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The Finish Line, Inc. (NASDAQ:FINL)

F2Q09 Earnings Call

September 26, 2008 8:30 am ET

Executives

Kevin Wampler - Chief Financial Officer

Steve Schneider – Chief Operating Officer

Alan Cohen – Chief Executive Officer

Analysts

Robert Ohmes - Merrill Lynch

John Shanley - Susquehanna Financial Group

Kate McShane - Citigroup

Bernard Sosnick - Gilford Securities, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

Sam Poser - Sterne, Agee & Leach

Heather Boksen - Sidoti & Company

Operator

Welcome to The Finish Line second quarter earnings call. (Operator Instructions) Now I would like to turn the call over to Kevin Wampler, Chief Financial Officer.

Kevin Wampler

Good morning and thank you for participating in the Finish Line conference call pertaining to the second quarter earnings press release which went over the wire Thursday, September 25th at approximately 4:15 Eastern Time.

This call is being recorded and can be accessed by calling 706-645-9291, conference ID number 64091009. The recording will remain active for two business days. You may also access this recording as well as a copy of our Q2 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 product demand and market acceptance risks, the effect of economic conditions, the effect of [inaudible] pricing and pricing, availability of products, [inaudible] of growth and other risks detailed in the company's September 25th press release and in its SEC filings.

Moreover, the results of the period presented herein are not necessarily indicative to be expected for any other future period or year.

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 plans going forward.

Steve?

Steve Schneider

Thank you, Kevin, and good morning to everyone.

For Q2, which ended August 30, 2008, consolidated net sales increased 3.9% to $353.3 million from $340 million last year. Total company comparable stores net sales for Q2 increased 4.7%. By concept, Finish Line comp sales increased 4.9% and Man Alive comp sales increased 1.3% compared to the same 13-week period last year.

Comp store sales by month for Finish Line stores were as follows: June increased 10.3%, July increased 2.8%, and August increased 2.2%. For the quarter, comp store footwear sales increased 6.5% while soft goods decreased 5.4%.

For the quarter, Man Alive stores posted a 1.3% increase in comp store sales. By month, June comps increased 12.1%, July decreased 7.3% and August decreased 2.9%.

For Q2 the company posted income from continuing operations of $13.2 million or $0.24 per diluted share as compared to $6.9 million or $0.14 per diluted share recorded for Q2 last year.

The gross profit percentage for the quarter increased 150 basis points versus Q2 last year to 31.3% of sales. This consisted of a 100 basis point increase in product margin along with a 10 basis point improvement in shrink and another 40 basis points from improvement in occupancy costs. The product margin increases were driven by fresher inventory and a faster inventory turn for the quarter. The leveraging of the occupancy costs is primarily related to the 4.7% comp gain.

SG&A expenses for the quarter were 25.3% of sales. That's a 100 basis point improvement compared to 26.3% in Q2 last year and actual SG&A dollars were slightly less year-over-year. Improvements were in marketing, store supplies, depreciation and freight.

Interest expense was $244,000 for Q2 versus $237,000 for Q2 last year.

The effective tax rate for Q2 was 38.9% as compared to 42.3% for Q2 last year. The company expects its effective tax rate to approximately 39% for the remaining two quarters of fiscal 2009. That's excluding any effect of any potential discrete items under FIN 48.

Diluted weighted average shares outstanding increased 16.1% to 54.8 million for Q2 versus 47.2 million for Q2 last year, primarily reflecting the 6.5 million shares issued in connection with the Genesco litigation settlement.

Year-to-date, net sales increased 2.5% to $641.3 million versus $625.7 million for year-to-date last year. Comp sales increased 3.1% as compared to a 4.4% comp decline reported for the first half of last year.

Year-to-date, the company reported income from continuing operations of $14.1 million or $0.26 per diluted share as compared to $4.3 million or $0.09 per diluted share recorded for year-to-date last year.

The company opened two Finish Line stores, remodeled six existing stores and closed five stores in Q2. The company operated 697 Finish Line stores as of the end of Q2, which is the same number of stores operated at the end of Q2 last year as well.

Finish Line stores square footage decreased 1.2% to 3,816,000 square feet compared to 3,862,000 square feet at the end of Q2 last year.

The company did not open, close or remodel any Man Alive stores during Q2. As of August 30th, Man Alive operated 94 stores compared to 95 stores last year. Man Alive stores square footage remained constant at 326,000 square feet for both years.

Merchandise inventories on a consolidated basis were $269.9 million at quarter end compared to $303.6 million at the end of Q2 last year. On a per square foot basis, consolidated inventories decreased 10%, with Finish Line store merchandise inventory decreasing around 10% and the Man Alive store inventories down 4% compared to one year ago.

Capital expenditures for Q2 were $4.1 million and $9.2 million year-to-date.

The amount of depreciation and amortization expense in Q2 was $9.7 million and $19.4 million year-to-date.

The company believes that the Capex will approximate $16 to $18 million for fiscal 2009 and depreciation expense will approximately $38 to $40 million. These Capex expenditures include capital and technology costs for the corporate office as well as the cost to build out 9 to 10 new Finish Line stores and remodel 15 to 17 stores. The company does not plan to open any Man Alive stores in fiscal 2009.

The company ended Q2 with $65 million in cash and cash equivalents and no interest-bearing debt compared to $34 million at the same time last year.

We expect to report earnings for Q3, which will end on November 29th, on Tuesday, January 6th, and that'll be followed by our quarterly earnings conference call the morning of January 7th.

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

Alan Cohen

Thank you, Steve, and good morning.

We are encouraged by our positive second quarter results, particularly given what remains a challenging macroeconomic environment. We continue to measure our performance against the strategic initiatives that we have discussed on previous earnings calls. These include continuing to evolve our premium product assortment, improving our inventory position and reducing our cost ratios. Our progress on these initiatives is reflected in the increases we reported this quarter in both our productivity and profitability.

As our financial performance demonstrates, in our Finish Line stores our strategy of focusing on premium products in apparel and in performance sports-style footwear is being received favorably by our customers. We increased the average selling price of footwear by approximately 10% versus the second quarter last year.

This focus, as well as our improved assortment planning and inventory management, are also leading to very positive financial results. During Q2 we grew comp sales nearly 5% and product margins increased by 70 basis points. Notably, the performance was accomplished with inventory levels on a per square foot basis 10% lower than the second quarter last year.

Additionally, our efforts to reduce consolidated expenses produced positive quarter results versus last year, including SG&A improvement of 100 basis points and occupancy cost ratios that improved by 40 basis points. We believe that by remaining focused on our strategic initiatives we can continue to improve performance and earnings for the remainder of this year.

Now for a review of the product and the brand performance during the second quarter at the Finish Line stores.

Our basketball comp sales were up low double digits. Brand Jordon continued to drive business across all offerings, including retro shoes, games, tennis line exclusives and in line products.

As mentioned in our last earnings call, we have seen improved consumer response to Nike performance basketball. This continued in the second quarter, let by successful released of Hyper Dunk and Sharkley.

We continued to lead the mall in the running category with our broad and deep assortment of technical and fashion products. The running category comped up for the quarter with a significant increase in product margins. Our women's business was especially strong, as the running profile remains very important to this customer. Nike, Asics, Brooks and Puma were solid brand performers. Shox from Nike led the way, with Finish Line exclusives, classics and new model introductions.

In the training category, Under Armour footwear sold well, with double-digit weekly sell throughs during back-to-school. We are confident that the next iteration of Under Armour's training shoe, which will be launched in October, will support our continued success in this category.

For the quarter, kid's comp footwear sales were up high single digits, driven by Jordon, Nike, Puma, Under Armour and New Balance. This was especially encouraging as we were still competing with Heely's strong sales during Q2 last year.

Sports-style footwear sales were down slightly, with inventory down low double digits and product margins up. Women's was up mid single digits, with strength in high-top footwear from many different vendors, including Ed Hardy, Pastry, Baby Phat, and Chuck Taylor.

Men's sports-style comp sales were down mid single digits. The leading sellers for men were Lacoste, Chuck Taylor and Nike.

During the quarter we had good sales performance from sandals, especially in men's slides.

In sports style, the significantly higher product margins and higher average retail prices, combined with better inventory turns, demonstrate the progress our merchant team is making in identifying and responding to trends in the marketplace while also differentiating the Finish Line from the competition in the mall.

As we anticipated, soft good sales were challenging during the quarter, down 5% on a comp basis. However, we were able to exceed our gross margin dollar plan with significantly reduced inventory levels, down 27%, as we continued to focus on improving our return on investment until a more meaningful apparel trend develops.

We have seen positive sales of the most premium items, including Under Armour, Jordan brand and some Nike apparel.

Our direct-to-consumer business performed well during the quarter. Ecommerce sales grew by 20%, with solid improvement in product margin. This remains an important strategic initiative and focus for our company.

For the quarter, Man Alive comp sales increased low single digits. We saw improvements in both men's and junior's apparel sales, which were partially offset by the elimination of footwear from our product offering, a strategic decision made earlier this year.

During our first quarter call, we discussed our strategy to realign Man Alive's product assortment and to broaden our consumer base, which included a transition from hip hop apparel to multicultural street wear offerings and a shift from apparel collections to a key item strategy for both men's and junior's. We are making progress as our merchants adjust the product offering and our in-store presentations.

During the quarter we experienced traffic declines at Man Alive, but were able to offset this by improved conversion rates and units per sales transaction. The Man Alive team is diligently working to find ways to improve traffic and sales in our stores, as it appears this business is more affected by the negative macroeconomic headwinds facing retail in general.

Looking ahead at Q3 and holiday, we believe Man Alive sales will be challenging as we will continue to evolve our product assortment in order to appeal to a more diverse consumer base and work our way through these adverse economic conditions we're facing.

At Finish Line, looking at the current quarter and holiday, we believe we have the right footwear programs in place with our many vendors to continue to increase profitability. In basketball, there are key Jordan releases that will help us maintain our sales momentum. Additionally, we look for Nike basketball products, such as the Hyper Dunk, the Sharkley, and also some Finish Line exclusives to sell well and rebuild consumer interest in this very important category.

In running, our shop comp sales numbers begin to get tougher in the back half of the year. Although improvement may be more difficult, we firmly believe we have the right product and programs in place with many brands to keep this business growing.

For example, beginning at the holiday season, Finish Line will have the mall exclusive from Adidas on bounce technology. We're also very excited about the initial Under Armour running footwear release scheduled on January 31st. And additionally, technical running should also remain strong throughout the year, led by Nike, Asics and Brooks.

In sports style products, women's high tops will continue to be represented by numerous brands in our store. As this trend appears to be gaining momentum, we expect high tops will become an increasingly important part of the women's sports style assortment, along with key fashion offerings in the boot category.

In men's sports style, we are looking forward to an expansion of Lacoste and Knight by Nike to more Finish Line doors, along with the continued development of new and existing product programs from other athletic vendors, including Converse, Adidas, Puma and New Balance. We will also introduce additional new brands in both men's and women's as we continue to gain knowledge in fashion relevance with our core consumers.

In kid's we look for a continuation of take down in premium product programs to drive this business. We expect the kid's category to remain strong in the back half of the year.

In soft goods, we will hold our inventory in check until we see brands or items that we are confident can drive positive sales and product margins. We anticipate strength in our fleece offerings this fall and holiday from Nike, Under Armour, Jordan and NCAA. We are not planning higher soft good sales; however, we are planning for higher product margins with lower inventory, thus improving ROI.

As for business to date in Q3, comp sales for the first three and a half weeks of September are low single digit negative, with continued improved product margins and we have not - and have not been adjusted for the negative effects of the hurricanes. We are cautiously optimistic about the back half of the year. It appears that athletic footwear is performing better than other retail segments.

We feel positive about our preparation for Q3 and the upcoming holiday season. The big question remains: How will the economy affect our consumer during this period?

With improved margins and expense controls, we have confidence in our ability to improve our earnings.

Before opening the lines for Q&A, let me summarize Q2, which was a very good quarter for us with many metrics indicating improvement or strength. These positive results include:

Comp sales increased almost 5%.

Product margins improved 100 basis points.

Shrink improved 10 basis points.

Occupancy costs were levered by 40 basis points. SG&A was levered by 100 basis points and in dollars was actually less than last year.

Income from operations increased by over 90%.

Average selling price for footwear increased 10% for the quarter.

Inventory is fresher and down 10% on a per square foot basis.

And we increased our cash $30 million and remain debt free.

For all of us at Finish Line and Man Alive, Q2 was very good, but it's now history. We understand our challenge for the rest of this year is to keep these metrics positive in a tough retail environment.

And we can now open the lines up for any questions you may have.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Your first question comes from Robert Ohmes - Merrill Lynch.

Robert Ohmes - Merrill Lynch

Can you give us a view on how much Nike is increasing as a percent of the mix as you move through this year, so by the time you get to the end of this fiscal year, what do you think Nike will be as a percent of your sales year-over-year?

And then the second question is: Can you talk a little bit more about the weakness in the apparel business? I know you're bringing inventory levels down, but it seems like with the strength in the marquee footwear business that there would be some pull at some point, and if you could maybe go through the history, where you've seen there.

Alan Cohen

With regard to Nike and as a percentage of our business and how it's growing, Nike is just doing magnificent. I mean, they are really, I think, hitting on all cylinders in the U.S. We're very excited about what we've seen, the product we've seen and the product that we're seeing on a go forward basis. And this is especially true with regard to the Jordan brand. The Jordan brand is just really also doing a magnificent job for us.

We think that, when it's all said and done, our best estimate will be that our Nike business will probably increase a couple of percentage points as a percent of our total business for the year. And it's going to be at about 60%, maybe a point here or there, one way or the other.

The second quarter pertaining to apparel, weakness in apparel and what we intend to do, what we're trying to do in apparel is exactly what we're doing with regard to our footwear and doing very successfully with regard to our footwear and hopefully we can also get to the same place with apparel.

I think it's important to remember and we have realized this at The Finish Line, that we are first and foremost an athletic specialty and a sports style footwear retailer, so we never want to take our eye off of that fact. But we do think that we can sell apparel and maybe the best times for us in apparel are going to be opportunistically.

Right now we're struggling, and I think maybe it's something that's going on in most athletic specialty and maybe, to some extent, in apparel in general. It's really very difficult in athletic specialty in our stores. We're having difficulty finding something that we can - finding things that we can differentiate with in our stores and things that are compelling or relevant or important to our consumer.

And in the past we've tended to just try to chase product and bring product in to fill up the store, and we decided we're not going to do that. We're going to concentrate on ROI. If we have to reduce sales - we're going to reduce inventory; if we have to reduce sales, that's fine, but we want to make certain anything and everything we bring in is a premium presentation from an apparel perspective and that it's things that we think can really be a long-term investment for us, can differentiate us, can improve our sales in the long term and maybe most importantly, keep product margins where they need to be.

Robert Ohmes - Merrill Lynch

Nike had indicated that they're pushing for price increases. Can you maybe elaborate on what percentage of your mix you've seen year-over-year price increases and if you see that expanding going forward and is that a significant driver to your comps right now and sort of what you're seeing there?

Alan Cohen

Well, I think we're seeing a lot of price increase come in place with regard to Nike product. I guess most importantly, we're just not seeing any resistance at all. We're having good comp sales. We're seeing a pretty dramatic increase in our average unit price. And I guess it really does get down to if the product is good and if it's a product that's compelling to the consumer, they're going to find a way to buy it. And that's what we're experiencing. So we're just not seeing any price resistance.

And I don't know, maybe the prices, as they're going up, they're not going up dramatically or tremendously. I mean, if you increase by $5 on a $100 shoe, I mean, that is $5 but in the overall scheme of things I don't think that is tremendously startling to the consumer who's willing to pay $100 anyway for a pair of shoes.

Operator

Your next question comes from John Shanley - Susquehanna Financial Group.

John Shanley - Susquehanna Financial Group

What was the percentage of sales that were apparel versus footwear in the second quarter?

Alan Cohen

Apparel sales or soft good sales is what I should say, because when we talk about soft goods, it includes our apparel business and it also includes our accessory business, the breakdown was probably about, I think, 13% or so being soft goods versus the other, what, 87% would be the footwear. So it really has become a very small part of our total business.

And I would tell you that, you know, when I say 13% soft goods, probably about 6% or 7% of that can be accessories. So when you're really looking at apparel, you're looking at a number that could be, what, 8% or 9% of the total sales? Is that right, Steve?

Steve Schneider

[inaudible] And it's down about 1% from last year, because last year soft goods about 14% in the quarter.

John Shanley - Susquehanna Financial Group

And the accessories, Steve, would be about the same - 6% or 7% of last year?

Steve Schneider

Yes.

John Shanley - Susquehanna Financial Group

The drive that you had in terms of ASPs were pretty spectacular. With the introduction of greater quantities of marquee and sport style products the primary reason for the 10% increase in ASPs and the 100 basis point improvement in the product margin?

Alan Cohen

Well, I think with regard to the ASP, a lot of the ASP is certainly dealing with selling premium products, higher-priced products. We are seeing that. I mean, we're getting tremendous sell throughs on a lot of Jordan product at high prices. We've always sold a lot of Shox from Nike.

And maybe the other end of what's driving ASP is we've got a much cleaner inventory and with a much cleaner inventory there's a lot less markdown product being sold and whatever markdown product we're selling, we're selling at higher prices than we might have been selling at in previous years.

So I think it's probably those factors that are creating the ASP improvement and also the margin improvement.

John Shanley - Susquehanna Financial Group

How far along in the process of shifting out of hip hop apparel into street fashion in the Man Alive chain are you? I mean, how much, on a percentage basis, what would you say the progress so far is?

Alan Cohen

Well, I'd say it's probably a little over 50%. It's really been a two-pronged challenge in Man Alive, and one of the prongs is obviously when you're making a merchandise change like this, you've got to be concerned about two things. First of all, you want to bring in new customers. That's what you're trying to accomplish to some extent. But also you don't want to alienate your existing customers. So that's a very fine line that they have to walk in there, and that's been challenging. It's been very challenging.

And of course the other part of it is the timing, which is certainly not anyone in Man Alive's fault, but apparel is really, I think, struggling more so than, let's say, athletic footwear or specialty footwear in the environment that we're in. So it's sort of like a double whammy that they're up against. They could have anticipated the first prong of it, but the second prong is something that's out there and we just have to live with it and we have to get through it.

John Shanley - Susquehanna Financial Group

Was the level of promotional activity in the second quarter about what you expected and what's your outlook for promotions in the back half of '09?

Alan Cohen

Yeah, I think we are in a much different kind of environment than we were a year or two ago in athletics. I think the promotional activity was much less during the second quarter in general. I mean, I think we have been very consistent from The Finish Line's perspective. We have not changed our procedures or policies. The thing that we're doing better is we're just a lot cleaner with a lot fresher, better inventory so that creates less markdowns for us to try to maintain inventories where they need to be.

The general marketplace, I also think, is much cleaner. I think most everybody, especially in athletic specialty, has done a darn good job of focusing on inventory, getting their inventories in shape. And I think is going to help us all as we go into third quarter and into the holiday. I think inventories in athletics are going to be pretty clean.

The only danger, of course, is what I've alluded to - we really don't know what effect is there going to be as we continue to go down the road here on the consumer. And that in and of itself can create problems. If product isn't moving the way it's anticipated it's supposed to move, I think most retailers are going to have to take action, maybe that they don't want to take but that they're going to have to take to do two things - to get the sales they need, but maybe more importantly to keep those inventories in line.

So we just have to wait and see that, but I think the biggest thing is I think inventories are in really pretty good shape.

Operator

Your next question comes from Kate McShane - Citigroup.

Kate McShane - Citigroup

Can you break down how much of your comp was driven by any kind of market share gains? And what was the traffic like in the stores during the quarter?

Alan Cohen

Kate, I don't think we can give you - I can't today, anyway. I'll ask Kevin or Steve. Anything that might sort of break out what percentage would have been market share gain or would be market share gain?

And I'm sorry, what was the second part? Oh, traffic. Okay, yes, traffic has been tough. Traffic has been down. It's been down in our stores and from the services that we're getting information from, it's been down in the malls. And we're tracking just about the way the malls are.

I don't think that's terribly surprising. And again, that's why we're pretty pleased to be able to come out like we have and I think that speaks to the good things that we're doing in our stores and that the team is doing, but also I think it speaks to the strength of athletics and athletic footwear and some of the things our vendors are doing to put out compelling product can sort of get us through these tough economic times maybe better than some other kinds of retailers.

So again, I think everything we're hearing, reading and feeling is that the traffic's going to continue to be tough right through the rest of the year. And that's why we think in terms of how are we going to continue to drive profitability and drive better earnings, and it's the things we talk about - it's improving our productivity, improving our efficiencies, both from a margin perspective as best we can, and also from the cost end of the business.

And I think one of the most important things we've done that is giving us benefits everywhere is getting this inventory in much better shape, operating with a lot less inventory and it just creates savings up and down the company, in the office here, in the distribution center and also in the stores.

Kate McShane - Citigroup

So traffic has been down. Are you seeing, for the traffic that you are getting in your stores, people are just buying more pairs of shoes during one visit or is it just mostly being driven by these higher average selling prices?

Alan Cohen

Really, Kate, it's the average selling prices, which we think are going to continue. And they're up 10%. We made note that the comps for the quarter in footwear were up 6.5%. So that does tell you we're selling less units, which does correspond with some of the traffic. But what we are selling per transaction is up.

Operator

Your next question comes from Bernard Sosnick - Gilford Securities, Inc.

Bernard Sosnick - Gilford Securities, Inc.

You speak a lot about success with premium products. What's been happening with the middle price points?

Alan Cohen

That's a tough one to break out, Bernie, because a lot of the sports style product is the kind of product that we could say is more middle price point, anywhere from, let's say, $40 - you could still buy Chuck Taylor at $40 - and we consider that to be premium product, in our definition. It's very compelling. It's very relevant. It's very important to that consumer that's looking for that kind of footwear.

So we're also getting very good sales and very good, big increases out of a $40 item. Slides, again, a lesser-priced item, is performing very, very well for us. Some of the sports style product from Ed Hardy, from Pastry, again, anywhere from $50 to $70 to $80 kind of stuff is performing very well for us.

So, again, we're also selling a tremendous amount of Jordan product and Nike Shox product, but we're seeing pockets and areas in the middle price points and even the lower price points that are performing very well. So I think it's really more the idea it's important that we have the best in class in each of the areas to each of the consumers that we're directing ourselves to, and it's not just hitting a high price point or a middle price point or a low price point. It's being best in class, and that's really, when we talk about premium, we talk about best in class, not necessarily just over $100 or high-priced product.

Bernard Sosnick - Gilford Securities, Inc.

Well, looking at the store, you can see a tremendous positive change in the assortment. Are you saying that the changes in the assortment at moderate price points have offset weaknesses in traditional athletic shoes at moderate price points?

Alan Cohen

Well, there still are good things that can happen. It's so hard to try to classify or characterize things that simply because there's always exceptions. Again, it's almost like every shoe has its own story or every SKU has its own story.

Some classics are still doing very, very well, and other classics have sort of waned. But that's not unusual. We tend to see that's what happens with classics, they always sort of stay around but they sort of become more important at times and get hot and then you back away from them, the consumer backs away from them. You still can sell them, but certainly not like you were.

Our challenge is to remain committed to athletic, to remain committed to athletic performance, but also to recognize that the consumer that we are so focused on, the consumer that is coming into our store is not just coming into the store looking for one particular shoe.

They might come into our store two, three times a week or five or six times a month, and each time they come in they might be looking for a different type of shoe. At one point in time they might be looking for a shoe to actually go out and perform in, to run in or to play basketball in, and the next time they come into our store, they might be coming in and looking for a shoe that they can knock around in to go out Friday night or Saturday night or to wear to school.

So we really have to try to focus and, again, it just gets back to the same mantra. We have to be best in class in all the different areas that we're trying to serve this customer that we're so focused on.

Bernard Sosnick - Gilford Securities, Inc.

Actually, really, the question that I was asking applies to your staying ahead of the curve with a terrific improvement in the assortment, so I congratulate you on that. Could you give us any coloration or your assessment of the back-to-school season because, in fact, the sales growth did decelerate during the quarter?

Alan Cohen

Yes, I think maybe the best way to look at that is more looking at what we experienced in June. I mean, June was up double digits - was it up by 10?

Steve Schneider

Yes.

Alan Cohen

Yes. So I think what we realized is we probably got more of a benefit from the tax refund check than any of us could really tell what was going on at the time. And I think that might not just be particular to us. I think that might be a phenomena that you're going to hear a lot from retail, if you've not already heard it.

I think then when we got into July and when we got into back-to-school, we started to see what might be more normal kinds of sales increases or performance increases that aren't necessarily being stimulated. So it's not - I mean, there was a deceleration, but I think it was more of maybe what's normal. What's expected is what we saw after June, when the stimulus was really in effect.

Bernard Sosnick - Gilford Securities, Inc.

And you didn't adjust for hurricanes in your September comment and I don't expect you to do it now, but you have quite a few stores in Texas. Could you just in terms of locations of stores give us an indication of what the two hurricanes might have meant to you? I assume from talking to other retailers Ike was even worse than Gustav.

Steve Schneider

One thing I would say, and we have not quantified it totally yet, but there were many, many days that we missed because of closings. But our number one state, both in quantity and in square footage, is Texas, and number two is Florida. That tells you that it's an certainly important area.

Alan Cohen

Let me add a little color, and I don't want to get too much into talking about - we've only gone through three and a half weeks of a quarter, but I would say that looking at the hurricane, I'd be surprised if, on the quick, back of the envelope kind of numbers we looked at, it would be less than a percentage point from a negative perspective.

And I think the other thing we should talk about in The Finish Line stores, which I think really has affected the first three and a half weeks, that's why I'm always a little reluctant to talk in terms of such a short period of time, is we had a Jordan situation, a Jordan release situation that  the Jordan that came out this year didn't perform nearly as well as the Jordan that came out - I mean, the one that came out, yes, this year didn't perform nearly as well as the one that came out last year that we were performing against in this three and a half week time period.

So, again, we know that there's a negative effect on the Jordan release, and if you've heard anything from me today, you've heard how confident and bullish we are on Jordan products, so we know that that does not mean that there's any weakening or softening in Jordan. It just is something that continually goes on. You can run into a great release last year with a release this year that can be very good, but just not as exciting, and you can really get a dramatic shift in your numbers.

That's one of the reasons why we thought it was so critical that we quit reporting numbers on a monthly basis and go to a quarterly basis, to try to smooth out those kinds of circumstances. But to hold true to what we've been doing historically, we want to give color for the new quarter and, again, we don't want to talk about it too much but I do think it's important to point out those couple of things.

Bernard Sosnick - Gilford Securities, Inc.

And finally, can I ask what are your expectations roughly speaking with regard to year-to-year comparison for SG&A?

Steve Schneider

All we've really talked about at this point, Bernie, is working on our cost control this year coming in. We knew it was going to be important because we knew it could be a difficult year from a traffic perspective and things like that.

But all we've really said at this point is our goal is try to keep our SG&A dollars by quarter at close to last year as possible. I mean, we're really looking for minimal increases by quarter in dollars. In Q2 here we were able to actually show a slight improvement year-over-year which, you know, is the first time that's ever happened in my tenure here.

And it continues to be a focus by the whole company. We know that traffic and the economy and different things, there's plenty of headwinds out there in the things that we have to control, the things we can, and that’s one of them.

Bernard Sosnick - Gilford Securities, Inc.

Are there any anomalies in expenses year versus year in the third quarter?

Steve Schneider

If you exclude the charge that we took for Genesco last year in Q3, no, there were no real anomalies.

Operator

Your next question comes from Jeff Van Sinderen - B. Riley & Company, Inc.

Jeff Van Sinderen - B. Riley & Company, Inc.

A couple questions for you on the ASP. I guess one of the questions I have is is there any way to quantify how much the Nike price increases have impacted your overall ASPs?

Kevin Wampler

I don't know that we have a way to truly quantify it. Obviously, as Alan has alluded to, the Jordan product has continued to perform very, very well. Obviously that is good product at a high price point. We probably have shifted our mix a little bit as part of the overall picture, so whether it's 50/50 or 60/40, I don't know that we can really say at this point.

Steve Schneider

But in general, with Nike being 60% plus of the business and you've got that mix of Jordan product, which has been fantastic - that's obviously higher priced - I think most of the Shox running shoes all went up $10, as I recall. And then you have the mix of this less of the aged product, cleaner inventory, those all, I mean, if you try to break that 10% down, obviously a lot of it is Nike - Nike and Jordan.

Jeff Van Sinderen - B. Riley & Company, Inc.

And then I guess looking a couple of quarters out or what have you, when do the ASP anniversaries start to become more challenging and do you think that you can keep the ASP increases going a couple of quarters out?

Kevin Wampler

We do look for ASPs to continue to be up. Not all of it's going to be up 10% at the end of the day, but we do look for ASPs to continue to be a benefit going forward. And as well, hopefully there's some margin help as well at the end of the day.

But I think one of the things that I would mention is the fact that when we get to the fourth quarter from a margin perspective, kind of take the ASPs out of the calculation, maybe looking just at the margins, last year in the fourth quarter we ran the highest product margin that we have run in probably 10 years. And so we do come up against some tougher comparisons from that perspective as we go through the year. So that's an additional headwind we face as we go into the all-important holiday season.

Jeff Van Sinderen - B. Riley & Company, Inc.

And then I know you talked a little bit about SG&A and just wondering - I know you're trying to keep the dollars flat - would it be feasible for your SG&A dollars to be down again for the second half? Is that a realistic possibility?

Kevin Wampler

You know, it's something we're going to strive for and it's either going to be plus a little or minus a little at the end of the day. I think unless something unexpected happens, I think we can keep it close to where we were last year. You know, there's just enough variables there for me to say today that we'll definitely keep it below last year is not a statement that I'm comfortable making.

Jeff Van Sinderen - B. Riley & Company, Inc.

And then I guess maybe for Alan, what's your assessment of the overall retail environment, at least maybe within your space? Do you think it's stable? Do you think it's getting better or do you think it's getting worse sequentially?

Alan Cohen

When I'm talking about my space, I'm talking about the mall and mostly just athletic specialty. That's probably what I can speak to with some intelligence.

I think it is stabilizing. I think it is getting better. I think we're all sort of doing the right things as far as looking at our stores, looking at our square footage. And if stores aren't profitable, they're being closed. When leases are coming up that don't make sense anymore, then we're either getting the economics right or we're walking away and closing the store.

And then I guess the other part, very important part, is when we're looking at our inventories we're trying to make certain that the inventory is as clean as it can be, it's as relevant as it can be and we can try to turn it certainly faster.

So I think those are all things that I know we're focusing on. I think other people in the mall are focusing on those same things, and I think it's something that's beneficial for everybody. Actually, I think it ultimately beneficial for the vendors, too. And I think that's something that's going to continue.

Jeff Van Sinderen - B. Riley & Company, Inc.

And then when, since you mentioned leases or closures, when you go to work on a renewal and maybe it's a store you're questioning whether you should keep open based on the current lease rate, are the landlords more willing to work with you now in terms of reducing the rent, perhaps? How is that situation looking?

Alan Cohen

Well, I think they're being very realistic. I mean, nobody likes to reduce their rent. Most of them are now public companies or REITs and they face the same kind of challenges we face.

So I think everyone, you sit down at the table, you present the information that they have, that we have, and we try to come up with a way that makes sense so we can continue to be a good partner and continue to stay in the mall. But at the same time, they understand that we're not just going to keep stores open that aren't profitable for us.

So sometimes what this means is you come up with shorter-term kinds of solutions. And we're all trying to get to a better place where it can become more of a normal kind of a business again, so I think they are being more accommodating. I think they're being more accommodating out of necessity, and I credit them for that.

Steve Schneider

And Jeff, one of the things I'd say also on that, because a lot of us here are involved with our real estate committees who look at every one of these that come up, either because it's at a kick-out period or at the end of a lease, what Alan was talking about really happens a fair amount, where maybe you're coming to a kick-out or you're coming to the end of the lease and you say hey, this isn't working as it's structured right now.

We don't really want to leave the mall. The landlord doesn't necessarily want us to leave the mall. We work out something to maybe add on a year or two or three. And if we're at the end of a lease and we can increase it for two years or three years, then we really don't put much money into it in terms of refurbishment. We might put some more paint into it, maybe change the carpet. Very little expense there. We're already out of depreciation because we're probably at the end of the lease. And at the end of the day, it can turn out to be a win-win for both us and the landlord.

Operator

Your next question comes from Sam Poser - Sterne, Agee & Leach.

Sam Poser - Sterne, Agee & Leach

Can you talk a little bit about, first of all, the average selling prices at Man Alive this year over last year, and has the run rate at Man Alive improved versus the loss that you had expected to take for the full year?

Alan Cohen

With regard to the average selling price, it is a lower average selling price. What has happened is when you get out of collections and you get into key items, you're getting out of some more expensive kinds of product and you're getting into more of a commodity, lesser expensive type product.

So the average selling price in Man Alive has gone down. The conversion rate, as I talked about, has gone up, and the number of units being sold per transaction are going up. And also in the second quarter we had better margins.

So it's a difficult, challenging situation. They are working very, very hard. They understand their mission. They understand their challenges. And, again, maybe the most unfortunate thing is what's going on with the economy as far as their business is concerned. I mean, it's unfortunate anyway, but that really has sort of put another barrier to get this thing to where they want it and where we want it.

Kevin Wampler

If you want to talk about from a P&L perspective, Sam, what we've talked about for Man Alive is basically reducing the loss, cutting it in half for the year. For the quarter, they reduced it by about 30%, so we didn't quite meet our goal for the quarter, but I would tell you for the year they're not real far off their plan.

So they've got a lot of work ahead of them in the second half of the year. Q4 is their big quarter, so a lot of it, whether they meet this plan or not, is really going to come down to that fourth quarter.

Sam Poser - Sterne, Agee & Leach

And then the 4.0 stores in the smaller boxes, can you give us a read on how that's doing and your continuing plans to downsize the store sizes?

Alan Cohen

Yes. 4.0, we've got three 4.0 stores open to date. We've got another one getting ready to open here in a week or so and we're really excited about this last one that's opening this year because it's going to be right here in the Indianapolis area, so it's going to be something that we can really get much closer to on a day-to-day basis.

And that's the process that's going on at 4.0. I think we're very, very pleased with what's going on with 4.0 in general. We're accomplishing the primary goal and that's to dramatically increase our sales per square foot. We're well over $400, up to $450 a foot in sales in these stores, and that's fantastic. Again, keeping in mind that the rest of our company's probably performing at what, about $300?

Steve Schneider

$300 on average.

Alan Cohen

Yes, at this point in time. So that's certainly the accomplishment. The thing that we're doing is we're trying to tweak the look and the feel and the fixtures in the store to make them as efficient as we possibly can and yet get the look and the feel that we want from a Finish Line store.

So there's going to be more 4.0 stores that are going to open. Are they going to look exactly like what they look like today? Probably not. But, again, the most important thing is we're getting the kind of productivity out of the stores that we need, and I think that bodes well.

Even thinking in terms of this year, we're going to open about 9 or 10 stores this year. Our stores this year are going to average about 3,500 to 3,700 square feet per store. Keep in mind that the average Finish Line store in total is about 5,500 square feet, so that process of bringing the size of the stores down is something that's certainly in play and it's going to continue as we go down the road.

Sam Poser - Sterne, Agee & Leach

And just one last question. You're launching the Under Armour shoes, the Under Armour running shoes, on January 31st, and you had about 320 stores, if I remember, of the trainers. Can you give us some idea of how much bigger the running launch is going to be as compared to the performance trainer launch back last May?

Alan Cohen

Oh, boy, you know, I don't have that number right in front of me as far as, I mean, how far are we going out in our number of stores. I know that we're very excited about it. I think it's going to be good. The only thing I can suggest to you is when I get that information, if that's what you're looking for is how many stores of our 700 stores are going to be involved, I just can't give you accurately that number today.

Sam Poser - Sterne, Agee & Leach

Is it bigger? As far as you know, is it bigger than what you launched the performance trainers?

Alan Cohen

Oh, I think it will be a bigger rollout. Yes, that's my best estimate or guess today. It will be a much bigger rollout than the cross-training was.

I know we felt good about the cross-training. We felt much better about running. I mean, again, remember, when they came out with that cross-training shoe you were talking about a category, cross-training, that really hadn't had any real excitement for quite awhile, sustained excitement for quite awhile. So there was some concern, you know, are people going to be out there looking for cross-training shoes? And the shoe did very, very, very well. We know there's a demand for running. We don't have that hurdle, and that's certainly been our mind-set. So we anticipate that the running end of it should be even better.

Now the only difference is and we've got to all keep in mind that when the running release takes place, it's not just going to be Finish Line from an athletic specialty perspective. You know, Foot Locker, Inc. is also involved in the running release. Again, I don't know to what degree they're involved either.

Sam Poser - Sterne, Agee & Leach

I have one last question real quick. You started off Q2 very, very strong and things sort of faded. You said, I think, in the prepared remarks, Alan, that you were optimistic about the rest of Q3 even though you're starting down low singles. Do you see that improving as we move through the quarter?

Alan Cohen

Well, it's hard to say. Again, I don't want to give too much color on the quarter. I talked a lot about it as far as when I talked about Q3 looking forward, and the holidays as far as the product we have, our approach to the quarter. I think I gave a lot of good information about the direction we're looking, where we think the benefits are going to be.

It's not going to necessarily be a quarter that's going to be profitable or be beneficial because we're going to see great comp increases. It's more of a situation where the efficiencies we're now feeling, the productivities that we've put in place are things that we really want to continue.

Yes, we'd love to see positive comps. That's for sure. But that's not necessarily what the driver's going to be.

Alan Cohen

We've got time for one more question.

Operator

Your last question comes from Heather Boksen - Sidoti & Company.

Heather Boksen - Sidoti & Company

You mentioned with regard to some of the new, you know, [inaudible] products and stuff you have coming out in the back half of the year, you mentioned exclusives. Can you give us any color on what those are going to be? Are they new [SKUs] or are they just exclusive colors? What are they?

Alan Cohen

Well, again, Heather, I don't want to talk too much about it because it's stuff that's not in the marketplace yet. But what it's going to be, it's kind of, I don't want to say basic product but it's more along the lines of a classic kind of a looking product, but done in a little different way. So it's not necessarily totally new product, but I think there's some things that have been done to it that are going to be very, very exciting. And we think that it's a number of SKUs and we think its going to be well received by the consumer.

Heather Boksen - Sidoti & Company

Okay, so it's not just your own exclusive color system?

Alan Cohen

No, no. It's a shoe that really is exclusive to us.

Heather Boksen - Sidoti & Company

All right. Thanks.

Alan Cohen

Okay. Well, thank you to everybody. Glad that we could have the kind of quarter we had. The people here worked very, very hard, and certainly we appreciate everybody's patience. We've been through some tough times, but I think we're back on the right road and we want to continue going in that direction.

Thank you very much.

Operator

This concludes today's conference call.

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Source: The Finish Line, Inc. F2Q09 (Qtr End 08/30/08) Earnings Call Transcript
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