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The Finish Line, Inc. (NASDAQ:FINL)

F1Q09 Earnings Call

June 27, 2008 8:30 am ET

Executives

Kevin Wampler, Chief Financial Officer

Steve Schneider – COO

Alan Cohen – CEO

Analysts

John Shanley – Susquehanna International Group

Jeff Van Sinderen – B. Riley & Company

Ken Stumpfhauser – Sterne Agee

Heather Boxsen – Sidoti & Company

David Turner – BB&T Capital

John Pinto – Brightleaf Capital

Bernard Sosnick – Gilford Securities

Operator

(Operator Instructions) At this time I would like to welcome everyone to the Finish Line First Quarter Earnings Conference Call. I would now like to turn the conference call over to our host Mr. Kevin Wampler, Chief Financial Officer.

Kevin Wampler

(Instructions) We ask that you remember that some of the comments made by 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 June 26th press release and 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 color on the quarter and our business plan going forward.

Steve Schneider

Our Q1 which ended May 31, 2008 consolidated net sales were $287.9 million versus $285.8 million last year. Total company comp store sales for Q1 increased 1.2%. By concept Finish Line comp sales increased 1.6% and Man Alive comp sales decreased 7.1% compared to the same 13 week period last year.

Comp store sales by month for Finish Line stores were as follows: March decreased 5.6% and increased 7.6% in April reflecting the Easter shift followed by 6.6% increased in May. For the quarter comp store footwear sales increased 2.8% with monthly results as follows: March decreased 4.9% while April increased 8.8% and May increased 8.5%. Another positive trend was the average selling price or ASP for footwear which increased 4.8% for the quarter.

In soft goods comps sales decreased 5.2% for the quarter. By month March decreased 9.8% April increased 0.7% and May decreased 4.2%. Although soft goods experienced a mid single digit decrease for the quarter gross margin dollars were up with inventories more current and down approximately 16% on a per square foot basis.

For the Man Alive stores March comps decreased 21.4% while April increased 1.2%. These results reflect the Easter shift and the exiting of the footwear business. May increased 7.1% as our new merchandising and sales initiatives started to kick in with significantly better product margins.

Now I will review the consolidated earnings results for Q1. Income from continuing operations was $865,000 or $0.02 per diluted share compared to a loss from continuing operations of $2.6 million or $0.05 per diluted share for Q1 last year. The gross profit percentage for the quarter increased 190 basis points versus Q1 last year to 28.9% of sales. This consisted of a 200 basis point increase in product margins that was partially offset by a 10 basis point increase in occupancy costs.

The increase in product margins was the result of improved margins at both Finish Line which was up 190 basis points and Man Alive up 440 basis points as both divisions improved their aged inventory and inventory mix. SG&A expenses were flat as a percent of sales for the quarter at 28.3%. Increased store payroll costs were offset by lower depreciation, supplies and freight expenses. Interest income was $255,000 for Q1 versus $463,000 for Q1 last year. This decrease primarily reflects the lower interest rates earned on invested balances year over year.

The company’s effective tax rate for Q1 was 55.8% and includes the effect of certain discrete items recorded pursuant to the financial accounting standards board interpretation of the 48 which covers accounting for uncertainty in income taxes. The company expects the effective tax rate to approximate 39% for the remaining quarters of fiscal 2009. Diluted weighted average shares outstanding were $53.9 million for Q1 and $47.1 million for Q1 last year. The increase primarily reflects the 6.5 million shares issued March 7th to Genesco as part of the litigation settlement.

During Q1 the company opened four new Finish Line stores while remodeling eight existing stores and closing one store. As of May 31 the company operated 700 Finish Line stores compared to 695 one year ago. That’s an increase of 1%. In addition, Finish Line’s store square footage decreased slightly to 3,848,000 square feet compared to 3,861,000 at the end of Q1 last year.

The company did not open, remodel or close any Man Alive stores during Q1. As of May 31 Man Alive operating 94 stores compared to 93 stores last year. In addition Man Alive stores square footage increased 2% to 326,000 square feet compared to 319,000 one year ago.

Merchandise inventories on a consolidated basis declined to $281.2 million at May 31, 2008 compared to $308.1 million one year ago. On a comparable per square foot basis consolidated inventory decreased 8%. Finish Line merchandise inventory decreased 7% and Man Alive merchandise inventory decreased 21% compared to one year ago.

CapEx for Q1 was $5.1 million, the amount of deprecation and amortization expense in Q1 was $9.7 million. The company believes CapEx will approximate $19 to $23 million in fiscal ’09 and depreciation expense will approximate $38 to $40 million. These CapEx estimates include maintenance and technology costs for the corporate office as well as the costs to build out eight to 11 new Finish Line stores and remodel 14 to 17 stores. The company does not plan to open any Man Alive stores in fiscal ’09.

The company ended Q1 with $40 million in cash and equivalents that’s compared to $33 million one year ago and had no interest bearing debt. The company has made all material payments for the settlement and related expenses for the Genesco matter.

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

Alan Cohen

While the macro economic conditions remain challenging we are encouraged by the measurable improvement in our business during the first quarter. The improvement reflects the progress we are making in our fiscal ’09 strategic plan. As we discussed last quarter this plan is designed to increase our productivity and improve our profitability. We’re pleased to report that we’re on target with our plan and we are now seeing the positive initial results.

One area of focus is to improve our assortment planning and inventory management. During the quarter we reached all of our targets in merchandising by growing revenue and product margins, improving inventory turns and reducing our aged inventory to levels lower than they have been for many years. As Steve mentioned our inventory levels were down 8% on a consolidated per square foot basis versus last year. For the balance of the year we anticipate inventory levels will remain lower than last year as planned.

Customers are responding well to our continued focus on premium performance and sports style products in the Finish Line stores. In addition to helping differentiate our offering this focus enabled us to drive higher product margins and realize increased average selling price during the quarter. A compelling product offering that balances premium performance and sports style will remain a priority.

Another key element of our strategic plan is keeping a close eye on costs. In particular we aim to contain or reduce our expenses regardless of whether we grow our top line sales. As a result of our effective cost management SG&A expenses were flat as a percentage to sales for the quarter at 28.3%. Increased store payroll costs which were anticipated in connection with the increase in minimum wage were offset by lower depreciation, supplies and freight expense.

Occupancy cost ratios are improving as we have been able to downsize our store footprint, favorably negotiate deals as they come up or close underperforming stores as needed. All of these cost saving measures are aimed at improving our bottom line in an economic climate that continues to challenge the retail sector as well as many others.

Let me give you a little bit of color regarding our product. During the quarter running was up in men’s and women’s following a strong performance in the fourth quarter of our fiscal ’08. Shox from Nike continued to perform well. Especially our exclusive Remix II. Technical running footwear from Asics, Brooks, Saucony, Mizuno and the Nike Bowerman Series were all so strong during the quarter. The running footwear average selling price and sell throughs both showed improvement.

In basketball, brand Jordan continues to drive the business across all product offerings including retro, game, Finish Line exclusives and inline. Jordan sales, turns, margin and average selling price all improved during the quarter. The launch of the training shoes from Under Armour was successful with double digit sell throughs. Sales have remained consistent since that May launch.

As planned Sports style was down low single digits for the quarter with inventory down double digits. The increased productivity of this inventory has helped margins for the category which were up 210 basis points. In men’s we continued to see strength in Lacoste, Chuck Taylor and Nike during the quarter. Men’s sandals exceeded plan with gains in slides from Jordan, Under Armor and adidas. Women’s sandal sales have not been as robust during the quarter.

Kid’s footwear category experienced strong performance in most brands but was down mid single digits overall for the quarter with inventory down low double digits. Sales in kid’s excluding Heelys product were up 18%. These increases were driven in large part by Jordan, Chuck Taylor, Under Armour, Lacoste and Polo. We expect a better comparison against Heelys to begin after back to school and we anticipate continued improvement in our kid’s business in the back half of the year.

As Steve stated although soft goods experienced a mid single digit decrease for the quarter gross margin dollars were up with inventories down approximately 16% on a per square foot basis and more current. Soft goods are being driven by basic core replenishable branded and private label items such as t-shirts, shorts, socks and shoe care. We are also seeing success with Under Armour and programs including Live Strong which is the Lance Armstrong product from Nike, as well as some of our new graphic t-shirt vendors.

Last quarter we discussed some initiatives to improve sales in Man Alive and as of the first quarter we are on plan. We achieved positive comps in May which were the result of our key item strategy beginning to take hold. During the quarter we experienced higher margin due to improved mark up, more relevant assortment and a much fresher inventory which was down over 20% on a per square foot basis at the end of Q1.

Our strategy of becoming more street fashion focused and more item intensive is continuing to evolve. At Man Alive the evolution away from exclusive hip hop offerings is in motion. Improvements in conversion and units per transaction along with the elevation of the in store loyalty program has helped us to drive sales increases despite traffic declines. Our sales metrics continue to improve.

I want to give a special call out to Lou Spagna, Man Alive’s new President and all of his staff in the office and in the stores for their hard work and the tremendous progress being made to transition these stores to a new vision which we feel is much more contemporary and compelling to the existing and new Man Alive customers.

Looking at the current quarter we believe that the excitement surrounding the Summer Olympics will help further energize performance athletic products and will place a focus on athletic brands. We believe we are well positioned to take advantage of this anticipated increased demand for performance product. Early sales on Re-Mix Three our exclusive Nike Shocks product for back to school in Men’s, Women’s and Kid’s are encouraging. We anticipate the continued success of Shocks during the quarter and beyond.

Also from Nike we have the exclusive Air Max 180 Rebellion, a $100 air shoe coming in late July which will help drive sales at back to school. Technical running led by Asics and Brooks should also continue to be strong. In basketball we’re looking forward to continued key releases of Jordan product during the quarter to keep our momentum going. We have four Jordan launches in July and four in August including an Olympic package.

Finish line is well positioned to see Jordan sales increase in the quarter. We are also beginning to see positive trends in other Nike basketball products as well. In men’s sports style we recently launched NYX a sports style footwear collection from Nike inspired by youth culture. We’re very encouraged by the early sales results and anticipate this success will continue through back to school and beyond as new NYX product hit our stores.

We will also continue our emphasis on differentiation with exclusive products from a variety of sports style brands that we believe will continue to separate Finish Line from the competition. As I outlined before during Q2 and throughout fiscal ’09 we will remain focused on the execution of our fiscal ’09 strategy to improve our productivity and our profitability. The company’s financial position is strong as we ended the quarter with $40 million in cash and no interest bearing debt.

Trends in athletic performance have improved while we will continue to monitor the effect of the macro economic environment on our business and the stress it puts on our consumers we are cautiously optimistic with respect to Q2 as we head into the very important back to school selling season.

As for business to date comp sales for the first three and a half weeks of June have been good, up approximately 10% in the Finish Line stores and up high single digits for Man Alive. Additionally product margins are exceeding last year and planned. With that we can now open the call up for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from John Shanley – Susquehanna International Group.

John Shanley – Susquehanna International Group

You mentioned in your comments that the company is planning on downsizing the store footprint. Can you give us an idea what you envision would be the ideal size of a Finish Line store going forward and is there a game plan in place in terms of reducing the square footage of some of the bigger Finish Line stores that are already in existence.

Alan Cohen

When I referred to downsizing I was talking about in some of the renegotiations, leases that are coming up and things like that in particular in my initial comment. You’ve raised a good point. That is something that we are focusing on and concentrating on. This year the new stores that we’re anticipating that we’re going to open are probably going to average somewhere between 3,500 and 3,700 square feet which is certainly a lot smaller than the average of all of our existing stores which is about 5,500 square feet.

Also we’ve talked about the test that we’re doing with Finish Line 4.0 which is 3,000 to 3,500 square foot stores with a new fixture package and new look and feel which we’ve got a couple of those stores open which are doing very well. They’re performing at a much higher per square foot sales ratio than the rest of our company. We are intrigued with trying to operate smaller stores, get higher per square foot performance, more productivity and hopefully more profitability.

As far as downsizing our bigger stores it’s not that simple. We have a lot of very big stores, stores that might be 10,000 to 15,000 square feet that are performing very well. What we have to do is we have to look at every one of our stores individually, store by store basis, look at the economics of the deal, look how the stores are performing and then when we have the opportunity when the leases are up or when we have some other sort of an opportunity if we think it makes sense to downsize we’ll downsize to increase productivity and profitability.

John Shanley – Susquehanna International Group

The company’s gross margin level in the quarter was considerably stronger than what we had anticipated up 220 basis points as Steve pointed out. Can you give us an idea what product categories in particular really helped to drive gross margin improvement were there some products that really were major contributors to the bottom line results in the quarter?

Alan Cohen

With regard to the Finish Line stores I think the product margins were up about 190 basis points which is very strong and we’re very proud of that. The effort by the merchant has been to reduce inventories, operate leaner and increase turns, reduce mark downs. All these things happen when you get your inventory under control.

What we’re finding is really the improvement in product margin is really in most categories across the board. It’s not anything only or specifically. Certainly some areas are performing better than others. The Jordan brand is just performing fantastic for us, with regard to turns, product margin. It’s been an effort across the board in all the different categories; men’s, women’s and kid’s and we’re seeing improvement just about everywhere.

In Man Alive tremendous increases in product margins, a little explanation, we had a soft painful March in Man Alive but that was by plan. As I had said last conference call we spent the last quarter of ’08 and we were going to spend the first quarter of ’09 cleaning out the inventory, making the inventory fresh and getting ready for the transition that we knew was going to take place and that’s exactly what they did during March and we started to evolve the new merchandise mix in April and really continued to evolve it in May.

We saw good improvement in the sales, the revenue and also we started to see some tremendous improvement in the product margins in April and May and it’s continued to build strength in Man Alive. Its across the board, it’s just about everywhere in all products.

John Shanley – Susquehanna International Group

My last question concerns Man Alive, has it been a noticeable fall off in terms of shopper traffic level in the Man Alive stores since the footwear product category was eliminated? Is there a timeline in terms of what you’re looking at now in terms of when you expect Man Alive to get up to operating margins that are acceptable to you and the company’s management going forward.

Alan Cohen

As far as getting up to acceptable margins I think they’re making tremendous progress. We said that we’re not expecting Man Alive to be profitable this year but we’re expecting it to continue to improve throughout the year. Based upon what they did first quarter, exceeded what the plan was we’re feeling very good about what’s happening and the job they are doing and the progress that they’re making.

We’re not looking for profitability this year but we’re looking for tremendous improvement and we’ll have to see about next year. We certainly would like to see it turn around and become profitable next year.

John Shanley – Susquehanna International Group

As far as the traffic level without footwear.

Alan Cohen

Nothing noticeable, the footwear program was never that successful, it was never that meaningful it was a good test, it was a good try. We just couldn’t get traction in Man Alive with footwear and the decision was made by the Man Alive team. We just don’t need it; we can do better without it. If we can’t have the best product, if we can’t be the most relevant to our consumer then let’s get out of it and that’s exactly what we did.

The traffic in Man Alive is again the most important thing is once we start to transition the inventory, get the new product in, get the new concept going traffic has picked up pretty well and we’re pretty satisfied with traffic and the way its building.

Operator

Your next question comes from Jeff Van Sinderen – B. Riley & Company.

Jeff Van Sinderen – B. Riley & Company

As you look at your plan for the rest of this year does it appear feasible for gross margins and operating margins to improve on a year over year basis. What I’m getting at is I understand part of the improvement at Finish Line really has to do with inventory rebalancing and getting that in line and what I’m wondering is there further improvement to be had in inventory and how much of the merchandise margin improvement at Finish Line and footwear do you think is associated with inventory versus other factors.

Alan Cohen

I think it’s a combination. Certainly when your inventory is in better shape you turn your inventory faster, you’re having less mark downs. At the other side of the spectrum we’re also seeing better product mix, we’re seeing faster sell through with regard to the new products that we’re bringing in which also certainly help you increase your gross margin or your product margins.

I think its coming from both sides. We anticipate that we’re going to continue to see good strong gross margin improvements. We think that we’ve got on a go forward basis the product looks good, we feel very confident and comfortable with what we’ve got on order. The quality of the inventory is good and we think that certainly being something that being accepted by the consumer. They’re coming into the stores looking for the product and buying it relatively quickly.

I feel real good about the margins that we were able to attain in the first quarter and that we can continue to perform certainly to that level.

Jeff Van Sinderen – B. Riley & Company

As far as apparel in the Finish Line business, also seems like inventory rebalancing is part of what’s helping that business overall in terms of the margin. What do you think it takes at this point for the apparel business to start to comp positive in Finish Line? Do you think it’s a matter of traffic at this point or are there other things that you guys are working on that you think can help drive comp improvements there?

Alan Cohen

It’s a situation that we’ve struggled now for two or three years with the apparel end of the business. What’s happened is there are no drivers. There’s nothing that is that relevant or that important to our consumer that we can carry in our stores that will differentiate us and be meaningful to the consumer and that’s what we’re struggling with.

We tried for years and years to make things happen in the soft goods of the apparel end of the business and finally some time last year we just decided that we’re not going to try to make something happen if its not there. We’re going to try to become efficient with the inventory; we’re going to approach our soft goods business just like we’re approaching our footwear business.

We want to be premium, we want to be best in class and we want to be relevant to our customer. If there’s nothing in the marketplace that can get us there in apparel then we’re not going to make a big apparel statement. That’s the way we’re approaching that. That doesn’t mean we’re not looking or that we’re not trying, we are.

We will consistently and constantly look and try to find those items that fit into the category premium, best in class and relevant to our consumer. The things that will help differentiate us in the marketplace. We don’t want to be in an apparel business that is just commodity, selling t-shirts for $5.00 or whatever. We want to take it beyond that.

I think our next move, when we really get aggressive in apparel is going to be because we’re going to have things that we feel good about that can take us to where we want to be in the soft goods business. I think that will happen. Everything does become cyclical, things do change. We’ve been in a soft period in athletic type apparel branded and even to some extent private label for the last two or three years. Certainly licensed has not been that strong. We have to maybe wait for the next catalyst to come along and I’m sure it will.

Steve Schneider

Just to add a little bit to the inventory question. I think Kevin had mentioned in last quarter’s call that our goal would be to operate our business at 5% to 10% less inventory as we go through this year. We operated at 8% overall at the end of Q1, 7% for Finish Line and 20% plus for Man Alive. It’s obviously not hurting our business. We ended the quarter at those kinds of numbers down and yet we started the month of June up 10% in Finish Line sales with margins at above plan and above last year.

We’re going to continue to do that and as good as they are I wouldn’t say that we’re feeling any where near where we need to be. This is going to continue. By this time next year we would hope we still operate even less because we still want to get our turns higher. We think this is just the beginning of a plan that’s going to offer us some pretty good margins here for a while and we’ve got some opportunities there in both Man Alive and Finish Line. It’s going to have a nice positive effect on the cash flow as well.

Jeff Van Sinderen – B. Riley & Company

Let me ask you if we can shift to Man Alive for a minute that is starting to improve sequentially. Should we expect that business to continue to improve and then any light you can shed on the drag to profitability in the quarter or what we should expect this year from the Man Alive business would be helpful. I’m trying to get a sense of how much that’s hurting the overall numbers and we’ll leave it at that.

Kevin Wampler

As we’ve talked about we haven’t spoken directly about how much or quantified the Man Alive losses at this point in time. I would tell you that historically their best quarter is Q4. Q1 and Q2 tend to be a couple of their softer quarters at the end of the day. Fairly decent drag but obviously we saw sequential improvement. I think what’s most important is we’ve gotten inventory in line. We had a positive 7% comp in May and we’re up high single digits here so far in June. I think that’s the most important thing.

As Alan said the idea is it won’t be profitable this year. The idea would be we will probably look at it towards the end of the year and as we continue to make progress we would probably hope that we get there next year. It’s too early to tell, we’re very early in this process. We’re very encouraged by what we’re seeing but still a lot of work to do at the end of the day but definitely going the right direction.

Operator

Your next question comes from Ken Stumpfhauser – Sterne Agee.

Ken Stumpfhauser – Sterne Agee

I’m wondering if you guys might be able to give us some color, how many stores do you anticipate you will be getting the NYX and Nike Sport style product this year.

Alan Cohen

We’re in a little more than half of the Finish Line chain with NYX this year.

Ken Stumpfhauser – Sterne Agee

As far as the sports style is concerned I know it’s down year over year but did it show more strength versus your plan as opposed to the performance related product this quarter?

Alan Cohen

No, I wouldn’t say it showed more strength. Performance is really been doing very, very well. Sports style we’re very satisfied with the way its performing. It is on plan, we planned it down. To give a little bit of history about what’s going on with us in the sports style end of the business. We knew when we got into it last year that we were making mistakes. We were being very aggressive, we wanted to make statements.

It was sort of dipping our toe into the water and trying to understand the business and to let the consumer and the customers know that we are in fact in this business and we’re going to offer this kind of product. We made mistakes. This year we made a lot less mistakes. We did more things right and we didn’t need as much inventory, we knew that. We didn’t need to do as much volume because we were going to do less volume at higher margins and become more profitable.

That’s exactly what’s happening. Its on plan, we feel very good about it, we’re continuing to learn. It is a different business than what we’ve been doing in athletic performance. It is a very relevant business for us and it’s a business for people who come in our stores are looking for this kind of product and now they’re beginning to understand and learn that you can find this product, you can find relevant, compelling industry leading product in sports style with very, very important brands at the Finish Line store and we’re making tremendous headway there.

Operator

Your next question comes from Heather Boxsen – Sidoti & Company.

Heather Boxsen – Sidoti & Company

First a quick housekeeping question. How many store closures are you planning for this year?

Alan Cohen

We’ve talked in terms of 15 to 20 I think is the number we put out. We’ve only done one so far. The way it works with us is we really take a good hard look at our stores after the key seasons. For instance back to school. We like to get through back to school and then look and see how stores are performing and then make decisions.

We’re going to be very critical in the way we look at our stores. That’s part of our strategy; it’s an important part of our strategy. We’re not going to operate stores that we don’t think can be profitable. We’re not going to be as tolerant as we’ve been in the past or as patient as we’ve been in the past. If these stores aren’t performing the way we need for them to perform, if we can’t get the deal right with the landlord then we’re going to close the store and we’re going to move on.

Heather Boxsen – Sidoti & Company

With respect to the rebate checks in May did you guys see any pick up around that in terms of your comps for the month of May?

Alan Cohen

That’s hard to say. We had no way to track it or measure it that we know of. It’s hard to say what caused the good numbers in May, what caused the good numbers in June, is that part of it, the rebate checks, I really don’t know. We know that a lot of the success we’re having is because of the strategies we’ve put in place and the quality of our inventory. Whether or not people have more money in their pockets our customers have more money in their pocket because of rebate checks and they’re coming in and spending it we really don’t know that, I just can’t answer that.

Heather Boxsen – Sidoti & Company

With respect to the ASP increases you saw in the quarter how much of that is a shift in the product mix and how much of that is generally higher mark ups?

Alan Cohen

I think its higher mark ups is what we say most of it is. We’re selling very well some of the high priced product. I talked a lot about Shocks, $109 and up. That’s good; there was a price increase even in there that doesn’t seem to be creating problems. Also we’ve had less mark downs which also can certainly the average selling price.

I think that it’s a combination of those things that have really helped the ASP. We’re seeing a lot of exciting, compelling products, I’m feeling a lot more interest and excitement around performance athletic and with the consumer and that’s exactly where we want to be.

Steve Schneider

The Jordan product has been so hot for us. That generally speaking is some high priced products as well. We see that continuing. We would be looking for ASPs to continue to build.

Heather Boxsen – Sidoti & Company

There’s been a lot of talk about rising footwear prices with everything going on in China. Are you seeing that and to what extent do you expect prices to rise going forward. I’m assuming it’s correct to assume you guys plan on passing that along.

Alan Cohen

They are rising and we’ve already seen it and it’s already in our stores. It doesn’t seem to be affecting negatively what we’re doing. I work on the old adage and the old assumption if your product is really good and its compelling the consumers are going to buy it. We’re not seeing crazy increases; maybe we’re seeing 3% to 5% increases in product. It is happening and it is being passed on.

Operator

Your next question comes from David Turner – BB&T Capital.

David Turner – BB&T Capital

A follow up to that question, you mentioned costs being up 3% to 5% it looks like ASPs were up about 5% as well but yet your merchandise margins were still very strong. Is the cleanliness of the inventory going to trump the inflationary pressure coming from China this year for the year or is there more to it than that?

Alan Cohen

It’s a combination of so many things. What’s going on in our stores is really good at the time. We’re seeing faster sell through on regular price product as we bring it in, which is important. When you’re selling the product at regular price you’re selling it at higher margins, you’re selling it at better turns and you’re selling it a higher price.

It helps all those metrics and that’s been very important. Same thing when you have less mark down product when your inventory is cleaner. All those metrics also get better. It’s a combination of all those things and I think at this point in time the price increases aren’t really that noticeable as far as what’s going on with the consumer. Not what we’re seeing or feeling. We’re not hearing or feeling or seeing any price resistance of any of the price increases that have already taken place in our stores.

Steve Schneider

The ASPs were up 4.8% for the quarter but that wasn’t across the board, it actually grew during the quarter and it’s continued. The customer is buying that premium product and that’s our mantra here is to be premium. When you’re premium and the customer is buying that it doesn’t seem to have the negative reaction that you might think with all the other costs that are out there with gas, etc.

Alan Cohen

In my comments I said that we’re cautiously optimistic and I know you hear that term a lot. It really is important here because we’re seeing what we think are very good results and we’re seeing in the backdrop of the macro economic conditions that everybody’s aware of. We know the kind of stress that the consumer is under, the headwinds that we’re facing.

We’re seeing things that are very exciting for us but at the same time we are living in this world and we take things as they are. What is all this going to mean two months from now, three months from now, four months from now, what’s going to happen to prices, what’s the consumer’s attitude going to be? It’s hard for us to say so that’s why we’re optimistic but I do think that it’s important that we have to be cautious because of what we know is out there.

David Turner – BB&T Capital

What is the percentage of your mix and footwear would you classify as performance at this point and how does that stack up versus where it’s been and where it’s going? If you could give us some idea as to how the magnitude, if there has been a shift in the performance.

Alan Cohen

We’ve talked and I think it’s stayed consistent. In the men’s end of our footwear business we think about 20% of our business is what we might characterize as sports style. That would mean that about 80% of our business is being done in what we would call performance athletic. In the women’s end of the business the numbers are a little different. Women’s about 40% sports style and about 60% what we would call athletic performance. We don’t see big changes or shift in those percentages through the rest of this year.

David Turner – BB&T Capital

Maybe to get a little more arcane, are the sell throughs in the premium product doing better than, you say you just walked through the percentages of the mix, it sounds like particular attention is being paid to the Jordan and the Shox and that premium price product are they driving the ASP improvement or is it more across the board in the performance overall?

Alan Cohen

If you’re going to sell more Shox, if you’re going to sell higher priced Jordan you’re obviously going to drive your ASP up. Both those categories of shoes are selling very, very well. We’re getting good sell throughs and we’re in pretty good inventory position now and on a go forward basis. I think that that’s going to continue to be important and that’s going to continue to work for us. Jordan and also the Shox running that we’ve talked about, those are big important programs from us in Q2 and for the rest of the year.

Steve Schneider

Not to reiterate it but we do have less mark down. Margins are up 200 basis points. You’re having less mark down so you’re going to sell those at higher prices. It’s a combination of all those and its not like we’re going into the second quarter with bad inventory we’re actually in pretty good shape there. We think that’s another reason to think ASPs will continue.

Alan Cohen

When we talked premium product we might use a little different definition here than maybe some other people use or talk about. Premium product to us isn’t necessarily only high price. Premium product is best in class. To us Converse canvas is premium, its premium because it is the most relevant and compelling product in that particular genre. That’s where we want to be and we want to represent that kind of product as best we can.

Another important brand for us that we’ve just done tremendous things with and we’ve seen good growth and we’re going to see continued good growth in Lacoste. That certainly is a premium brand. It runs the gamut in price point but it certainly is premium and we’re having tremendous success with the Lacoste brand and it’s something that’s going to continue to grow in importance in our stores.

David Turner – BB&T Capital

One last question on Man Alive, Parapax exited the Demo division has anyone within your company looked at the overlap, did Man Alive overlap with the Demo stores and in those store has there been any noticeable pickup from a competitor existing the market or is it just about in your opinion you have matter of Man Alive’s improvement being just mainly from better blocking and tackling.

Alan Cohen

I think there’s no question Demo leaving certainly helped the situation. We did look; we knew exactly where they were leaving where we had Man Alive stores. I don’t think we’ve done the exercise, maybe they have in Man Alive but I don’t know about it to see those stores improving more than the stores where there were no Demos.

I think your assessment at the end there was the most accurate. Just doing better blocking and tackling and paying attention to the fundamentals and getting the mix right and understanding the consumer better. These are the kinds of things that they’re doing and doing very well.

Steve Schneider

My recollection on Man Alive was it was less than half was overlap. In a number of cases you had a local person come in their place. It wasn’t like they totally exited.

Operator

Your next question comes from John Pinto – Brightleaf Capital.

John Pinto – Brightleaf Capital

On SG&A for the rest of the year will you be able to say in absolute dollars below last year?

Kevin Wampler

As Alan noted in his talk earlier our plan is to leverage our costs whether we get top line growth or not at the end of the day. Our hope and plan is to keep SG&A fairly close to last year even on a pure dollar basis. Whether we can accomplish that we’ll have to see. There are some variable costs in there at the end of the day but we think we’ve got a pretty good plan in place. We executed pretty well in Q1 but obviously we’ve got three more quarters and then we’ll see were we get to but I think we’ve got a good opportunity.

John Pinto – Brightleaf Capital

Yes I mean you obviously did it in Q1. If you count 10% in Q2 for the whole quarter I’ll expect a little bit higher SG&A. I think most people will. There is nothing in terms of the timing of the SG&A reduction in this quarter that will be different over the next three quarters or is there a Piva because this year you are still comparing against Piva in Q1 and Q2?

Kevin Wampler

That’s all in discontinued operations. Piva’s out of the mix I think it will be apples to apples.

John Pinto – Brightleaf Capital

On gross margin what did you say for the first quarter how much roughly could we say was driven by merchandise margin improvement?

Kevin Wampler

Our merchandise margins were up 200 basis points in Q1, 190 at Finish Line and 440 at Man Alive.

John Pinto – Brightleaf Capital

What about due to leverage on occupancy.

Kevin Wampler

We delivered by 10 basis points on occupancy on a 1% comp. De-levered on 1% comp.

John Pinto – Brightleaf Capital

That’s not very bad. Historically I think you said 4% is what you needed to leverage but it sounds like you could probably leverage with less than 4% comp.

Kevin Wampler

We talked a little bit about that at the last conference call in the sense that that was our hope and our plan was to, you are exactly right, we have historically takes about 4% comp to leverage our occupancy. Obviously if we’d been at 2% this quarter we would have levered and it’s our second smallest quarter. I think we’re making progress. That goes back to the real estate team looking at deals and when we have deals coming up trying to get us in a little better position. Overall our hope is we can do a little better. We’re hoping that it doesn’t take a 4% comp to lever at the end of the day.

John Pinto – Brightleaf Capital

It doesn’t sound like it will. I’m assuming that as deals are coming up, renewals are coming up it sounds like you have had success in renegotiation. Is that part of what’s driving it?

Alan Cohen

It’s mall by mall, store by store. It all depends on what situation, circumstances but I think the overall tone would be yes, we’re having success.

John Pinto – Brightleaf Capital

In terms of the rest of the year on a merchandise margin in your plan you said right now you’re above last year and plan. The 190 basis points that you got at Finish Line, I’m assuming first quarter, second quarter and maybe third quarter a little easier than the fourth quarter you’re starting to comp some harder merchandise margin comparisons, is that fair?

Kevin Wampler

That is true, our comparisons are a little easier in the first half of the year and they get sequentially harder as we go.

John Pinto – Brightleaf Capital

In the old days you used to do 30% gross margins in all quarters except maybe Q3. Are we getting back to that, is there a reason why you can’t get back to that pretty quickly with a nice comp?

Kevin Wampler

We’re not going to say we can’t but obviously we don’t give guidance quarter by quarter or even for the year. There’s nothing more we can say.

Operator

Your last question comes from Bernard Sosnick – Gilford Securities.

Bernard Sosnick – Gilford Securities

I’d like to focus a little bit on the back to school season. You said that there are four launches scheduled for brand Jordan in July and four in August plus a package. How does that compare with the launches a year ago?

Alan Cohen

The Olympic package I talked about is one of the four. To answer your question, I’ll answer your question like the old Alan would answer your question. The situation with Jordan this year in comparison to next year let’s say with regard to Q2 we’re in much much better shape. We have a situation where our plan is calling for continued improvement in revenue, continued improvement in margin and continued improvement in turns on the Jordan brand for us in Q2.

We’re feeling very good about the product we’ve got and how we think its going to sell based upon what we’ve seen. This is not just Finish Line getting more retro, that’s not the situation here at all. We’re seeing success with Jordan across the board in all the different areas whether its retro, whether its game, whether it’s the other Jordan products that we do with them we’re just having tremendous success with it and we think its going to continue through Q2 for sure and beyond.

Bernard Sosnick – Gilford Securities

The Summer Olympics have always been a time when the major brands have stepped up their marketing. Could you give us a little bit of color in terms of what you expect that they might be doing and how you’re planning perhaps to benefit during the back to school season.

Alan Cohen

I wish I was more privy to exactly what they’re going to do. I can just tell you being in this business as long as I have and being around the vendors they will not pass up this opportunity. There will be tremendous amount of visibility of the athletic brands from a marketing, from a demand creation perspective through the Olympics.

I don’t have anything more specific I could tell you. I know that they are going to be out there and they’re going to be talking to the consumers and driving demand. What’s the effect going to be maybe that’s even the more important question? It’s hard to read what the effect is going to be from an Olympic unless the Olympics is on the same sort of time schedule where it’s viewed live.

We had found with what happened when the Olympics were in Atlanta it was amazing. It was absolutely amazing because it was real time. Everyone was paying attention to everything that was going on. There was a tremendous amount of excitement, the demand creation; the marketing that was being done was as effective as it could be.

Now being half way around the world what’s the effect going to be, we know there will be an effect I don’t think it will be as great as what we saw if it was real time like it was when they were in Atlanta but I think there’s going to be a lot of interest in China. That in and of itself is going to create excitement with the consumers and I know the vendors will do a good job as far as how they’re going to market the product. They’ve got great product out there and I’m sure they’re going to be very vocal in the way they present it.

Bernard Sosnick – Gilford Securities

You’ve done a fantastic job of controlling your own inventory and it’s benefited the gross through fewer mark downs. We’re hearing roughly the same thing from others. Could you give us your assessment of the promotional tone in the malls in the athletic business?

Alan Cohen

A lot of progress is being made in the US; I speak to the US market. I think the market is much cleaner than it’s been. I know we’ve made a real effort to reduce our inventory and become much more relevant. The Foot Locker Inc. has also done a very good job of accomplishing the same. I know it’s a work in progress for them just like it is for us. These are all very important good signs and good advancements for athletic and athletic specialty and especially in the mall. It’s going to be very beneficial.

There is still some promotion that goes on. We haven’t changed our cadence or approach, we don’t promote to drive traffic or to drive sales we promote to keep our inventory clean and its working for us. There’s still some promotion going on out there. It’s not nearly as open or overt or its not front of the store kind of promotion or entire store kind of promotion its more of the weekend kinds of things that go on, three day kind of stuff, over the internet or handing out coupons things like that. Certainly much better than its been for a long long time as far as I’m concerned.

Thank you to all for being with us today and hopefully we can continue to give you the kinds of information we’re giving you now and good solid optimistic reports. Thank you very much.

Operator

This will conclude today’s conference call you may now disconnect.

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Source: The Finish Line, Inc. F1Q09 (Qtr End 05/31/08) Earnings Call Transcript
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