Kevin S. Wampler-Chief Financial Officer, Executive Vice President
Steve Schneider-Chief Operating Officer
Alan Cohen-Chairman of the Board, Chief Executive Officer
Jeff Van Sinderen-B. Riley & Company, Inc.
Elizabeth Parrella- Merril Lynch
Bernard Sosnick-Gilford Securities
Chris Svezia-Susquehanna Financial Group
Finish Line Inc. (FINL) Q42008 Earnings Call March 28, 2008 8:30 AM ET
Good morning. My name is Sheila and I will be your conference operator today. At this time, I would like to welcome everyone to the Finish Line Fourth 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 will now turn the call over to Mr. Kevin Wampler, Chief Financial Officer. Sir, you may begin your conference.
Good morning and thank you for participating in our conference call pertaining to the fourth quarter earnings press release, which went over the wire Thursday, March 27, at approximately 4:15 Eastern Time. This call is being recorded and can be accessed by calling 706-645-9291, conference ID # 37760311. The recording will remain active for two business days. You may also access this recording, as well as a copy of your Q4 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, potential liabilities, liquidity needs, product demand and market acceptance risks, the effect of economic conditions, the effect of competitive products and pricing, the availability of products, management of growth and other risks detailed in the company’s March 27 press release and in its SEC filings.
I’d now like to turn the call over to Steve Schneider our COO, who will review the results discussed in yesterday’s release. Alan Cohen, our CEO will follow with some comments on the Genesco settlement, as well as additional color on the quarter and our business plans going forward. Steve.
Thank you, Kevin and good morning. For Q4, which ended March 1, 2008, consolidated net sales from continuing operations were 382.8 million, versus 425.7 million last year. Total company comp store sales for Q4 decreased 6%. By concept, Finish Line comp sales decreased by 5.4% and Man Alive comp sales decreased 14.2%, compared to the same 13 week period last year. Comp store sales by month for Finish Line stores were as follows: December decreased 5.4%, January decreased 10.6% and February decreased 0.7%. For the quarter, comp store footwear sales decreased 2.1% and soft goods decreased 8.1%.
For the Man Alive stores, December comps decreased 15.9%, January decreased 20.3% and February decreased 6.5%. For Q4, the company posted a loss from continuing operations of 38.6 million or $0.82 per diluted share, as compared to income from continuing operations of 25.8 million or $0.54 per diluted share for Q4 last year.
For the quarter, the company posted non-GAAP income for continuing operations per dilute share of $0.45 as compared to $0.51 for last year. The non-GAAP income from continuing operations excludes a pre tax charge of 81.5 million or $1.20 per diluted share for expenses incurred in connection with the dearth of the Genesco merger litigation settlement and $0.07 per diluted share for the non-cash impairment charge to write down long lived assets for 26 stores pursuant to S FAS #144. The 81.5 million in costs is comprised of cash settlement of 39 million, the issuance cost of 6.5 million shares of 27.7 million and the legal, experts and consulting costs of 14.8 million. The company believes this represents substantially all costs related to the Genesco matter and does not expect fiscal 2009 to be materially affected by any additional costs related to the terminated transaction.
The gross profit percentage for the quarter increased 20 basis points versus Q4 last year to 32.2% of sales. This consisted of a 120 basis point increase in product margins that were mostly offset by a 100 basis point increase in occupancy costs. The deleveraging of the occupancy costs is primarily related to the 6% negative comp sales for the quarter, as well as last year benefiting from the additional sales for the 14th week. It is positive to note, that although occupancy costs deleveraged for the quarter, they actually decreased 1.4% in dollars. The increase in product margins was primarily the result of improved margins at the Finish Line division, especially in our soft goods business, which were partially offset by clearing goods at Man Alive, as the division makes merchandising changes to improve inventory mix and quality,
SG&A expenses, excluding the settlement and asset impairment costs, decreased 2.9% in dollars for the quarter, but increased as percent of sales to 23.3%: that is a 170 basis point increase compared to 21.5% in Q4 last year. The increase as a percent of sales was primarily related to the deleveraging of expenses based on the negative comparable store sales as well as last year benefiting from the additional sales in the 14th week.
Interest income was 457,000 for Q4, versus 157,000 for Q4 last year. This increase primarily reflects the higher invested balances year over year.
Diluted weighted average shares outstanding were 47.3 million for Q4 and 47.6 million for Q4 last year.
Now for the year, consolidated net sales from continuing operations decreased 4.1% to 1.277 billion versus 1.332 billion for last fiscal year. Comp sales decreased 4.7% for the year. The company posted a loss from continuing operations of 48.1 million or $1.02 per diluted share, as compared to income from continuing operations of 40.3 million or $0.84 per diluted share for last year.
The non-GAAP income from continuing operations per diluted share was $0.37. This excludes $1.32 per diluted share for acquisition, merger litigation and settlement costs in connection with the Genesco terminated merger and $0.07 per diluted share for the non-cash impairment charge to write down long lived assets for the 26 store I previously discussed.
During Q4 the company did not open any Finish Line stores, while remodeling three existing stores and closing four stores. As of March 1, the company operated 697 Finish Line stores, compared to 690 one year ago: that’s an increase of 1%. In addition Finish Line stores square footage increased 0.5% to 3,855,000 square feet, compared to 3, 834,000 square feet at the end of Q4 last year. The company did not open or remodel any Man Alive stores during Q4, but did close two stores. As of March 1, 2008, Man Alive operated 94 stores, compared to 86 stores last year: that’s an increase of 9%. In addition, Man Alive store square footage increased 11% to 326,000 square feet: that’s compared to 295,000 square feet one year ago. For the full year the company opened 18 Finish Line stores, remodeled 21 stores and closed 11 stores. Man Alive opened 11 stores, remodeled 2 stores and closed 3 stores.
Merchandise inventories on a consolidated basis declined to 268.3 million at March 1, 2008, as compared to 287.3 million one year ago. On a per square foot basis, consolidated inventories decreased 7%. Finish Line store merchandise inventories decreased 4%, compared to one year ago.
Capital expenditures for Q4 were 4 million and 29.3 million for the year. The amount of depreciation and amortization expense in Q4 was 10.1 million and 41.2 million for the full year. The company believes capital expenditures will approximate 18 to 22 million in fiscal ’09 and depreciation expense will approximate 38 to 40 million: these capital expenditure estimates include maintenance and technology costs for the corporate office, as well as the cost to build out 10 to 15 Finish Line stores and remodel 15 to 20 stores. The company does not plan to open any Man Alive stores in fiscal 2009. The company ended the fiscal year with 72.9 million in cash and cash equivalents and no interest bearing debt. On March 7, the company paid the cash settlement of 39 million to Genesco: as of today, the company has paid all other expenses related to the settlement litigation, with the exception of approximately $6 million. The company expects to end March with over 50 million in net cash and cash equivalents.
As noted in our press release, the company plans to discontinue the practice of reporting quarterly sales information in a separate release prior to reporting of its quarterly earnings. The company believes that simultaneous release of quarterly earnings and the sales information in one press release is a practice that is becoming more common among the industry peers and is also consistent with that practice. Thus, beginning in the first quarter of 2009, fiscal 2009, the company will issue one press release that will report both sales and earnings for the period. We expect to report sales and earnings for Q1, which will end March 31, on Thursday, June the 26.
I am now going to turn the call over to Alan for some additional comments.
Thank you, Steve. Good morning and thank you for joining us for our call this morning. Before commenting on results and our plans and expectations going forward, let me provide some brief comments on the resolution of the Genesco litigation.
As you know, earlier this month we entered into a settlement agreement regarding the litigation with UBS and Genesco and as a result, the merger with Genesco has been terminated. In consideration for the settlement, Genesco received 175 million, of which 39 million was paid by the Finish Line out of our cash reserves. We also issued, to Genesco, approximately 6.5 million shares of our Class A common stock. Genesco is required to distribute these shares to its’ shareholders as soon as is reasonably practicable. While we strong believe that our cases before the courts had merit, this settlement eliminated the risk of an adverse ruling and additional legal expense, at what we believe were favorable terms for the Finish Line and our shareholders. We are satisfied with the result and believe this settlement is a positive outcome for the company. In particular, it allows us to move forward and focus all of our resources and attention on our fiscal 2009 goals and priorities as a stand alone company. I want to acknowledge the support and dedication of our employees during the litigation process. They kept focused on doing their work and serving our customers during a very challenging time. I am very grateful for their hard work and I am pleased that this considerable distraction has now been eliminated.
Now let’s move on to the results and then I will discuss our brand, our merchandising and new store strategies for fiscal ’09. As I am sure most of you were aware, Q4 was very challenging for retail. The consensus seems to be that retail will remain challenging as we begin the current year, with mall traffic lagging and the consumer financially strapped. While we acknowledge these unfavorable conditions, we do have some strategies in place that we think will help off set some of these trends and better position the Finish Line for fiscal ’09 and beyond. At the beginning of fiscal ’08, I outlined four key operating initiatives for the year. I am pleased to report that we have completed or made significant improvements in these areas: first, we have reorganized our footwear buying and planning department and the team has made tremendous improvements in our product assortments, which will continue to evolve; our focus on premium product is sharper than ever in both performance and sports style footwear and more in line with consumer demand. Secondly we have also re-merchandised our stores and improved our overall presentation. We opened up the sight lines in the store, decreased the density of apparel and added new fixtures to our shoe walls and floors, which all contributed to making Finish Line more shop able; we are telling more compelling product stories in all of our stores. Third, we also increased our investment in direct to consumer. Traffic in sales are up double digits and we continue to focus on this profitable and growing segment of our business. Fourth, with respect to product margin and inventory, our year end inventory versus last year was down 4% on a per square foot basis in Finish Line stores and 7% per square foot in total. We entered ’09 in a much better inventory position, not just lower inventory per square foot, but also much better assortments by category and department.
Not withstanding these improvements, Finish Line stores comp sales for the quarter decreased 5.4%, the soft goods category was down 18.1%, while footwear decreased 2.1%. In footwear, men’s comp down approximately 1%, women’s were up over 3% and kids down high single digits. In the fourth quarter we experienced strong demand for premium products, especially brand Jordan, Nike, Sports, Style and Shots running. Our footwear average selling price for the quarter was up 1.9%, the first quarterly increase for the year; in the quarter, both men’s and women’s running comp positive, in spite of declines in classic running styles. Technical running in men’s and women’s was up significantly in sales, sell through and AST, led by Shock, Barrowman series and plus enabled product from Nike, as well as Asics and Brooks. Women’s running trended significantly better and our improvement during the quarter gives us confidence about the women’s running business for Q1 and the rest of fiscal ’09. During Q4, basketball also increased in sales, margin and AST driven by Brand Jordan products, which includes the Retro, the Game and other premium and Finish Line exclusives.
In sports style footwear, men’s comp sale for the quarter decreased in the low teens and women’s increased single digits; the classic porcent of this business also continued to be soft. Nike Air Force Ones remained strong in both sales and sell through; other positive performances in women’s were Puma, Pastry and Ed Hardy; in men’s Lacoste, [Chuck Taylor} continued to grow. Kids were down 9% for the quarter, primarily attributable to the decline in Heelys business. Performance basketball and low profile styles were also slow in kids. We did see a strong result in Jordan, Shocks running and some new brand and product introductions. We continue to build our inventory in these styles to support the demand.
Soft goods sales remained a big challenge area during the quarter, headwear did not perform well and the NFL was disappointing, as we went against tough comparisons on Bears and Colts merchandise, which we were not able to comp with this years Super Bowl participants.
Our men and women’s license fleece were up double digits and we continued to grow under armor business during the quarter.
Our shoe care and stock businesses also had positive sales. At year end our inventory and apparel was down approximately 20% per store. We began the first quarter with much cleaner inventory versus last year. While soft good sales were disappointing, soft goods gross margin dollars for Q4 were flat with less inventory, faster turns and better margins.
Now turning to Man Alive; Lou Spagna our new president has spent time evaluating the current organization and has recently hired a new GMM, Ernest Brown, a 25 year industry veteran from Parisian. We are confident that with this leadership team in place, we will begin to see important improvements in the Man Alive business in the back half of this year. During the quarter and after the change in management, we took significant mark downs in order to get our inventory current. In the past, Man alive has been exclusively focused on hip hop apparel and although we aren’t making a complete departure from this offering, we are making a significant adjustment towards relevant, urban street wear. This spring we are also adding an assortment of key items led by denim in t-shirts, which is a shift away from our focus on collections. Recently our marketing group completed a consumer research project in Chicago, Atlanta and Washington Baltimore area to better understand our customer. We will be evaluating the results in the next 30 days and are continuing our effort to both recreate and validate our merchandising vision. We look forward to sharing more of our plans with you on future calls.
Looking forward, for the Finish Line stores we will continue to address the need for more differentiation in athletic specialty in the mall. For our customers it means creating a memorable shopping experience through best in class product offerings, store environment, marketing and the knowledge and service of our sales people. In terms of product, I believe our assortment is the best it’s been in the last several years. Our running presentation, especially tech, continues to increase, as does our position with all the important running brands. Our sports style business is more focused with a combination of traditional athletic brands and new athletically inspired brands. We are excited about new brands introduced into our stores over the last year or so, which include Lacoste, Ed Hardy, Sperry, Frc, Pasty and Under Armour and there are more new brands coming. We are very serious in our dedication to being premium in brands, categories and items that we offer. Everything we do is about focusing on premium product, having the best in class and being the customer’s store of choice. We intend to offer the most relevant, on trend brands and products, not necessarily the most expensive.
Specifically, in men’s and women’s running, shocks will continue to be an important driver for our business, along with our Nike Plus enable assortment. We’re looking forward to the launch of the Shock’s experience, a new shock shoe with the shock technology encapsulated in air, on April the 3rd; also coming in the first quarter of this year are new colors of our exclusive Shocks, Remix 2 and the launch of Remix 3. Other key brands in the performance segment will be Asics, Brooks, Adidas, Mizuno and New Balance. We will have elevated marketing positions in our stores and on the web to support these product initiatives.
In men’s sport style Lacoste continues to grow and is now at 600 or our doors. We’ve also significantly increased our position in the nautical look with brands like Sperry, Lacoste, Timberland and Nike. We anticipate continued strength in Chuck Taylors’ and also Ed Hardy. Slides will play an important role during the quarter led by Adida, Jordan and Under Armour.
In women’s sports style, we look for Nike, Puma and Chuck Taylor to drive the business along with new styles from Baby Phat, Ecko, Sperry and Ed Hardy and many more to come. We anticipate continued strong sell throughs and new arrivals from Pastry and we believe we have an excellent inventory position for sandals and slides this spring and summer, again led by Nike, Adidas and Under Armour.
In basketball, Brand Jordan will continue to lead the way with several key launches in the first quarter. A very successful launch which has already taken place on March the 8th of the Air Force and the Retro Jordan 12, the fusion product, also the successful launch that took place on March 15 of the Retro 2 Pac, the combination of the 14 and 9 Jordan retro shoes and the highly anticipated launch of the next generation of the Game 23 coming on April 5. This should continue through out fiscal ’09. This product clearly crosses over from performance to lifestyle and we are working with the Jordan team to find ways to expand our assortment into additional category sales. We’re looking to help reenergize the training category with the recently launched Nike Spark and also the launch of Under Armour training footwear on May 3, with limited distribution in the malls.
Trends in our kids business are improving based on continued momentum in Jordan and Shocks. The introduction of Under Armour footwear and more Pastry products, Crocs and other new brands in our stores should improve this category’s sales.
With respect to soft goods, as I mentioned, at fiscal year end we had approximately 20% less apparel in our stores and our plan is to be at levels even lower over the course of the year. We will continue our strong Brand Jordan and Under Armour presentation and/or growth in both programs. We also have plans to expand our Live Strong presentation from Nike and to introduce Pastry and Fila in the north base into select stores. Overall, our soft goods business is still plan down in sales for the year, as we focus on fewer and more impactful product statements. Our plan is to improve margins, turns and profitability.
In terms of our store environment, we’ve made significant improvements in how we present ourselves to the consumer inside and outside of our stores; in store fixtures, we have new shelves, tables and pedestals for our footwear; in our lease line marketing we will continue with our industry leading campaigns and our windows and add our store entrances, such as the very successful Be Heard campaign.
As the web continues to play a major role in our consumers’ lives, we’ve continued to grow and improve our web site. Finishline.com is an excellent vehicle to serve our customer; with 100, 00 people visiting the site daily and traffic up double digits online, this continues to be an important growth vehicle for us. Our real estate plan for Finish Line stores this year calls for 10 to 15 new openings and 15 to 20 closings. As we have previously said, there are no new Man Alive stores planned at the present time. We anticipate ending fiscal ’09 with slightly less square footage compared to ’08.
A strategy we’ve been working on to improve our business is to explore new store designs, that will improve our productivity, improve the overall shopping experience and make the store more relevant for our younger core customers. We have two different formats that we are opening this quarter, one from our own design team, which we call Finish Line 4.0 and one that we have designed in collaboration with Nike; and this morning, we have a few slides to show on our new 4.0 format. For those of you not joining this call via the web, we have put these slides of our 4.0 store on the finish line web site under the investor relations tab.
As you can see, we have recently opened the first of our new format stores and this is in the Westtown mall in Madison, Wisconsin and as you can see, in the first slide, the store front is clean with a showcase window on the right that elevates the footwear to waist level and higher and a glass case at the entrance for new releases that will open up the storefront by removing towers we currently have at the lease line. As you can see from the next Slide, the size of the store is noticeably smaller at 3500 square feet versus our current average size which is about 5400 square feet. This should allow us to improve our square foot productivity. The store will carry about 600 unique styles of footwear, versus our average of about 800 today and obviously a more focused apparel assortment. A big change is that we have moved the service area to the center of the store and away from the shoe walls and we believe this will help us provide a more comfortable and more responsive level of service. And my last slide, with regard to 4.0, shows the walls are no longer wood paneled, but a wall system that allows us maximum flexibility to tell footwear or apparel stories of all sizes and in any category. The walls and material in the store give it a much more modern and technical feel, to which we think our customers’ will respond well.
From a technology standpoint, we are also testing a digital signage system through out the store and swivel monitors at the cash wrap that allow customers to order products not in the store via our We’ve Got It store or website. We will be opening another o this type of format in Houston, Texas in a few weeks and will be closely monitoring the results. We are anticipating improved performance and productivity from this new store concept.
Next, I’d like to give you a little more information about a store design project on which we’ve been collaborating with Nike to enhance how their brand is represented in the mall and to improve the overall customer experience where their brand is sold. In this regard, we’ve been working with Nike on the remodel of one of our existing stores in Phoenix, Arizona at the Chandler mall. We’re calling this store Finish Line LTD, which allows us to leverage our brand name and to modify slightly to signify to our existing customers that this store is unique, compared to our current format in design and in product assortment. We are targeting young athletes who run or use running to train for other sports. From a product standpoint, this store will carry three categories of footwear, apparel and accessories. The primary focus will be on running, training and sports style. We have been working on making a much stronger connection to the local community through product and through marketing. We are very excited to see what this new environment enhanced product and elevated level of service can do for sales. We will unveil more details as we get closer to the grand opening date in May.
As for business to date in Q1, after nearly four weeks of March, sales are on plan with product margins still exceeding plan.
And with that, we can open up the lines for any questions that you may have.
(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first questions comes from the line of Jeff Van Sinderen of B.Riley.
Jeff Van Sinderen-B. Riley & Company, Inc.
Good morning. So, looking at your business, your comps have been running negative for some time and I guess my question is, what needs to happen for that to turn around; how much is a function of mall traffic, or increased popularity of athletic styles of other styles that you carry or changes to your footwear or apparel assortment and is there anything out there that’s happening that makes you think that those changes could drive positive comps in the foreseeable future?
Yes, Jeff, there is a lot in that question and we’re going to try to address it all, I’ll start. You know, I think first and foremost we all have to be very cognizant and we are and I just mentioned it briefly in my opening comments of the environment that we’re in from a retail perspective and certainly what’s going on in the economy and I think, with the consumer; I think it would be naïve to not keep that in mind and we certainly are. But, I think mall traffic, again, is something that’s not been good; with regard to our stores, mall traffic has been down. We do monitor about half of our stores and it’s very difficult, we don’t get direct information from the malls any more as to their mall traffic, but there are some organizations that monitor mall traffic and I think mall traffic in general has also been down to some extent. But, you know I feel very good about the product and I feel good about a lot of the things we’ve been doing, that we’ve really been doing over the last year or so and I continue to see momentum. As I mentioned, I feel that our product offerings and our product presentation and the marketing in our stores is as good as it’s been for the last several year. We’re seeing some very, very positive trends in key categories and areas; the women’s business has turned positive and that’s very important, that’s something that has been negative for the last couple of years. Also, in the men’s business, we’re seeing strength in basketball, certainly led by Jordan, not necessarily what we would call all performance basketball, but the basketball category, especially Jordan, is really performing well and of course tech running, both men and women and we and our team of merchants have done a really fantastic job of really diving into the tech area in particular, the tech running are with a lot of the different brands and certainly all the important brands. We are seeing good trends in our direct to consumer business, the e-commerce end of our business. We continue to have double digit growth in traffic and sales and this, I think, is certainly a trend that’s going on in general out there with the consumer, they’re shopping more on line and we feel that we have the ability to capture our share of the market in this particular business. So, I guess the bottom line is, do I think that we can turn this business around; do I think that we can make sales go positive, because we have been negative for a couple years? I think we can. I’m not looking and I would not sit here today and say there’s going to be a monumental shift, but if we can take sales from a negative 4.5% in Finish Line and -6 as a consolidate company back to flat in ’09 or maybe even a little bit positive, I think that I would be pretty happy with that in view of what we’re facing, the head winds and the economy and also I think it ‘s very critical and hopefully everyone’s listening and hearing what I’m saying, I do think we’re going to have better product margins; that is a focus of this company in ’09. We really feel that we can improve our product margins, we think we can do it with less inventory and quicker turns and all those things are very positive on a go forward basis.
Jeff, this is Steve Schneider. A couple things I probably would add that we think are also benefits, we saw that in the fourth quarter that our average selling price was up for the first time in a number of quarters and we do believe that that’s going to continue; so we’ll have, maybe not quite to the 1.9% that it was, but we’re going to see some increase there. Also, this is an Olympic year, you know sometimes that’s really good, but sometimes it’s just good, but it’s certainly never a negative to have the focus on athletics in our business, because we know the vendors spend a lot of money during these times, in the summer time. So we think those are also some side benefits we get.
Jeff Van Sinderen-B. Riley & Company, Inc.
Okay, that’s helpful. And then, on Man Alive, I don’t know, maybe Kevin, you can give us a sense of how much that’s hurting profitability and maybe how much that hurt profitability last year and then , I guess for Alan, what gives you confidence that you can start to turn that business around?
Yes, Jeff the loss at Man Alive this past year grew pretty significantly and again, it is not something that we have disclosed publicly at this point in time. I think what is important is that Lou and now with Ernest on board, we have a management team that we believe is really focused on getting the inventory trend right and making these stores something that the consumer looks at and wants to shop at. Obviously, with Demo closing their doors that is a positive at the end of the day and this is a very fragmented industry where there is a lot of opportunity for somebody to grab and I think it’s up to us to prove that we can go forward and make it happen at the end of the day. I would tell you that for ’09, that our plan is that it will still lose some money, obviously not to the same extent that it did this past year, but the first half of the year will still be a little difficult as we continue to get the inventory right, but we do believe that by the second half things will be much, much better than they were a year ago; in particular in the margin area, because we have taken some significant hits this past year, on the margin side, as we clear through goods that just were no trend relevant to that industry. So, we still have a lot of work to do, but that’s some of the things we are looking at.
And let me add, this is Alan, echo what Kevin has said. I know and I myself am still very positive about the future of Man Alive. I do think there is a lot of change going on with this consumer and I think it’s all positive change. I think that the consumer and the consumer base for the Man Alive store is broadening and I think that that’s what our market research is showing and that’s what the information from going out and talking to consumers and watching what’s going on in the marketplace, there is a big shift going on in the focus on the product. We are coming out of, what we might refer to as hip hop product, we’re not going to totally abandon hip hop, but we see a big shift to what we classify as cross-over urban street wear, which is really multi culture, city inspired fashion. And when you go into the malls and you go into the stores and you watch the shopping patterns that are going on, you’re seeing a lot of different types of people, kinds of people going in and out of stores that in the past you wouldn’t see, interested in different kinds of products. And we think that the Man Alive, in the way the box is situated and the locations we have is well positioned to take advantage of this shift and actually be one of the companies that can lead the way. We have to get the right product into the stores and that’s the process we’re going through right now. Lou is very upbeat, he’s a very positive person, he’s put a great organization together and I share his enthusiasm; at the same time, I know that we have to be realistic, we have to be patient and we have to be prudent, but we do expect to see positive results from all these efforts, certainly in the last half of the year and I can assure you we will continue to monitor Man Alive and to evaluate what is the best thing to do with the company.
Jeff Van Sinderen-B. Riley & Company, Inc.
Thanks very much and good luck.
Your next question comes from the line of Virginia Genereux of Merril Lynch.
Elizabeth Parrella- Merril Lynch
Hi, good morning, it’s Elizabeth for Virginia. My first question is on the gross margins, which certainly came in better than we were modeling. Can you just talk about any vendor support that you might have received?
Well, I don’t think that would be anything that would be unusual this quarter or even last year, than it’s ever been. We’ve always worked closely with our vendors and they’ve worked closely with us and I don’t think that in and of itself had anything to do, or much to do with the improvement in gross margin. I think what happened is that we’ve been focusing on premium product, to premium presentation. We’ve been working very hard on keeping our inventory as clean as we possibly can, taking our mark downs where we need to take them; we’ve had actually less promotion in the fourth quarter than we had last year in the fourth quarter and even, again, with less promotion we were able to improve our inventory and also at the same time dramatically improve the margin. A lot of the product margin improvement, well really all of the product margin improvement came out of the Finish Line, because Man Alive was in a clearance mode and most of the Finish Line improvement was really related to the soft goods end of the business. As I mentioned, we’ve lost a lot of the top line sales, but we’ve so improved the product margin in the soft goods end of our business that, when we looked at gross margin dollars, which is really what pays the bills, they were flat in spite of those pretty negative comps. So, we think that’s the way to go, we want to do business in soft goods that’s profitable, we’d like to start seeing things get positive, but we’re not going to chase soft goods or apparel just to put it into the stores; it has to make sense and we’re going to try to be more focused and we think that we’re on the right track and the right course.
Elizabeth Parrella- Merril Lynch
Okay, great and then my second question is just on your marketing budget for this year. It sounds like you guys may be increasing that and do you expect that to be sort of offset by any benefit from the Paiva closures?
Well, in marketing, it’s not really that we’re going to increase the marketing budget; we think we’re going to hold the marketing budget pretty much in line. What we’re going to do is be shifting the focus of the marketing budget. We’re really going to focus very much on the internet business, we’ve had a lot of success with the internet, we think it’s important, we think our consumers are migrating to the internet, they’re using it more, they’re shopping more on the internet; what we find is that they shop the internet and they shop our stores sometimes in the same day. So, it’s not that we’re going to spend more money, I think we’re just going to shift it; and also we’re going to shift more to the lease line and what’s going on in our stores. I think that, again, we realize we are a mall based retailer. We pay a lot of rent and we don’t feel that it ‘s important that we drive traffic into the mall, we think it’s important that we get that traffic that goes by our store every day to come into our store and we can do that by the exciting types of campaigns that we’ve been putting in place with Be Heard and the different iterations of Be Heard and we’ve gotten tremendous reviews on the graphics and the POP that we’re doing and the excitement we’re putting into the stores and we’re going to continue to do that.
Elizabeth Parrella- Merril Lynch
Okay great and then my last question is just on the 15 to 20 door closures that you have planned. Are most of those natural lease expirations?
Not necessarily. We certainly a portion of it will be natural lease expirations, but if we come to the conclusion and also we have situations where we don’t necessarily have to wait the full ten years to make a decision about whether or not we’re going to stay in a store or in a mall in a lot of instances. So, we really evaluate the stores a couple of times a year, after the major seasons: back to school and then obviously after a holiday and we bring in all the different department store ops, the merchants, the finance, everybody and we evaluate the stores that aren’t performing and we make decisions, as a group, is this a store that we need to, whether to impair the store, whether to close the store, what do we need to do. And actually I think we’re all looking at it with a much more critical eye now than we’ve ever looked at it. And we’ve really realized that we don’t necessarily have to grow the top line of our business to make more profit. We always want to grow the top line, but if we close 10 or 15 stores that are losing 4, 5, 6, 7 million dollars, what we’ve done is we’ve actually added that money to the bottom line and added it to profits. So, we are not going to just chase sales or do dollars to do dollars, we are going to focus on profitability.
Elizabeth, its Steve her too; one thing I’d want to add is that a large number of our leases have kick out provisions in them that anywehere from three to six years there might be a sales target that we have to hit or if we’re below that, we have the opportunity to kick out. In those cases, that actually provides an opportunity for us. So this 15 to 20 door number that we have for closing, we haven’t specifically put store numbers on that because we do believe that if we come to a losing store that is trending below that kick out line, but we can renegotiate that lease because of the kick out, we may not close the store at all, actually turn a loser into a winner. We’ve been pretty successful with that over the last quarter or so and we think that’s only one of the few advantages of having negative comp store sales is that you are in a little bit better position when you’re renegotiating. So, I think that helped us in the fourth quarter or the first quarter that I can ever remember where our actual dollar occupancy costs were less than last year and we think that that has an opportunity to continue, which would be a big help to us. So, I wouldn’t, that 15 to 20 doors is a possibility, but hopefully it will actually end up being less than that because we renegotiate some leases.
Elizabeth Parrella- Merril Lynch
Okay, great thanks.
Your next question comes from the line of Bernard Sosnick of Gilford Securities.
Bernard Sosnick-Gilford Securities
Good morning. First Alan, I would like to say that it’s a pleasure to hear you with a voice that’s less stressful.
Thank you Bernie, you know it’s nice to be with a voice that’s less stressful.
Bernard Sosnick-Gilford Securities
You’ve explained how you’ve differentiated your stores with less emphasis on premium products and not necessarily a question of having the highest prices, you’ll sell whatever is trend right at any price. But what I’d like to do is have you focus a little bit towards the lower spectrum of your price points, because competition has been severe at the moderate price points for athletic footwear and how are you coping with that and how are you insulating yourself at that end of the business?
Yes Bernie, if you go into the stores, you’ll see that we have dedicated an area of the store, on the shoe wall, that we call the 50 spot and that is our way of trying to, and I think very successfully, deal with the value proposition for footwear. And, we do a 50 spot area on the men’s side, we do a fifty spot area on the women’s side and then we do a 35 spot area in the kid’s footwear section of our stores and it’s been very successful. What’s been working for us is we’re really focusing on buying for those areas for our store, for those particular kinds of value. So, it’s not going to be $50.00 because we’ve taken three mark downs on a shoe that maybe cost us $40 or $50.00 at cost, it’s more of making certain and planning and spending our buy dollars, a specific percentage of them, for that type of product. We think we really offer the value proposition that way. We do it the right way, we don’t take great product that can carry a higher price point and should carry a higher price point and reduce it to a mark down or reduce it to a value and I think that ‘s certainly advantageous to the vendors and I think they’d rather see it that way. Also, I think it’s important to note that there is a lot of product out there that’s very important to the consumer that’s not expensive. I mean, we can look at the Chuck Taylor, which we’re having a tremendous amount of success for, at around $40.00, Crocks at a low price point and there is just a lot of product that the consumer can buy and they’re basically paying full retail, but it can be anywhere from 35 to $50.00 and take that and with the 50 spot section we’re doing, we still think we can offer a lot of value and maintain our approach of a premium product, because it’s still premium product, it’s just what we characterize at a premium product, but it’s at a very, very good value. And maybe most importantly, what we’re doing is we’re maintaining our premium status, because we’re not throwing sales signs, BoGo signs, and all this other kind of stuff all over our store. We have a very much a kind of a premium product kind of an attitude, but yet the value is easy to spot in the stores.
Bernard Sosnick-Gilford Securities
Alright, that’s very helpful and lots of luck going forward.
Thank you, Bernie.
And your final question comes from the line of Chris Svezia of Susquehanna Financial Group
Chris Svezia of Susquehanna Financial Group
Good morning, gentlemen, good to speak with you all. A couple questions, I guess not to beat this year, but just on the margin, I was wondering how sustainable it is for you to continue to show improvement in merchandise margin and what is obviously being characterized as a very difficult environment, are you kind of willing to sacrifice top line growth, maybe like you’ve done in apparel to improve the margins? And, can you just remind us again, what level of comp you need to leverage occupancy on the gross margin line and obviously your SG&A expenses.
Chris, this is Kevin. From a leverage perspective, traditionally we have said that probably we would need probably about a 2% comp to leverage our SG&A and that was during a period of time when we were in pretty significant growth mode; we’ve opened a lot of stores over the last 5 or 6 years. We are hoping to be able to bring that down a little bit this year, but we have to see, it’s obviously going to take some work because costs are increasing in various aspects of our business. But, we’re going to try to, hopefully with a little less than a 2% comp be able to leverage that. And then on the occupancy side, I would tell you, I don’t know that that has changed a lot. Historically we have said that that’s probably a 4% comp roughly to leverage our occupancy costs. Now again, as Steve spoke to, we are looking at all of our stores and we’re going to close doors that don’t make sense, which is helpful to the occupancy side and we’re also going to look to renegotiate where we have that ability. So again, I would hope that maybe it doesn’t take quite a 4% comp to leverage that expense this coming year, but again, we’ve still got to execute to do that at the end of the day.
Chris Svezia of Susquehanna Financial Group
Okay, that’s helpful and then on the merchandise margin?
Yes, from sustainability standpoint, obviously as we’ve talked about, it is a big focus. Our inventory is cleaner than its been in quite awhile, especially on the apparel side and the footwear is looking pretty good too and I think our merchandising team is making it a pretty good focus to increase our turn this year, which has decreased probably each of the last three to four years, so we’ve got some work to do there. And we believe that we can be, really there is just some peripheral things that we’ve bought in the past that we probably don’t need to buy going forward. We can operate with 5 to 10% less inventory and really be much, much more productive, not only from a term perspective, but also from a margin perspective.
And Chris, one thing that I would add here too is that, we really are looking for some pretty big margin improvements, especially in the second half of the year in our Man Alive division, as I really cleaned that out’ so I think that’s really going to be a big benefit maybe in the second half. They are still cleaning some out now, so it may not be that benefit the first, but the second half will be a much bigger benefit.
Chris Svezia of Susquehanna Financial Group
Okay, that’s helpful, thanks, Steve. And I guess Alan, a strategic question for you. In the past you’ve talked about kind of the need in the industry for kind of consolidation, or a reduction in square footage growth, I guess within the malls and I’m curious how Finish Line sort of fits into this strategy. Obviously Genesco transaction didn’t necessarily materialize, yet Paiva, that venture was close and Man Alive, obviously you have some work to do in term of making improvements there and you seem to be making some head way. So I’m just kind of curious, is there an opportunity for growth for mall based athletic specialty retailers, particularly yourselves, or the industry as a whole, as you sort of move up in the next, call it 18 to 24 months.
I think, with regard to athletic specialty in the mall, I think the best thing that’s happening right now is the reduction of square footage. I think that’s important, I think that’s critical. There is not enough differentiation , there is not enough, what we might call key product or high profile product that sells quickly and well to support all the square footage that’s currently out there. So, I know we are talking about less square footage, we’ll have to see, but that’s really what we’re planning and I know some of the other people in athletic specialty are really talking the same way and actually doing it. So, I think that is a very healthy situation. There is no sense keeping stores open that aren’t productive and if all of us in athletic specialty focus on operating our productive stores and getting rid of the stores that just don’t seem to make any sense, I think we can all get healthier. I think the other thing that we’re doing is we are testing the two new proto types that I talked about, that I think, in particular with regard to our 4.0 store, which is a smaller store where we think we still have the ability to present the kind of merchandise program we expect and want to present in a Finish Line store, but we can do it in less square footage and we can really improve our productivity. You can’t, as Steve said, you can’t operate in the malls today at $300.00 a foot. We have to be at the Finish Line at $400.00 a foot and we have to get there and I don’t think we can necessarily always get there by driving a top line number. I think maybe what we have to do is reduce the size of our stores, maybe do less stores and really focus on driving that 300 number up to $400.00 per square foot and I think that can be done; it’s going to take some time, but it can be done.
Chris Svezia of Susquehanna Financial Group
Alright, thank you very much guys. I appreciate it and good luck.
If there is a question, we have…
That’s final? Okay I’m sorry. Thank you very much. I appreciate everybody sticking with us as you have. I know it’s been a difficult year, I know it’s been difficult for the shareholders and I know it’s been difficult for the people who have been following the company. We appreciate your support and hopefully you can see that we are very, very happy to be focused on the business again and we have gotten rid of the distractions, so we’re looking for better things to happen. Thank you.
Thank you for participating in today’s Finish Line fourth quarter earnings call. You may now disconnect.
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