin S. Wampler – Chief Financial Officer & Executive Vice 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

Presentation

Operator

Good morning. My name is Latasha and I will be your conference operator today. At this time I’d like to welcome everyone to The Finish Line’s third quarter earnings conference 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) I would now like to turn the conference call over to our host Mr. Kevin Wampler, Chief Financial Officer. Mr. Wampler please go ahead sir.

Kevin S. Wampler

Good morning and thank you for participating in our conference call pertaining to the third quarter earnings press release which went over thewire Thursday, January 3^rd at approximately 4:15 eastern time. This call is being recorded and can be accessed by calling 706-645-9291 conference ID# 25979417. The recording will remain active for two business days. You may also access this recording as well as a copy of our Q3 earnings press release on the web at www.FinishLine.com.

We ask that you remember that some of the comments made by Finish Line management during this call may be considered forward looking statements that involve risks and uncertainties and therefore actual results may differ materially from those statements expressed or implied by management. Such risks and uncertainties include but are not limited to costs, potential liabilities and other events relating to the company’s merger agreement with Genesco, Inc. and the related litigation, product demand and market acceptance risks, effective economic conditions, the effective competitive products and pricing, the availability of products, management of growth and other risks detailed in the company’s January 3^rd press release and in its SEC filings.

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

Steven J. Schneider

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

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

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

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

Interest income was $223,000 for Q3 versus $21,000 of interest expense for Q3 last year. The increase primarily reflects the higher average invested balances year-over-year. The effective tax rate for Q3 was 39.6% as compared to an effective tax rate of 37.3% for Q3 last year. Diluted weighted average shares outstanding were 47.2 million for Q3 and 46.9 million for Q3 last year.

For the year consolidated net sales decreased 1.3% to $894.4 million versus $904.2 million for year-to-date last year. Comp sales decreased 4.1% year-to-date as compared to a 5.8% decrease reported for last year. Year-to-date the company posted a loss from continuing operations of $9.5 million or $0.20 per diluted share as compared to income from continuing operations of $14.5 million or $0.30 per diluted share for year-to-date last year. The non GAAP year-to-date loss from continuing operations per diluted share was $0.07. This non GAAP loss excludes $0.13 per diluted share for expenses incurred in connection with the pending merge with Genesco and 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 company operated 701 Finish Line stores compared to 692 one year ago. In addition, Finish Line store square footage increased 1% to 3,875,000 as compared to 3,854,000 at the end of Q3 last year. The company opened one new Man Alive store and remodeled two existing stores during the third quarter. Man Alive operated 96 stores as of the end of the quarter compared to 88 stores one year ago. That’s an increase of 9%. In addition, Man Alive store square footage increased 15% to 332,000 square feet compared to 288,000 square feet at the end of Q3 last year. The company has completed its fiscal 08 expansion plan which included the opening of 18 Finish Line stores and 11 Man Alive stores. The company also remodeled 18 existing Finish Line stores and two Man Alive stores. For the year the company has closed seven Finish Line stores and one Man Alive store.

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

The capital expenditures for Q3 were $5.3 million and $25.3 million year-to-date. The amount of depreciation and amortization expense in Q3 was $9.8 million and $31 million year-to-date. Our capital expenditure projects for 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 report sales for Q4 which will end March 1^st on Thursday, March 6^th.

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

Alan H. Cohen

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

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

During the third quarter in performance running offerings from Nike Shock continued to lead the way especially in the men’s department with sales up 20% and average selling price up $5. Tech Running also continued to build in importance and we saw our sales momentum increasing. Key brand contributors during the third quarter included Nike, Adidas, Asics, Brooks and Mizuno.

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

In sports style footwear in the quarter comp store sales were down primarily due to soft classic sales and also low profile sales. Nike Sport Culture lead by Air Force One remained strong in both sales and sell throughs. Other positive performers where the Chuck Taylor Canvas and also the Lacoste brand. We’ve been pleased with the results we’ve seen in several new brand introductions into our stores like Pastry’s, Crocs and the nautical inspired footwear Silhouettes that we’re now carrying. We still believe that sports style will remain about 20% of our men’s footwear 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 to comp against strong Heelys’ sales from last year. We continue to sell Heelys’ product, actually more units versus last year but at a reduced average selling price and product margins. Also in the kid’s area brand Jordan and Shots Running are selling well and we are building our inventory in these styles to support the demand.

Our soft goods comp sales declined 9.5% in the quarter. Both apparel and accessories were negative. However, inventories were down and product margin was up. In apparel we continued to expand the Under Armour in our stores and we remained pleased with its performance. Our NCAA license business also continues to grow in both men’s and women’s and aside from brand Jordan basics other branded apparel underperformed. In accessories our core sock and shoe care business did well. Headwear, bags and other branded and licensed accessories remained challenging.

We continue to grow our direct-to-consumer business through www.FinishLine.com and our catalog. Q3 sales increased double digits and we will continue to invest in this segment of our business. Man Alive stores comp sales declined 9.8% in what continues to be a very challenging environment for urban retail. As I previously announced Man Alive is under new leadership with Lou Spagna as president. Lou is inthe process of evaluating our merchandising strategies, marketing initiatives and consumer demographics in order to develop a new vision for this business. www.ManAlive.com which launched in Q2 this year performed above expectations inthe third quarter and we anticipate continued growth for Man Alive in this channel. As I have previously said there are no new Man Alive stores planned as Lou and his team work to stabilize this business

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

First, we are studying the court decision and considering our 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 to the closing. In fact, in holding that The Finish Line is required to close the merger with Genesco the Nashville court expressly reserved for determination by the New York court 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, there is not much more we can say at this point and we would ask that you keep your questions today focused on our results. We will keep you updated on the litigation as best we can. While the litigation with Genesco proceeds and the legal team moves forward with their work I and the rest of the executive management team are continuing to operate our business in the ordinary course including implementing our product and branding strategies.

Going forward in Q4 and beyond Finish Line kicked off the holiday season with the next iteration of our be heard marketing campaign which was initially launched during the back to school selling season. The newest part of the campaign was called what I want and continues to position Finish Line as the destination for all types of athletic footwear from performance to sports style and for licensed product especially NCAA apparel. We feel the campaign connected with our customers, vendors and employees and helped differentiate our stores in the mall.

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

In basketball we will be focusing on our total Jordan business which is one of our healthiest and it’s increasing as a percentage of our total basketball offering. This product clearly crosses over from performance to lifestyle and we’re working with the Jordan team to find ways to expand our assortments into additional categories.

In Q4 we’re looking forward to some new and exciting releases. The Air Jordan Force collaboration which is the fusion of Jordan and Air Force is to be released on January 5^th. The first of the Retro two packs from Jordan combining two retro shoes adding up to the number 23 the first release is set for January 19^th and a new Jordan game shoe scheduled for a February 23^rd release.

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

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

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

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

As for business to date in Q4 Finish Line comps are running down mid single digits. However, product margins have improved for the same period versus last year. Now, I’d like to open up for questions and again as that you keep questions focused on Finish Line operating and financial performance as there’s not much more that I can say with regard to the pending litigation 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 additional comments on the business sales trends in December, what the promotion cadence was how 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 there was a lot of hype there was a lot of excitement there was a lot of promotion going on. We saw really good traffic in the malls and we had what we thought were pretty good sales. Business slowed down and then as we got closer to Christmas which seems to be the trend that’s magnifying each and every year now that the closer we get to Christmas the more shopping and the more excitement that there is. I think that pretty much held true and after holiday again, the trend seems to be like it’s been the last few years more excitement more shopping.

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

Jeffery Van Sinderen – B. Riley & Company

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

Alan H. Cohen

Well, really our footwear business is again, is really not that bad. Even in Q3 footwear was down about a point and a half I think. So, it’s the soft goods end of our business which is what we’re really struggling with and I think that’s going to continue to be the problem for us. We feel really very good about our product mix in footwear on a go forward basis. We are building inventory in key products things like brand Jordan, Shox and also we’re doing a very good job of bring in new brands and new products especially within the sports style arena that are much, much more relevant on a go forward basis this year than what we were able to do last year. We really feel that our merchants are getting ahead of the trends now rather than being so far behind the trends especially again 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 of products dedicated to performance especially Tech Running which is really turning into a very positive program for us building a lot of momentum with a lot of new and different brands as well as the offerings for Nike Shock and also from Nick Bowerman and other performance products.

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

Steven J. Schneider

One thing that I would add to what Alan said is that the month of December is the biggest month of the year in terms of soft goods sales for us. So, the fact that soft goods is really where our weakness is gets exacerbated in this month and that’s certainly added a lot to that negative mid single comp loss as we get in to January and beyond just the mere mix of sales will help us in the comps because footwear 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 whereas soft goods so far in Q4 the numbers haven’t been good the margins have been much better and this is really something that we’re focusing on. We’re tired of simply driving sales and not getting the kind of product margins and the kind of results out of the product margins and that’s really been a focus for the merchants. We want the sales that we do have in the soft goods to become profitable and I think they are doing a good job with that. One other item that I would mention on a go forward basis that there’s a lot of excitement about is our Under Armour program. We’re doubling the number of stores that are going to have Under Armour apparel so that in and of itself is pretty exciting to us.

Jeffery Van Sinderen – B. Riley & Company

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

Kevin S. Wampler

We haven’t specifically broken out Man Alive from an earnings perspective but obviously they did lose money for the quarter. They historically have made money in Q4 and typically lost money in the other three quarters. They were part of the loss that we did incur but we haven’t quantified it. As far as we know we are under new management there, Lou and his team are looking at the stores, spending a lot of time in the market place in the stores themselves gaining an understand of where Man Alive is at and determining what the next steps are. And obviously, a big part of that is determining from a fashion standpoint which direction to go as in the street fashion business there’s been some changes over the last couple of years and we may probably be lagging behind that a little bit. We’ve got some work there but we feel it’s in capable 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 and Q2?

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 legal situation but I’ll throw at least one question out there. When you model the combined entity, the combined Genesco Finish Line entity when do you see running into a liquidity issue? How far out is that in your model?

Tom

That’s an ongoing operation right now as far as looking at that. Obviously, that’s subject to the litigation that will be going on in New York so 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 Susquehana International.

John Shanley – Susquehana International Group

So we can look at things on an apples-to-apples comparison basis regarding the Finish Line operation can you give us an idea of what the comps for Finish Line in the third quarter would have been without the inclusion of Internet sales and hopefully you can give it to us by both footwear and apparel so we can get a sense of how that may be affecting your business overall?

Alan H. Cohen

I just don’t know. Do we 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 the moment 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 Internet were so we could just back out our model how much that could have impacted sales for the quarter for The Finish Line chain.

Kevin S. Wampler

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

John Shanley – Susquehana International Group

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

Steven J. Schneider

One thing I would say, my recollection is that it affects it by 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 down pretty steeply almost 10%. When do you see a turnaround in this business in terms of when it may start to turn positive in terms of comps? And, do you have any further flexibility if this thing doesn’t seem to be working out in terms of some of the fashion changes that have occurred in the apparel component of the Man Alive chain. Obviously, you’re fighting a change in terms of fashion direction pretty steeply. Do you have the flexibility in your lending agreement with UBS or your other lending agencies to be able to consider alternatives to this business including possibly shutting it down somewhere down the road?

Alan H. Cohen

I think the approach that we’re taking now is that we’re very excited about Lou. He has a very strong apparel background and he has a nice history even actually in this particular arena of apparel. He’s a very upbeat positive guy. He’s spending a lot of time – he’s only been around for 30 or 60 days now but he’s visiting as many stores as he possibly can, he’s visiting as many markets as he possibly can and really getting to know his people. His near term priorities which I think are important are stabilizing the business, getting the inventory under control and then developing the right merchandising mix. After that certainly there’s going to have to be longer term goals and he’s going to have to come up with a plan and we want to hear and get that from him and then I think we’ll be in a much better position to start passing on more of a long term view about what’s going to be happening and what we think can happen with Man Alive. But, right now to be fair to Lou he’s really just trying to focus in on those short term goals that I mentioned and I think that’s really what’s most important.

As far as the business from 30,000 feet it is a changing business. It’s a very dynamic business. We’ve known that. It really has dramatically changed over the last couple of years. I do think the business is becoming less competitive. There’s people that are leaving the business, that should present some opportunity we’re not sure exactly how much opportunity that’s going to present and I think that opportunity we still have to do it right or we’re not going to take advantage of that opportunity. We want to keep an eye on that business. We want 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 positive results in a relatively short period of time.

John Shanley – Susquehana International Group

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

Alan H. Cohen

Well again there is a litigation going on and litigation initiated by UBS up in the New York District Court dealing with the solvency question. As you know, the Tennessee Court, the Chancery Court in Tennessee ruled but basically said that the solvency question has to be decided because of the lawsuit that had been initiated by UBS – that the solvency question has to be decided up in New York. To me, commenting beyond that I think would be premature. Let’s wait and see what happens in the New York Court. Let’s see what happens in regard to a determination of solvency and then our position is going to be as I talked about. We want to continue to review all of our options. Our legal teams are looking at all options including appeals if in fact necessary or appropriate. We will make decisions and go from there. Our concern and we are very concerned about what’s happened with the stock. We’re very concerned about what’s happening to 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 and we’re trying to deal with as our shareholders are trying to deal with. The best way I think we can deal with it is to try to keep our people here focused on our business. I do think they’re doing a great job of remaining focused and really taking The Finish Line to a better level and to a different level and at the same time we have our legal teams and certainly certain people here that are very focused on what’s going on with the Genesco matter and our goal is to absolutely do what’s in the best interest of our shareholders and what’s in the best interest of the company.

Steven J. Schneider

One thing that I would add is that on a standalone basis right now although we’re not satisfied by any means with our Finish Line and Man Alive results year-to-date we are sitting as we speak with over $75 million invested and no debt. And, our inventories are down quite a bit here in December so we’re heading in the right direction there. We need to get this behind us what’s going to happen with litigation but, we have to find out what the 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 certainly not trying to portray The Finish Line as a victim in any way, shape or form but we’ve not filed a lawsuit anywhere. We were sued in the Tennessee court and we responded and defended ourselves. And now, we’ve been sued in the New York court and again, we’re going to respond and do whatever we have to do in New York. So, we’re sort of tracking along here and trying to do the best we can under these circumstances of this situation and try to do the right thing for the long term benefit of our shareholders and that’s a very difficult situation at this point in time.

John Shanley – Susquehana International Group

I can understand that Alan but, again investors want to know what the course of action likely is going to be if all of your appeals to the Tennessee decision and if UBS is unsuccessful in the litigation in Federal Court New York fails 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 should UBS 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 on some of those specifics. I think the most important thing we can do is focus on the litigation that is taking place. I will say, and this should not surprise anybody we’re going to do anything and everything we can to comply with whatever existing court orders exist. Certainly, with what the Chancery Court in Tennessee has ordered us to do. We’re going to do our best to meet all of our obligations as set forth by that Tennessee Court’s opinion. But, at that same time we’re also reviewing the opinion to determine if there is other courses of action we should take to protect ourselves.

It’s hard for me – there are so many different scenarios and I understand the concern and the confusion that’s out there. But, I can’t respond to each and every potential scenario because there are so many. The thing that is troubling to me to some extent is there’s no lack of opinions that are out there on the streets that are being written in the blogs. Half of them make no sense to me but it doesn’t make sense for us to try and respond to each and everything that gets written or said. I think what we’re trying to do is focus on the litigation and focus on our business. We really feel those are the important things and everything’s going to move forward and we’re going to get through this and we’re going to have a continuing strong ongoing Finish Line company and that’s really the plan. We’re going to do whatever we have to do to protect our company, to protect our shareholders. That’s the direction we’re going.

John Shanley – Susquehana International Group

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

Alan H. Cohen

Yes, they are.

Operator

Your next question comes from Virginia Genereux with Merrill Lynch.

Virginia Genereux – Merrill Lynch

Can you guys give us a sense if sort of current trends continue the way they are – can you give us a sense for what you think either EPS will be or the operating margin erosion in the February quarter? I’m asking if this is the quarter where you guys 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 the most part and the fact that margins are up. But, realistically we just don’t give guidance anymore so I’m not sure there 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 hold merchandise margins flat for the quarter you think? Or is something kind of weird going on in December?

Kevin S. Wampler

No I think we believe – obviously, one of our focuses all year long has been to keep inventory clean and it’s been a challenge and we’ve taken some hits along the way. But, I think the merchandising group is very focused on this fact and it’s our goal longer term is to operate this business on less inventory and again, should hopefully increase turns and increase margins. No guarantees but that’s our goal. I would think that the merchandise margins shouldn’t be any worse than flat 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 held sort of flat or maybe even down? Paiva couldn’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 are negative. I mean we really need to get our comps, our productivity back up to where we are flat to positive realistically. Obviously, we’ll continue to look at SG&A. Obviously, we’re in the process of budgeting for next year right at this point in time so we’re going to look at every line item and try to squeeze as much out as we can on a go forward basis and that will be our goal.

Virginia Genereux – Merrill Lynch

Okay. But, in sort of absolute dollar terms Kevin, SG&A up $600,000 in the third quarter I think is that kind of representative maybe of the year-over-year trend that you can hold 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 so that will help a little bit. But, to give an absolute dollar amount is pretty hard to do right now especially when we’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 formats Kevin are sort of running $500,000 in terms of on a capital basis so that was getting me to kind of maintenance cap ex 20 to 25. I mean if you shut – where could you guys take cap ex if you just took it as low as you could take it and didn’t open sort 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 Alive stores. Realistically if we opened no stores, I mean you’re always going to have some technology cap ex, you’re going to have maybe a few remodels and things like that could you get it down to $10 or $15 million? Probably but, we will continue to open some Finish Line stores next year so while we haven’t given a number 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 than that.

Virginia Genereux – Merrill Lynch

Lastly, are any stores – do you have any stores that are cash flow negative? If so, could you tell us how many? I mean, is that an option for you guys? Closing some underperformers?

Kevin S. Wampler

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

Virginia Genereux – Merrill Lynch

Okay. Kevin, I was thinking more like outright closures where the lease obligation where the cash flow were more negative than the present value of the lease obligation or what it would cost you to close them. Do you think you have any of those situations?

Kevin S. Wampler

I think that is all part of the process. When we look at the impairment process there’s two ways to go. Just impair the store and continue to operate it or impair the store and decide you’re going to close 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 that you’re raising especially with regard to the evaluating of our stores and are we going to keep them open or not keep them open. And, I think that is even more critical today than its ever been in that we’re going to look at it with a much more focused eye than we ever have before. Maybe, I guess what I am saying is the test is going to be stricter and harder. We’re going to be more apt and more likely to want to close stores that before we might have said, “Well, let’s give it another year.” Or, “Let’s continue to try and make it work.” I think we’ve reached the point in this industry and I don’t think I’m just speaking for us other people in athletic specialty where we have to face up to the reality that there’s just too many stores out there and not enough compelling important product to fulfill all those stores. So, we are going to do our part and not because we want to be benevolent to everybody else but because we think it’s the prudent thing to do. If stores aren’t going to be productive for us we think the best think to do is cut on them and get out of them and let’s move on and that’s the approach we’re going to take more aggressively than ever before.

Virginia Genereux – Merrill Lynch

That’s great Alan. Personally, I think that would be so good for the entire industry and could 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 Goldman Sachs.

Brad Cragin – Goldman Sachs

Can you just put in perspective some of your apparel business for us? The space that’s dedicated to that product in your stores it looks like that is getting a little bit smaller. Where are you in that process 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 consists of apparel and accessories and together last year they ran about 19% or so of our total sales and actually that numbers coming down maybe another percent or two this year. Your observations are absolutely correct. I think it’s consistent with what I’ve been talking about we’re going to become much more focused in the soft goods business meaning that we’re not going to chase sales we’re going to chase profits. We want to have tight specific programs that are important, that are meaningful, where we can make a statement in our store and make money on the apparel or the soft goods area that we choose to be involved in.

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

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

Brad Cragin – Goldman Sachs

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

Alan H. Cohen

Well just again managing inventory I think and becoming more productive with inventory is really a focus in both Man Alive and The Finish Line. The product is very, very different with very little cross over with the product that’s in Man Alive versus the product that’s in The Finish Line. And, I assume you’re talking about the apparel ends of the business. Again, the apparel end of the Finish Line business I’ve told you it’s about 18 or 19% and probably about 7% of that is accessories. So, we’re talking about 10 to 12% of our total sales is really done in apparel in the Finish Line store. Whereas, if you look at a Man Alive store it’s 90 to 95% of their business is done at apparel and really very, very little cross over if any in the different brands that we’ll carry in each of the stores. But, the theme 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 in the malls today with the way that costs are escalating you really do have to focus on the things that I’m talking about focusing on. It’s not necessarily all about sales. You better get better margins because that’s really what’s going to be important.

Steven J. Schneider

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

Brad Cragin – Goldman Sachs

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

Steven J. Schneider

Kevin, I think we’re probably under $300 now per square foot isn’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 can remember what $250? Something like that?

Kevin S. Wampler

About $260.

Steven J. Schneider

$260? So, surely from that standpoint when we were really at the low end we had average size of stores were even bigger because there was a time that we had a number of stores that were from 15 to 25,000 square feet. We’ve gotten out of most of those that were unproductive so I think that helps us. But, I think as we open these newer stores and continue to concentrate on the square footage – as we remodel stores as well we’ve been bringing the store size down. So, I don’t look for us to get down to those historically low levels by any means. Is there a potential that we can continue to go down from $300? Sure there is but, I think we’re trying to do some things that will prevent us from going down that low and I think the apparel 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 on the footwear side.

Alan H. Cohen

Just to reiterate a point that Steve made I think it’s important again, the idea that I think you’re going to see store closings not just in Finish Line but you’re going to see other athletic specialty store closings. And also from our perspective part of getting the stores to be more productive is make the store smaller. That I think is certainly something the way we’re approaching this business is with smaller stores we think we can do pretty much the same presentation. We have to become more efficient in the way we show product and the way we store product and things like that but, with smaller square footage, smaller stores we still think we can drive the same total volume or close to the same total volume. And, if we can do that, we can certainly increase our per square foot performance which is going to be the key and 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 at this time.

Alan H. Cohen

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

Operator

This concludes today’s Finish Line third quarter earnings conference call. You may now disconnect.

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