The Finish Line's (FINL) CEO Sam Sato on Q3 2017 Results - Earnings Call Transcript

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The Finish Line, Inc. (NASDAQ:FINL) Q3 2017 Earnings Conference Call December 21, 2016 8:30 AM ET

Executives

Ed Wilhelm - Chief Financial Officer

Sam Sato - Chief Executive Officer

Analysts

Randy Konik - Jefferies

Susan Anderson - FBR Capital Markets

Camilo Lyon - Canaccord Genuity

Paul Trussell - Deutsche Bank

Erinn Murphy - Piper Jaffray

Michael Binetti - UBS

Eric Tracy - Brean Capital

Chris Svezia - Wedbush

Jim Chartier - Monness, Crespi, Hardt

Jonathan Komp - Robert W. Baird

Operator

Good morning. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the Finish Line Third Quarter Fiscal 2017 Earnings Conference Call. [Operator Instructions] Thank you. At this time, I would like to introduce the host of today’s call, Finish Line Chief Financial Officer, Ed Wilhelm. Sir, you may begin.

Ed Wilhelm

Good morning, everyone and thank you for joining us. On the call with me today is Chief Executive Officer, Sam Sato. Before I get started, I need to remind you that this call may include forward-looking statements involving risk, management assumptions and uncertainties that could cause actual results to differ materially from the statements expressed or implied. Such risks and uncertainties include, but are not limited to product demand and market acceptance risks, the effects of economic conditions, the effects of competitive products and pricing, the availability of products, management of growth and other risks detailed in our news release and SEC filings. The forward-looking statements included in this call are made only as of the date of this report and the company undertakes no obligation to update these forward-looking statements to reflect subsequent events or circumstances. In addition, we refer to certain non-GAAP adjusted metrics on this call. Explanation of these metrics and reconciliations to the nearest GAAP metrics can be found on the earnings release filed earlier today. Finally, as we announced in November, we are exploring strategic alternatives for JackRabbit including a potential sale. Therefore, we are treating that business as a discontinued operation and reporting its results separately from the rest of the company.

I will now turn the discussion over to Sam.

Sam Sato

Thanks, Ed and welcome everyone joining us today. Let me begin by saying that I am disappointed our results from continuing operations fell short of expectations. While significant parts of our business did well during the third quarter, clearly, there is more work to do, particularly with soft goods to drive consistent growth and improve profitability.

I am going to walk through how the third quarter unfolded and highlight the key drivers of our performance, then I will discuss some high level trends from Black Friday and the first weeks of December before shifting to an update of our fiscal ‘17 management agenda. Finally, Ed will detail the financials and our revised guidance before we take questions. Following the back-to-school season, we have projected sales to improve meaningfully over the remainder of the third quarter due in large part to easier comparisons as a result of our last year’s supply chain disruption. Unfortunately, October and November were more challenging than we expected marked by weak traffic trends.

Q3 comps ended up 0.7%, including a mid single-digit increase in November. However, this was well below our expectations for a gain in the high single-digit range. It’s important to look at our performance by category and division to get the complete story of the quarter. Soft goods was the major contributor to our third quarter sales and earnings shortfall as comps declined 37% with apparel and accessories both significantly underperforming our expectations.

Starting with apparel, comps were down almost 50% compared with a year ago and well below plan. As we detailed in recent earnings calls, we have been working hard to narrow our assortment and align our offering with customer demand. This includes enhancing our branded offering with a heightened focus on key items, while deemphasizing our license apparel collections. We have planned our branded business to be up modestly in the third quarter based on the progress of recent merchandising initiatives. Unfortunately, softer-than-expected demand for cold weather gear more than offset gains in less seasonable categories.

Our go-forward strategy also involves exiting our entry price point NCAA fleece program. This has been a big driver in the back half of the year but a negative contributor to our profit margins. Therefore, we plan this business down significantly year-over-year, but it too missed our forecast. Apparel represented approximately half of the soft goods shortfall versus planned. Additionally, our accessories business struggled across the board. On a comp basis, accessories was down mid-teens and made up the other half of the shortfall to plan. We are adjusting our assortments to better reflect our customer preferences. In total, soft goods accounted for approximately 9% of our third quarter sales compared with 15% a year ago. Looking ahead, we expect the category to remain challenging in the near-term and this has been factored into our revised full year guidance.

Turning to footwear, comps increased high single-digits driven by strength in running, basketball and athletic casual. These results were within our projected range, albeit towards the lower end as elements of our offering underperformed versus our plan. Similar to the first half of the year, retro running and basketball shoes, along with the latest casual running styles from several brand partners were in high demand. For the quarter, running comps increased low single-digits, basketball grew high single-digits and casual was up strong double-digits. In men’s, which posted a mid single-digit comp increase, sales were driven by demand for multiple Nike retro running styles, including Huarache, Max 90 and Presto, along with new innovation from Huarache Ultra.

Meanwhile, adidas Ultra Boost, Alphabounce and NMD platforms continued to sell through at a past space. Men’s basketball was dominated by retro and retro-inspired products from Brand Jordan, along with the continued expansion of Under Armour’s Steph Curry signature series. Ongoing demand for Curry 2.5 combined with the launch of Curry 3 during the third quarter translated into a strong year-over-year gain for this franchise. Nike Soldier 10 and Kyrie also performed well. Collectively, these platforms helped offset some softness within the remaining areas of the category. Casual footwear remains on fire. Classic models from adidas led by Superstar, along with retro running styles from New Balance, Reebok and Puma contributed meaningfully to the comp gains in men’s.

Moving to women’s, comps increased mid-teens led by multiple running and lifestyle products from several of our brand partners. Pegasus, Huarache, Huarache Ultra and Roshe from Nike were top performers as were adidas Ultra Boost and Pure Boost X in running and Superstar and NMD from the Originals collection. Our Puma business accelerated in the third quarter fueled by demand for women’s-only product such as Fierce and multiple styles from Fenty by Rihanna. The work we have done to grow our women’s business is yielding positive results. This has included expanding our assortments with more premium materials and seasonal variations of key styles as well as incremental marketing programs targeting female consumers such as our current #WeAreMore campaign. Kids’ footwear increased high single-digits on a comp basis. Sales were driven by a healthy mix of performance and retro styles from Nike, Brand Jordan and adidas, along with strong demand for Under Armour’s Curry basketball shoes.

Overall, we are pleased with the progress we are making elevating our footwear offering at Finish Line. That said, we believe there is room for further improvement and we continue to work closely with each of our vendor partners to ensure we are carrying the right mix of brands and styles our customer is looking for.

Now to our Macy’s business, which continues to perform very well and exceeded our expectations. The multiple strategic initiatives we have implemented to increase consumer engagement are driving profitable results evidenced by a 33% gain in sales and operating margins that are tracking ahead of plan. Ed will review our guidance in a moment, but we have raised our full year outlook for our Macy’s business.

Beginning with increasing the availability of kids which is now offered in approximately 275 doors up from 240 in Q2 and compared with approximately 150 at the start of the year. In addition, we have expanded the assortments online to include more of the most sought after brands and styles, which also contributed to another quarter of triple-digit growth.

Kids represented approximately 15% of our Macy’s business for the quarter, a figure we expect to move higher in the coming quarters. At the same time, we are benefiting from our ability to better capitalize on visits to macys.com, one of the most highly visited digital websites. We have continued to improve the customer experience by expanding the assortments available to the macys.com customer and increasing store fulfillments, which is driving conversion rates higher. Digital sales surged 108% and represented approximately 24% of the total volume in the third quarter. Year-to-date, digital penetration now stands at approximately 22%.

Finally, we continued our successful shop expansion and relocation program during the third quarter. We are repositioning or expanding another 38 shops on top of the 108 we have completed since inception. This initiative has been a good source of revenue and profit growth in fiscal ‘17 and we expect these tailwinds to continue into next year.

Turning to JackRabbit, as we announced last month, following a comprehensive review, we made the decision to explore strategic alternatives for the business, including a potential sale. We believe our long-term growth strategy and profitability improvement plan aligned with simplifying the business to focus on The Finish Line brand. The process is proceeding and we expect to have news to share with you later in the fourth quarter. With respect to the holiday season, as expected, we experienced strong digital sales over Black Friday weekend and through the first few weeks of December before traffic began shifting more heavily to brick-and-mortar this past weekend. The selling environment has been more promotional than last year and we expect this trend to continue through the remainder of the fourth quarter.

I would now like to provide an update on our management agenda for the year, starting with our focus on strengthening engagement with The Finish Line consumer. In our third quarter, we debut our newest store format in 27 additional locations including strategic markets like Los Angeles, Houston and Atlanta. We now have 42 stores featuring the new design. As previously mentioned, the updated layout has a bold modernize design palette, including a complete refresh of The Finish Line logo, storefront, floor fixtures and shoe walls. Our store remodels are a critical part of our strategy to strengthen The Finish Line brand and fortify our customer connection. The feedback from our store associates, vendor partners and most importantly our customers continues to be extremely positive. On top of this, sales trends post remodel have been encouraging, which Ed will expand on in a moment.

We are currently finalizing plans for additional store remodels for fiscal ‘18 and will continue on to path to update a significant portion of the fleet over the next several years. In conjunction with our remodel plan, we continue to execute our store optimization strategy, which is allowing us to direct our store investment towards our most productive locations. During Q3, we closed six locations, bringing our year-to-date total to 17. We have now closed 71 locations over the past 21 months and plan to close another 7 to 10 over the remainder of this year.

On the digital front, recent improvements to our commerce platform have enabled increased traffic capacity and order growth throughput, resulting in a better customer experience especially during product launches and high volume days. This platform currently serves our desktop and mobile sites and will be the foundation of the next release of our mobile app. It has also enabled us to be more nimble and improve our speed to market. One of the biggest updates aesthetically is our new home page. Since it launched, visitors are reacting positively to the simplified message and layout, which has translated into improvements in click-throughs and bounce rates. At the same time, we have been rolling out personalization across the content slots and have seen increased conversion when we present more relevant products and content offerings to specific customer segments. We are pleased with the initial response to the new home page and we will continue to monitor customer behavior and make adjustment to ensure every shopping experience delivers the Epic Finish.

Our MobileFirst strategy continues to yield benefits as well. In Q3, we saw our mobile traffic increase over 19%, accounting for two-third of our total digital traffic. We are on track to launch an elevated epic experience before the end of this fiscal year. This upgrade will enhance our customer engagement capabilities that allow for greater discovery and personalization features such as live videos, exclusive access, personalized recommendations and more. Our investment in The Finish Line brand continued in Q3 with a continuity media program in support of our Shoes So Fresh campaign. We continue to connect with our target consumers through compelling video content deployed through the most relevant channels, including YouTube, Snapchat and Instagram. We have recently debuted the second chapter of the Shoes So Fresh campaign featuring the Adidas Tubular Shadow and the special appearance by hip-hop artist [indiscernible]. Consumer payback and brand metrics continue to be very positive including a lift in brand awareness and an increase in brand interest as measured by the Google brand lift study. We remain committed to improving our creative execution to drive increase in brand awareness and demand with new iterations of the campaign.

Moving to our next priority, driving the performance of our contribution of our Macy’s business, as I said earlier, the three major programs we focused on executing the past year to fuel sales and profit growth are driving strong growth results. As a reminder, they are; one, increasing the availability and penetration of kids, two, remodeling and relocating shops and three, accelerating digital penetration. Looking ahead, we see additional opportunities to take sales and profit margins higher and we fully anticipate exceeding the high end of our long-term goal of annual sales of $350 million. Last but not least, is our priority to create an operating model that drives profitable growth and generates shareholder value consistently over the long-term.

Starting with our supply chain, we are now fully reaping the benefits of our new warehouse and order management system. I am pleased to report that we continue to see stronger than expected productivity gains in DTC fulfillment and store deliveries. In fact we achieved a record setting day for direct-to-customer fulfillment the day after Cyber Monday and we were above historic highs on other key metrics such as 24-hour fulfillment rate, click to doorbell delivery time and customer order fulfillment during the busiest online shopping period of the year. Our focus remains on driving efficiencies from end to end in our supply chain that will benefit the company and our customers in the near-term and long-term.

During the third quarter, we also began streamlining our operations to become a more nimble and efficient organization. The changes we are making are enabling us to speed up decision making to better compete and win in today’s fast moving retail environment. We now have better flexibility to make or pullback on incremental investments to drive higher sales or protect profitability depending on the situation. For example, as Q3 sales were tracking below plan, we curtail certain expenses and kept SG&A lower than originally forecasted. Equally important, we have reduced our cost structure and will realize approximately $6 million in annualized savings starting in the fourth quarter. Going forward, we remain focused on driving greater efficiencies throughout the company and we expect to realize numerous tangible and intangible benefits from implementing our vision of the right operating model for this business.

While I am not pleased with our third quarter performance and revised full year guidance, I am encouraged with the progress we are making against our key priorities. We remain committed and focused on further strengthening the cornerstones of the company’s foundation, our Finish Line footwear business and our Macy’s partnership and I am confident we have the right leadership team in place to execute our plans.

I will now turn the call over to Ed.

Ed Wilhelm

Thanks, Sam. Before I begin discussing our results, I should point out that my comments will focus on non-GAAP or adjusted results from continuing operations. Our adjusted results excludes severance-related charges totaling $2.1 million in conjunction with the organizational changes made to streamline the business to make our operating model more efficient as well as more effective. In addition, as I stated out at the start of the call, because of the strategic alternatives process, we have separated JackRabbit results from the rest of the company and we are reporting it as a discontinued operation.

For Q3, consolidated sales increased 3%. This increase consisted of Finish Line comparable sales that were up 0.7% and sales associated with Macy’s of $75.1 million, up 33.2% compared to last year. With respect to cadence, comps for Finish Line were down 1.6% in September, down 2.1% in October and up 5.2% in November. Consolidated gross margin increased 370 basis points from a year ago to 26.7%. Product margin net of shrink increased 400 basis points as last year’s Q3 was negatively impacted by a lack of full price selling of new product due to the supply chain disruption. We deleveraged occupancy by 30 basis points.

Consolidated SG&A expense was 31.2% of sales, down 90 basis points from a year ago as we were disciplined in managing our expenses and also benefited by comparing against the incremental spend last year related to our supply chain disruption. On a consolidated basis, the adjusted net loss was $9.9 million or $0.24 per share compared to a net loss of $19.4 million or $0.44 per share last year.

Moving now to our balance sheet, inventory was up 4.6% on a consolidated basis at the end of the third quarter, with Finish Line-owned inventory up less than 1% and Macy’s inventory up in the low 20% range on a 33% sales increase. Capital expenditures were $23 million in the third quarter and we expect to spend approximately $60 million for the year. Depreciation expense was $12.1 million. We ended the quarter with $33 million in cash and $17 million in borrowings on our credit facility. The short-term debt at the end of the third quarter was timing-related and had to do with the seasonality of our inventory investments. We expect to end fiscal 2017 with no interest bearing debt on our balance sheet.

During the quarter, we repurchased 250,000 shares totaling approximately $5.8 million. The company has 5 million shares remaining on its current board authorized repurchase program. For Finish Line, we ended the quarter with 580 stores and our third quarter count for Macy’s stores with branded shops was 392.

Now, moving to our outlook for fiscal 2017. Please note that our updated guidance excludes JackRabbit’s discontinued operations. Based on our third quarter performance and current sales trends, combined with the IRS’s recent decision to delay certain income tax refunds, we are revising our full year guidance. For the year, we now expect Finish Line comps to range between flat and up 1% and earnings per share to be in the range of $1.24 to $1.30. This guidance assumes fourth quarter Finish Line comps decreased between 3% and 5% and fourth quarter EPS will range from $0.68 to $0.73.

Our fourth quarter projections reflect the continuation of our challenging soft goods trend and the negative impact from the delay in tax refunds, which will shift sales out of February and into March, the first month of our next fiscal year. We anticipate this timing difference will reduce Q4 Finish Line comps by 2% to 3% and earnings per share between $0.06 to $0.08. Inclusive of the tax refund shift, we are projecting footwear comps at Finish Line to be approximately flat in the fourth quarter. Excluding the shift, we would expect Q4 footwear comps to increase low single-digits.

Given the promotional environment, we expect our product margins to be down 150 to 200 basis points in the fourth quarter compared to last year. We also expect occupancy to deleverage in the fourth quarter compared to last year by 80 to 100 basis points on the negative 3% to 5% comp guidance. We expect SG&A to leverage in the fourth quarter as a percent of sales by 60 to 90 basis points due primarily to comparing against the incremental spend last year related to our supply chain disruption.

Lastly, related to specific assumptions for our fourth quarter guidance. We expect the effective tax rate to be approximately 37%. Our new guidance now assumes our Macy’s business will generate between $305 million and $310 million in sales for the year with an operating margin in the mid single-digit range, up from our previous forecast of $270 million to $280 million in sales and operating margins in the 3% to 4% range.

Lastly, before we open it up for questions, I want to comment on results of our store remodel program. As Sam mentioned, sales trends in the stores we have remodeled with our new store format have been encouraging. Again, it is still early, but for the stores remodeled in July, we are seeing a mid single-digit sales lift post remodel against the control group driven by increases in traffic and conversion. As we look to next year’s remodel program, we are making progress on reducing remodel costs and will be targeting a low double-digit ROI for store remodels. We will provide more specifics on our remodel results and our FY ‘18 program in March.

Scott, we are now ready to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Randy Konik with Jefferies. Your line is open.

Randy Konik

Yes, thanks a lot. So I guess, what I want to do is kind of really talk through the apparel side from a strategic standpoint, because obviously the commentary around footwear is pretty encouraging still, remodels and Macy’s and Internet, etcetera. So obviously, the market is going to focus on this apparel side. So if you look at the last five quarters, a lot of the commentary around the difficulty has been focused around, it looks like too wide of an assortment as well as some issues around weather and then supply chain. Now, let’s assume that the supply chain has been fixed. If you think about the idea of needing to narrow the assortment and also from that perspective, what do you think needs – and also from a seasonal versus – seasonal product versus unseasonable product or less seasonable product, how do we think about strategically from here, how do you want to set up that apparel business? How much of the SKUs need to be reduced? And then how do you think about assorting the line from a seasonal versus less seasonable – less seasonal, excuse me, product category perspective? That’s kind of how I want to think about the first question. Thanks.

Sam Sato

Yes, thanks. This is Sam. Obviously, the soft goods business in total was extremely disappointing to us given the disruptions we have last year and obviously our plan specifically around branded apparel offsetting our decision to strategically reduce the license business and specifically the NCAA fleece business. I think you hit it right on the head. Our strategy moving forward has to be to create much more narrow and deeper assortment that’s driven by opportunistic point throughout the season, but largely a strategy that really allows us to tell stronger go-to-market stories that complement our footwear stories. I am pleased with the progress we have made in footwear. That continues to be a bright spot for us and I think our team is doing a great job there. Apparel is an important part of the business, but it really has to be item-based and kind of hookup storytelling to footwear based, which is the direction we are going to take this part of the business.

Randy Konik

Right, right. So do you have any perspective on how much the SKU count needs to come down? And also any perspective on now that we are kind of at the troughing point from a percent of the mix, it looks like the apparel is about 9%, it peaked around the high-teens years ago. So I am just kind of curious about where we should be thinking about percentages where they need to go to from a penetration perspective. And then just lastly, when you talked about getting rid of licensing or reducing licensing in the NCAA and branded, how do you think about also another iteration of how we should be thinking about the assortment of branded versus more of like a private label or non-branded products that are either in the store or on the website? Thanks, that’s my only question.

Sam Sato

Yes. Just for clarity, our apparel business – our soft goods business in total, which is apparel and accessories is 9% of the total and its split about equally between apparel and soft goods – accessories excuse me. So apparel is roughly 4% to 4.5% of the total versus the 9% for total soft goods. Yes, as we move forward, branded – the branded apparel is really going to be where we put our energy around. And again, specifically to enable us to tell stronger go-to-market stories that are driving or being driven by the strength in footwear and all the great storytelling partnerships we have with our brand. So license will continue to be a part of the business, albeit smaller and really focused on those incredible sports moments and as I said opportunistically, but the branded piece is where we really got to put our energy and focus around a more narrow, more fashion-trending focus to drive those really clear stories and items in our offer.

Randy Konik

Thank you.

Operator

Your next question comes from the line of Susan Anderson with FBR Capital Markets. Your line is open.

Susan Anderson

Hi, good morning. Thanks for taking my question. Just looking at the annual guidance, updated guidance, just curious, so I guess it was lower quite a bit if you back out $0.06 or $0.07 miss this quarter and then the shift into next year, it looks like there is still $0.12 or $0.15, is that all due to the apparel issues which you expect to continue into fourth quarter?

Ed Wilhelm

Largely Susan, it is. As we talked about on the call, we are seeing an increased promotional environment currently and that’s affecting soft goods as well as footwear. So it’s affecting our ability to sell through at full price and we expect that to continue through the quarter. And I talked – I gave very specific fourth quarter guidance for a reason. So we are expecting our gross margins to be down in the fourth quarter. So I think that’s probably the biggest driver of both sales and margin contraction versus what we are previously thinking.

Susan Anderson

Got it, that’s helpful. And then on the gross margin this quarter, it appeared pretty strong despite the apparel issues, was that all just getting back the supply chain issues from last year or were footwear margins actually higher year-over-year on the third quarter?

Ed Wilhelm

Yes, it was largely recovering from the supply chain disruption from a year ago.

Susan Anderson

Got it, okay. And then last one, just any thoughts that you could give on the potential tax changes out of the new administration and the benefits that you guys could potentially get?

Ed Wilhelm

Yes. Very really, right, so not a lot to find yet. Lower tax rates for us corporately obviously will help earnings. Just talk about an import tax, who knows, but that could have some impact on the industry. But I guess at this stage, we all kind of tuned in and waiting to hear more from the administration.

Susan Anderson

Got it. Well, good luck next quarter for you guys.

Sam Sato

Thank you.

Ed Wilhelm

Thank you.

Operator

Your next question comes from the line of Camilo Lyon with Canaccord Genuity. Your line is open.

Camilo Lyon

Thank you. Good morning guys, how are you?

Sam Sato

Thank you.

Camilo Lyon

Just to wrap up the discussion on apparel, is this a kind of decline that we should expect for the next basically year until you are able to turn the assortment however you want it and how do you think about kind of safeguarding against the risk that the new assortment might not lead to the gains that you are hoping for?

Sam Sato

Yes. So I would say, we expect – in the near-term, we expect it to be challenging, consistent with Q3 as we move through Q4. Qs one and two will continue to diminish the percent of our total. And then as you get to the back half of next year, which is starting to lap this year’s Q3 and Q4, we should see that leveling out a bit. Having said that, I think the real question becomes as I said, opportunistically, how we are going to drive this business. It’s really going to become a business that enables us to do a better job with our footwear storytelling and make it a profitable business for us versus a growth business for us.

Camilo Lyon

And is that something that you have tested in the remodels that gives you some insights into the fact that that’s the direction you should be going, because there are other competitors that also have apparel businesses that are so-so, they are not – they are definitely not as strong as the footwear?

Sam Sato

Yes. So I would say in the store remodels we have done, we have specifically targeted a much more reduced soft goods offer in total and specifically apparel and have also limited the assortments to be really key item driven again that enhances our footwear storytelling and the strength that we have there. And those stores have done better.

Camilo Lyon

Okay. And then just moving on to the comments around the promotional environment affecting both footwear and apparel, clearly I think the apparel piece is understood, it you can just talk particularly what’s going on in the footwear side and maybe just help us understand what do you think is driving a lot of increased promotional activity in footwear, is it by category and/or by brand that you are seeing the preponderance of those promotions unfold?

Ed Wilhelm

Yes. I mean this was obviously just yet be my perspective. I think that retail continues to be more and more competitive and not just within our space, but across the broader industry. And as we continue to compete for the consumers dollars, we have got more and more things that we have to consider. It’s interesting because there has been and continues to be a lot of great new products that are coming to market. And in fact, those products are summing through fairly well. But in the macro sense, I think just overall in general, that the marketplace is just a much more competitive environment than it’s been. And as I said, it’s in every space of where we compete, whether it’s the high end department store guys or the price value guys. Everybody is significantly more promotional than they have been in the past. And so we have to make sure that we are driving our strategy, but at the same time ensuring that we are making the appropriate decision to be competitive and compete and win in this marketplace.

Camilo Lyon

Is that to say that you feel there is too much of the similar assortment across all of retail and therefore demand is just be not stripped by the available supply for those goods?

Sam Sato

No, not necessarily. I think that just when you have a broader marketplace that is highly promotional, consumers are deciding where they are going to spend their money and where their money may go further in certain areas or certain segments of the industry versus others. And so I don’t believe that there is this significant overabundance of inventory, although I think it’s clear that there is a bit more inventory out there than maybe what everyone would like and I think you are seeing that from different folks as they report. Our team I think has done a good job given the scenario we are in right now relative to comps being a bit challenging for us, that they manage the inventories well and they are working hard with our brand partners to ensure that we have got the right flow of goods and the right items and the right depth in those items.

Camilo Lyon

Okay. Two final questions, you mentioned the product public continues to be robust, if you could just give us some insights into what we should expect and the duration or how far out you can see. And then just if you could remind me what the traffic was for Finish Line stores?

Sam Sato

Yes. So when I think about the future looking pipeline and we have now seen all the way out till next fall, looks really promising. I think near-term, a couple of things that we are seeing. As an example, in Q3 we launched the new Air Max 17 as an example. That has come out of the gates really strong as well as over the last 90 days, 120 days as Nike has continue to invest against Lunar and we brought to market early the Lunar Epic and that ended up being a pretty good story for us and one that we believe we can build on. Obviously, the continuation of sell-throughs and demand for adidas and their Boost and Bounce programs continue to give us encouragement especially as we look out into the future. When I think near-term in terms of future pipeline, there is a ton of innovation coming to marketplace and just off the top of my head, some things that I think about as an example are the continued expansion of the whole Curry platform gives us some encouragement, the continued expansion of adidas around Boost and Bounce and now we have got a new product that just hit called Tubular Shadow that was featured in our last brand campaign is out of the gates really good. And then Nike coming to market as you saw during their innovation summit there, Air VaporMax which we think is going to revolutionize the whole Air Max platform and really create not only some energy and excitement in the marketplace, but will really revolutionize that platform and create future growth opportunities that are significant.

Ed Wilhelm

Camilo, on your traffic question, traffic was less than we expected across both channel stores and the web. It was down in the stores a little bit and of course increased on the web driven primarily by mobile.

Camilo Lyon

Great. Thanks for the color, guys. Happy holidays.

Sam Sato

Thank you too.

Operator

[Operator Instructions] Your next question comes from the line of Robby Ohmes with Bank of America. Your line is open.

Unidentified Analyst

Hi, good morning. This is [indiscernible] on for Robbie. Can you talk about just the digital growth in the quarter and then what the outlook is for that going forward? Thanks.

Ed Wilhelm

So as I just mentioned, the digital business and the stores business were both affected by weaker than expected traffic in kind of the category trends, as Sam talked about. As we look forward, we still expect our digital business to be a double-digit growth business within The Finish Line branded business.

Unidentified Analyst

Thank you.

Operator

Your next question comes from the line of Paul Trussell with Deutsche Bank. Your line is open.

Paul Trussell

Hey, good morning. You started to give a little bit of color there around the pipeline and what you see. If you can maybe just continue that conversation for us as we think about certain categories and kind of where consumer demand is moving from a casual standpoint versus maybe running and basketball and just what’s going on from a newness standpoint in each of those areas? And then second, if you can just kind of go over the color again you gave around December. I believe you said it was a strong kind of Black Friday, you had obviously mid single-digit comps in November and then I believe you said like the digital business was solid before traffic came into the stores very recently. If you can just help me kind of understand what you have seen exactly here to start off the fourth quarter and how you expect that cadence to go throughout the balance of the period? That will be helpful to clarify. Thank you.

Sam Sato

Thanks, Paul. So I am going to just quickly go through it by category. So basketball, as I mentioned in our prepared remarks, was up high single-digits and that was driven by product launches – new product launches from largest Brand Jordan and Under Armour’s Curry platform. Demand for Retro Jordan’s remains strong and that remains a very healthy and vibrant business for us. The sum of Under Armour Curry’s franchise as they expand that program continues to perform well. And then also we saw tremendous strength from some specific performance silhouette signature like Kyrie and LeBron Soldier 10 as well as Jordan 31. Having said that, the signature performance category continues to be a category that’s going through transition, but still remains a very healthy and vibrant business for us and we see much of what the brands are doing relative to product innovation within basketball silhouettes continuing and feel good about the pipeline we see. Running, lot of new innovation, as I mentioned earlier, that is in market today. Air Max 17, as I mentioned, LunarEpic, current models from adidas like Boost and Bounce continue to do well and we see the future of their expansion relative to those platforms continuing to drive running. At the same time, there has been a lot of strength around iconic styles and so you have got specifically from Nike, you have got iconic styles like the Huarache franchise, Flyknit Racer. Free continues to be a large platform for us and we are selling through some products there. Reebok Classics is an interesting one in that. It was such a important part of the fashion running business and is making its way back to kind of the top of the list. So, we see some exciting things happening there. Technical brands, however, in our space specifically Brooks and Asics is underperforming and I think that the large part of that is due to the current fashion trends are moving aggressively towards more lifestyle running. And so I think that as Brooks and Asics continues to evolve their offer without compromising their dedication to the runner that they will make some headway there. But the last year or so, that true technical business has been a bit more challenging for us. And then in the casual athletic piece, you continue to hear not only us, but others talk about some of these casual shoes and iconic styles like Superstar’s as an example that are really driving a lot of interest and excitement. And we believe we will continue to see that business evolve, but continue to grow in popularity.

Ed Wilhelm

Specific around the question of the holiday business today, as we said in the September call, we are not going to provide specifics on month-to-date comps. But I can tell you that what we have seen today is embedded in our guidance for the fourth quarter call. Our commentary around strength in digital beginning in Thanksgiving weekend and that’s continuing to perform well up to the point in time where you get to the point like this past weekend where we can no longer guarantee delivery of ground shipments and economy shipments by holiday. The business starts to shift from the digital channel to the store channel and that was our commentary around strength in digital early on in the holiday season and then picking up with the stores beginning this past weekend and we will expect that to continue through Christmas Eve. And that’s just a continuation of the same trend that we have seen over the years.

Paul Trussell

Fair enough. Thank you. Good luck.

Sam Sato

Thank you.

Operator

Your next question comes from the line of Erinn Murphy with Piper Jaffray. Your line is open.

Erinn Murphy

Great. Thanks. Good morning. You guys have called out pretty good strength with adidas throughout this year. I guess as we go into next year, that brand is going to be expanding its reach within the North American market. So, how are you guys working with them particularly to make sure that you are still seeing strong allocations and can still be that destination for the brands that becomes more available? And then I guess my second question is just in basketball, can you just talk a little bit more about how the Steph Curry 3 launch has been for you? There was a decent amount of promotional activity with the 2.5 when they were launching 3.0, so I am curious how the consumer is responding to the higher price point of the 3.0? Thanks.

Sam Sato

So what I will tell you around adidas is yes, their business is good. Their brand continues to resonate. I will say at a high level, we work closely with them as we do with all of our brand partners around how they are evolving the business, what they are bringing to market from an innovation perspective and it’s not solely and specific to adidas. Obviously, there is a lot of exciting things coming from all of our brand partners and I mentioned a number of those earlier. So I think we have got a really good plan in place as we move into next year, especially around not only the expansion of some of the highly coveted products from adidas and Nike, but also some of the new innovation that’s coming to market, especially on those platforms like Max Air that are big parts of our business and Nike is expanding on that platform to revolutionize what they are doing. We are putting in same type of effort with adidas and others to ensure that we get our share of not only what’s in the marketplace, but that we creatively partner with them to bring it to market in a distinct and compelling way. Erinn, specific to your question around Curry, what I will tell you is this, I think that in total or I see that in total, the Curry franchise is more than just a shoe. It’s more about the Curry signature series and what Under Armour continues to do to expand on that franchise. And as I have said, Q3 when we look at the combination of all the things we are doing with Curry’s products, including leading off with 3.0, but in combination with 2.5 as well as some of the lifestyle products we are doing, it led to significant growth results year-over-year.

Erinn Murphy

Got it. Thank you.

Sam Sato

Thank you.

Operator

Your next question comes from the line of Michael Binetti with UBS. Your line is open.

Michael Binetti

Hi guys. Good morning. I just wanted to make sure I understood some of the commentary around – I know apparel, we talked about a lot, but as far as what you are – how you are thinking about the problem that you saw in the quarter as you diagnosed it and maybe how – I think you gave good commentary on what meant in the current quarter and how you look at it, I think it’s about a 5-point drag on the comps right now, but really, as you think about the problem and the areas that you guys are working on, when do you think the cadence on that starts to improve, is it a matter of getting the current inventory out. And then as we look into year early fiscal ‘18, should we start to think that the same-store sales trends can look more like what you told us about on footwear, maybe not high single-digits, but did the apparel headwind start to diminish as we exit the year, is that may be a fair timeframe to think about?

Sam Sato

Hi, Michael. No, I think that over the next couple of quarters, we are going to continue to see a drag from our apparel business as we start to really narrow this assortment and reduce the dependency we have on certain parts of the apparel business. And so Q4 will continue to be challenging as we move into the first half of next year, I believe while it will diminish a bit, the challenge will still be, it’s really going to be until we get to the back half of next year where we start to see some leveling off. Clearly, our strategy is about making a more profitable part of the business versus growing its share.

Michael Binetti

Okay. And then on the – I guess more on the near-term as you think – as we look at the quarter you just reported and the 400 basis point product margin impact, is there anyway you can help us just directionally break that up between footwear and apparel, it sounds like the lion’s share that would be on the apparel side, may be you could help us just directionally with that for models?

Ed Wilhelm

Yes. For sure that lion’s share is on the apparel side, the soft goods side, Michael. Apparel – on the footwear side margin is down a bit, but the big driver was on the soft goods side.

Michael Binetti

Okay. And then I guess just internally, as you look at early ‘18, based on the comments you just gave on the apparel stuff, is it safe to say that you will reference back to the SG&A flexibility that you mentioned earlier as far as managing the costs in the first half of the year until some of those same-store sales headwinds delay is that how you are thinking about the year early on?

Ed Wilhelm

Yes. It’s still – it’s early as you know for us to be talking specifically about FY ‘18. We will start our detailed planning process here once we get past the holiday season and again into the beginning of next year. Having said that, there are some puts and takes as we think about next year, I mean Sam talked about kind of the headwinds on the soft goods side that will take into next year. We have already announced that we have looked at our cost structure and we have identified $6 million in savings, so that will result in about $5 million of incremental SG&A savings for us next year. We have talked about this tax shift that’s going to push some business from the fourth quarter into the beginning of next year, so that will help offset some of these trends. So again it’s still early, we will get specific guidance in March. Thinking about next year, we believe we can grow EPS in the low double-digits at this point and we will provide more specific guidance around FY ‘18 in March like we always do.

Michael Binetti

Okay, thanks a lot guys. That’s really helpful.

Sam Sato

Thank you.

Operator

Your next question comes from the line of Eric Tracy with Brean Capital. Your line is open.

Eric Tracy

Hey guys. Good morning. Sam, it’s for you. As we think about the branded, the evolution of the branded DTC business, Nike called out last night continued growth, they believe it’s a market expanding exercise, I would just like to know sort of your updated thoughts on whether that is the case or if it is potentially taking share from the wholesale partners and if so, sort of how you defend that and maybe in that vein when you think about your remodels, what you are doing to ensure that you are continuing to get distinct allocation or product. And then Ed, for you just in terms of the timing of those rollouts how we should think about the cadence of the remodels? Thanks.

Sam Sato

Yes. So here is how I would think about branded DTC. Our business in total continues to grow, albeit this last quarter specifically largely affected by our soft goods business. Our footwear business, as I have said in my prepared remarks, I am pleased with the progress we have made there. I think that while we have got some opportunity to continue to grow and show consistent results there, in this environment, promotional environment that’s happening today, coupled with some of our brand partners, DTC strategies, to have our men’s footwear business grow mid-singles, our kids footwear business high-singles and then our women’s business, I am proud to say, double digits. That I think affirming that the strategy that our brand partners have truly is about in an integrated marketplace that includes what our brand partners are doing to expand the size of the pie versus just move the P around the plate. And indicators that I see are absolutely doing that. As I mentioned or answered on earlier question around the current environment and the promotional activity, we are challenged as an industry to drive market share growth across all product segments, not just within the athletic specialty or sneakers or apparel athletic apparel industry. We have got to challenge ourselves to be compelling and inspiring to the consumer, leading them to obviously engage and transact with us. So I think that what the brands are doing actually long-term will be helpful to retail partners like us in expanding the total size of the marketplace, allowing us to obviously gain share and grow at the same time.

Ed Wilhelm

Eric, with respect to the store remodels, I mean our early results are encouraging, as we have talked about it. We have now started to narrow in a low double-digit ROI as the target. That ROI will guide us in terms of the number of remodels that we do next year, and we will talk more specifically about that on the March call. But with respect to timing, they will be weighted towards the front half of the year. So our best opportunity to remodel our stores are in the late first quarter, early part of the second quarter and that’s the period of time where the most heavy weighting of the store remodel program will be.

Eric Tracy

And just real quick on that Ed, in terms of – like can you give a sort of range or percentage of the fleet by next year?

Ed Wilhelm

Not specifically. We will comment on that in March. But again, as we said in our prepared remarks, we are committed to upgrading our stores with this new design in the key strategic markets around the country.

Eric Tracy

Okay, thanks guys. All the best.

Operator

Your next question comes from the line of Chris Svezia with Wedbush. Your line is open.

Chris Svezia

Good morning everyone. Thanks for taking my questions. So just first guys, just on inventory at your end, can you add any color with respect to the total company or any color between Macy’s and Finish Line stores where you expect to be?

Sam Sato

Year end, you said Chris, was that the question?

Chris Svezia

Yes.

Sam Sato

We are going to have to target and have our inventory growth be less than our sales – expected sales growth and that’s both at The Finish Line brand as well as Macy’s.

Chris Svezia

Okay. With regards to apparel, just so I understand something Sam, when you talk about, you don’t want to necessarily grow it making the sort of top contributor, but you expect it to be generating improved profitability, is that something you anticipate playing out in the first half while a comp drag to profitability should improve or is this something more second half of calendar ‘17?

Sam Sato

Yes. Thanks. And I want to be clear about what my answer was is we really want our apparel business to be both a profit contributor, but additionally it’s going to be an opportunistic strategy that we take. And so certainly, our attention and our desire is to grow the business, but it’s not going to be a strategy really have to make it a larger share necessarily of the total, in terms of the top line, but certainly we want it to be and needed to be a profitable and healthy part of the business. We think that as I have said earlier, that as we lap some of the changes we are making and our comparison, it’s really the back half of next year that we would expect to see some of that profit contributions start to happen.

Chris Svezia

Okay. Final question, just when you say Sam, strategically about Finish Line and over the year sort of the bumps that have occurred strategically, merchandising, having the right product. In your comments today about, hey, we got a promotional environment. How do you weigh what you can do as an organization versus against the environment? In other words, being in stock in the right product, managing inventory in a disciplined fashion so that you don’t have to be promotional, you don’t have to compete to the same extent. Just curious what your thoughts around that – what’s your thoughts around that?

Sam Sato

Yes. So I think you actually answered your own question, which is we continue to work hard and have had incredible support from our brand partners around the best items and having the right allocations and improved allocations in those items, but that’s not 100% of our offer. We have got a lot of other products out there that maybe aren’t selling quite as well or maybe are selling through in a little bit of a slower rate which are being noted. But equally important, as I said, this isn’t just about our industry. We are not just – we are not just competing with our industry in total, the entire marketplace is more promotional than it’s been historically and so we are competing for dollars spend share of wallet right now, not largely on the most coveted items, but on the balance of what we offer versus what others offer.

Chris Svezia

Okay, thank you and all the best to you on holidays.

Sam Sato

Thank you.

Operator

Your next question comes from the line of Jim Chartier with Monness, Crespi, Hardt. Your line is open.

Jim Chartier

Good morning. Thanks for taking my question. First on the apparel, I was curious what you thought the impact of weather might have been on the apparel business, if you could quantify that or give a little bit of color around that? And then on Macy’s you have just talked about in the footwear business specifically what’s working there versus what might not be working in The Finish Line stores?

Sam Sato

Yes. So relative to apparel and I will limit this to branded apparel, because as I said our strategy to exit the licensed NCAA fleece business, although this plan was substantial decrease which obviously help drive that 50% decline in apparel. Within branded, a large share of what the decrease came from was cold weather-related products. Although we had some other products that improved as well as a few items within cold weather like some products from adidas Original as well as Nike branded tech fleece actually did pretty well. Holistically, the cold weather gear was the big drag within branded. And then specifically to Macy’s, we are making really good progress there as evidenced by the some of those statistics I shared earlier. Our men’s business is solid and growing. The women’s business similar to Finish Line continues to outpace men’s and that was part of our strategy given the sizable consumer group that Macy’s attracts, female consumer group. And then the kids’ business as we continue to expand that and grow its penetration is a nice contributor for us and we think again that between the combination of our three strategic initiatives, not only do we continue to see that driving growth in profits for us, we think that there are some greater opportunities beyond what we are doing today.

Jim Chartier

Great. Thanks for the color and best of luck.

Sam Sato

Sure.

Operator

Your next question comes from the line of Jonathan Komp with Robert W. Baird. Your line is open.

Jonathan Komp

Yes, hi, thank you. Just want to follow-up on apparel. The question I have for the quarter, I assume you probably had planned apparel comps down given some of the changes. But any color or quantification how the down 50% or nearly that level compared versus your expectation coming in? And then maybe more broadly on apparel, are there any more kind of extreme scenarios being contemplated? And I am wondering structurally if you have made any changes to personnel on that side or even when I look at square footage in the stores, I assume the sales and the profit contribution is not up to speed with the square footage being implied to apparel. So, any thoughts on broader changes there potentially?

Ed Wilhelm

So John, I will address the question on plans. So largely due to tech, our strategy to exit the fleece business, apparel was down – plan down modestly. And obviously, we performed much worse than that. With respect to the rest of your question, I will let Sam answer.

Sam Sato

Yes, so a couple of things. Just quickly on the organizational piece, we have made some changes and we have realigned our apparel organization to be more closely tied directly to our footwear group. And as I said, part of our strategy is to go much more narrower to tie it out directly to our footwear stories and ensuring that we can tell a much deeper and exciting go-to-market story that is apparel through footwear and so we are driving it through that lens. And then back to your question around what we need to do as I continue to say, it’s going to remain an opportunistic kind of strategy, but we are going to go much narrower in our offer and deeper in those most important items that are trending from a fashion perspective and those items that our consumers are telling us are most important to them.

Jonathan Komp

Okay, that’s helpful. And maybe just one follow-up on the guidance for the year, Ed, maybe further help in kind of quantifying the change in the guidance for this year? I assume a lot of it is the soft goods, along with the shift you mentioned for the fourth quarter, but any color just kind of the difference in the soft goods expectation versus the footwear? And then even for JackRabbit, I assume the prior range included a negative profit for JackRabbit that now is discontinued operations, but if you could maybe talk about those pieces?

Ed Wilhelm

Yes. So, our original guidance for the year and the guidance that we talked about in the last call in September assumes JackRabbit in the guidance and our original guidance for JackRabbit was for it to do between $90 million and $95 million top line and for it to produce low single-digit operating margin loss and that was what was embedded in the original annual guidance that we gave. And we commented on the second quarter that it was actually performing lower than expectations on the bottom line in that business. With respect to the shift in the tax refund issue, we contemplated coming into the year that the timing of distribution of tax refunds was going to be consistent with last year. We learned on December 9 in an IRS newsletter that they were going to delay by several days the beginning of the tax filing season. And then specific to tax filers that we are filing childcare credits or income credits, there was going to even be a further delay and that’s a lot of our customer that gets those refunds and runs to the mall and spends money with us to purchase footwear. So that news came to us in mid-December and that obviously affected our thinking for the fourth quarter and for the year where we were originally. So it was very important for us to get that information out there and that’s a shift so that moves things from the fourth quarter of this year to next year and we quantify that. I would say the rest of the guidance I mean I was pretty specific in terms of the details for the fourth quarter guidance. We have got some challenges top line that we are facing largely around soft goods that we are expecting and guiding to have that continue in the fourth quarter. It’s a competitive promotional environment. We have talked a lot about that and that’s affecting our ability to sell-through at full retail versus our previous expectations and that’s around footwear and soft goods. And then we are doing what we can on the expense side, they pull expenses down in the fourth quarter to deliver kind of the EPS range that we are talking about. And we think this is at an appropriate range given what we know today in total. So hope that helps.

Jonathan Komp

It does. Appreciate the color. Thank you.

Ed Wilhelm

You bet. Thank you, operator.

Operator

That was the final question for today’s call. At this time, I will turn the call back to the presenters.

Ed Wilhelm

Thank you, operator. This concludes today’s call. Thank you for joining us this morning. We look forward to speaking with you again after our Q4 and our call in March. Happy holidays to everyone.

Operator

This completes today’s conference call. You may now disconnect.

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