Finish Line Shares Are Soaring

| About: The Finish (FINL)


Shares of Finish Line were pummeled in reaction to Nike's quarterly results.

Finish Line reported "soft guidance," but a simple analysis of the call shows that the company is in great shape.

I reiterate my fair value of $27.

As any long-time follower knows, Finish Line (NASDAQ:FINL) is one of my best ideas in 2016. Thus far, shares have not disappointed, surging 21% YTD with a $0.10 per share dividend to boot. Recently, after Nike (NYSE:NKE) reported a "soft" quarter, shares of Finish Line fell from nearly $20 to $19, before rallying back to a few cents away from $22 - where they sit today. Improving fundamentals, confidence in the upcoming calendar 2016 product assortment, a sense of urgency at the top, and modest expectations are all reasons why shares have rallied - and why investors should remain bullish.

Fundamentals are slowly improving and product assortment going into 2016 is excellent

Unlike most retailers, Finish Line experienced solid growth in the fourth quarter, with sales jumping 5.2% y/y to $580 million driven by a solid 4.6% same-store sales growth rate. Sequentially, these results compare phenomenally well to Q3's 3.5% top-line decline and 5.8% same-store sale decline that was driven largely by a failed supply-chain rollout. It seems that much of the fall-out from the supply-chain rollout is behind Finish Line, as fulfillment rates in the 24 hours following orders are approaching 80% of normal rates.

Even more impressive, the large sales increase in the important Q4 was on top of a 2.6% same-store sales increase in Q4 of FY15, so store productivity is actually accelerating. There are a few factors driving this improving top-line performance, but the majority, in my view, is driven by a favorable mix shift towards retro running, as well as a greater allocation of Jordan Brand retros as a result of Nike's ambitious plan to capture a greater portion of its coveted sneakers' market value. Management also called out strength in adidas' (OTCQX:ADDYY) product portfolio, with shoes like the Ultra Boost and Stan Smith notable contributors.

These styles look to be maintaining momentum into 2016, and I am also seeing better pull-through from Jordan at the retail level as it has slowed its launch cadence and provided a better product. Importantly, Finish Line is less exposed to Nike basketball, which has seen flagship models like the LeBron and KD struggle relative to years past. Overall, though inventories are a bit higher than I'd like to see, I think 2016 will be another great year for the footwear market, particularly as Under Armour (NYSE:UA) and adidas put pressure on Nike to improve its products.

A sense of urgency at the top

As noted in previous articles, Finish Line will be slimmed down considerably with about 25% of its stores closing. Newly promoted CEO Sam Sato continues to pursue this strategy, and the company successfully closed 54 of 150 of the stores it intends to close. Importantly, the company will be investing in remodels for its top stores - a move right out of Foot Locker's (NYSE:FL) playbook just a few years ago. This should help to differentiate stores in strong locations and boost their long-term productivity.

Further, Sato announced the hiring of AJ Sutera, formerly a senior leader in Hudson Bay and Saks' online businesses. Sutera began his career in finance before becoming a technology leader at several companies. Given his background, I suspect Finish Line will greatly improve its online experience while keeping in mind ROIC.

Finally, Sato seems to be engaging vendors to establish closer relationships and a better product assortment. Sato is looking for a new merchandising chief. In spite of this search, Finish Line's participation in the Lunar Epic Flyknit launch, I would say that, at worst, Sato is off to a good start.

"Soft" guidance likely a function of easy expectations rather than a poor outlook

The Street initially pounded shares after "soft" guidance of 3-5% comps and earnings per share of $1.50-$1.56. After digesting the positive commentary on assortment, remodeling, fulfillment improvements, and a new CTO are all reasons to be positive about the fundamental direction of the company. I think the company can easily earn $1.60-$1.70 excluding one-time costs related to store closures.

Overall, I think shares still look attractively priced, trading at a ~20% discount to my fair value estimate of $27. My cost basis is in the high-$16 range, so I am likely to trim my position in the $25-26 range.

Disclosure: I am/we are long FINL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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