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Shares of the The Finish Line, Inc. (FINL) ended the week with losses of 2.5%. The specialty retailer operating under the Finish Line and Running Specialty Group brand names reported its second quarter results on Friday.

Second Quarter Results

Finish Line reported second quarter revenue of $385.0 million, up 16% on the year. Sales were driven by a 12.3% increase in comparable store sales. Digital comparable sales increased by 29.6%. On average, analysts expected Finish Line to generate revenue of $357.2 million.

The company reported earnings of $25.0 million. Earnings per share rose 25% to $0.49. On average, analysts expected Finish Line to earn $0.44 per share.

At the end of the quarter the company operated 657 Finish Line and Running Company stores. CEO and Chairman Glenn Lyon commented on the result:

"We are very pleased with the strength of our second quarter performance. Our ability to achieve double digit comps in the second quarter, on top of a double digit comp increase in the prior year period illustrates our ability to further expand our leadership position in athletic footwear. We move forward with sound strategies in place that we believe will further improve our consumer mindshare, deliver consistent sales and earnings growth, and return increased value to our shareholders."

Deal With Macy's

Perhaps more important than the regular quarterly earnings report, was the announcement of a deal with Macy's Inc. (M). Finish Line-branded footwear shops will be opened in over 450 Macy stores. Store openings will start in the spring of 2013 and are expected to be completed by the end of 2014. Finish Line expects that the deal will add $250 to $350 million in annual sales.

Outlook

For the fiscal year of 2013, Finish Line expects a 6 to 9% increase in earnings per share, which came in at $1.53 for 2012. The guidance assumes comparable store sales to increase by 6 to 8%.

Valuation

Finish Line ended its second quarter with $254 million in cash and equivalents. The company operates without the assumption of short- and long-term debt, for a comfortable net cash position.

Currently, the market values the firm at $1.15 billion. Given the sizable net cash position, the operating assets of the firm are valued at $900 million. For its fiscal 2013, the company is on track to generate revenue of $1.5 billion, valuing the firm at 0.6 times revenue. Finish Line could report earnings per share of $1.65, valuing the firm at 10 times earnings.

Currently, Finish Line pays a quarterly dividend of $0.06 per share, for an annual dividend yield of 1.1%.

Investment Thesis

Year to date, shares of Finish Line have risen almost 20%. Shares quickly advanced from $19 in January to $25 in March. A disappointing outlook sent shares lower to $18 by June. In recent months, shares recovered and are at $23 at the moment.

Long-term investors have seen great returns. Over the past five years, shares rose from lows of $2 in 2008 to all time highs of $25 a little earlier this year. Between 2009 and 2012, the company grew its annual revenues from $1.2 billion to $1.4 billion. Net income rose from $4 million in 2009, to $85 million in 2012.

Friday's results were very strong, and the deal with Macy's is net positive for the company. Net sales are expected to increase some 20% in two years time, as a result of the deal. Despite the strong results, investors are not cheering as Finish Line warned for softening trends during the quarter.

Despite the warnings for further softening, the long-term prospects look good. The company has a very strong balance sheet and trades at very fair revenue and profit multiples.

The deal with Macy's guides for decent future revenue growth. Furthermore, Finish Line's digital operations are very strong, with comparable sales growth of almost 30%. The company is on path to report net profits exceeding $100 million in the near term, valuing operating assets at merely 9 times operating assets.

I see Finish Line taking out its all-time highs of $25 in the short to medium term, despite the soft warnings.

Source: Finish Line: On Track To Set New Highs On Strong Underlying Trends