The Finish Line's (FINL) CEO Sam Sato on Q4 2017 Results - Earnings Call Transcript

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The Finish Line, Inc. (NASDAQ:FINL) Q4 2017 Results Earnings Conference Call March 24, 2017 8:30 AM ET

Executives

Sam Sato - Chief Executive Officer

Ed Wilhelm - Chief Financial Officer

Analysts

Susan Anderson - FBR Capital Markets

Robby Ohmes - Bank of America Merrill Lynch

Erinn Murphy - Piper Jaffray

Kate McShane - CITIgroup

Jonathan Komp - Robert W. Baird

Paul Trussell - Deutsche Bank

Michael Binetti - UBS

Mitch Kummetz - B. Riley

Jay Sole - Morgan Stanley

Christopher Svezia - Wedbush

Operator

Good morning. My name is Lisa and I will be your conference operator. At this time, I would like to welcome everyone to the Finish Line's Fiscal Q4 2017 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

At this time, I would like to introduce the host of today’s call, Finish Line's 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 risks, 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.

I will now turn the discussion over to Sam.

Sam Sato

Thanks, Ed and welcome everyone joining us today. The fourth quarter was more challenging than we expected which resulted in a disappointing finish the fiscal 2017. Comp sales ended down 4.7% which was toward the low end of our guidance range and earnings per share of $0.50 was below plan due to significant pressure on product margins.

Our comp performance reflects the decision by the IRS to delay income tax returns until later in February combined with our continued work to reduce the penetration of soft goods to a smaller, more profitable percentage of our overall mix. While these headwinds were contemplated in our outlook the composition of our footwear comparable sales continued a higher percentage of promotional sales than we forecasted.

Towards the end of the quarter we needed to get more aggressive on pricing as the tax shift had a bigger impact on traffic as we expected which created a highly competitive selling environment. At the same time, elements of our offering didn’t resonate with our customers. This was true in both, running and basketball, our two largest categories where full price selling fell short of forecast.

We did experience strong sell through of casual athletic product which in total is becoming the bigger percentage of our business. Unfortunately, the category isn’t at a size that can fully offset the weakness elsewhere in our assortments.

For the quarter footwear comps were down a low single digits and soft goods was down high 20s. We are working closely with our vendor-partners to improve our merchandize offering to better align with customer demand. To do this as quickly as possible we increased our mark down cadence during January and February to clear through slow selling inventory. While these actions had a significant impact on product margin, it has allowed us to start fiscal 2018 with cleaner inventories and put us in a better position to flow new receipts into our stores and on to our digital sites.

When I addressed this audience for the first time as CEO at the start of this past fiscal year, I outlined our strategy for tackling several operational issues in the near term and setting the stage for long term success. I am disappointed that fiscal 2017 did not play out as we expected from a financial perspective which was driven primarily by the consumer response to our merchandise assortments.

That said, I am encouraged by the significant progress we've made from an operational perspective addressing the specific areas of our business and organizational structure that needed improving. While there is much more work to do, I am confident that today we have a much stronger foundation to support profitable growth and generate increased shareholder value over the years ahead.

Underscoring my confidence is our enhanced leadership team that has now been in place for several quarters and includes important experience we brought in from the outside of the company to help strengthen our execution and performance.

Let me review the critical achievements from the past year and our plan for driving further improvement in fiscal 2018. Starting with stabilizing our supply chain and beginning to reap the benefits of our new warehouse and order management system. By early fiscal 2017, we were back to or above historic levels on all key operating metrics following the temporary disruption in late fiscal 2016.

The work we did to ensure that all the things were worked out before heading into our highest volume period allowed us to achieve stronger than expected productivity gains during the back half of the year. This included a record setting day for direct-to-consumer fulfillment the day after Cyber Monday.

More recently, we've continued to see historic high on other key metrics such as 24-hour fulfillment rates, click-to-doorbell delivery time and store deliveries. We expect these trends to continue as we drive greater efficiencies from end to end in our supply chain that will benefit the company and our customers in fiscal 2018 and beyond.

We made good initial progress this past year streamlining our operations as we work toward becoming more nimble and efficient as well as designing the cost structure that is more appropriate for the current business. For example, by combining the Finish Line and Macy's merchandise and field operations teams we can now react and respond much faster to changes in the marketplace.

Additionally, as you'll recall, in early fiscal 2017 we announced leadership changes in our merchandising and planning and allocation teams that strengthened these critical functions. The transformation efforts we've undergone thus far have allowed to take costs out of the business and generate approximately $6 million in annualized savings including a $5 million incremental benefit in fiscal 2018.

We will continue to transform our operating model as we look to gain more efficiencies by further implementing best practices, profit improvements and leveraging automation. We are confident these actions will help us to profitably grow in today's fast moving retail environment and drive greater shareholder value.

Shifting to digital, we are now better positioned to serve our customers and fuel increased productivity. On October we migrated to a new more advanced commerce platform that currently serves our desktop and mobile sites. The new platform comes with a number of advanced capabilities that greatly enhance the overall customer experience such as the ability to handle increased traffic and/or processing.

This is critical especially during product launches and high volume days. It also supports our new homepage featuring a more simplified message and increased personalization all of which results in improved click throughs, bounce rate and conversions. Importantly, the new platform provides us with greater flexibility to make changes to our site so we can continually evolve the shopping experience based on feedback and changes in customer behavior.

Finally, the new platform is the foundation of the latest iteration of the Finish Line App launching in the next couple of weeks. The new App features a preference based content feed for each user, commerce integration, loyalty management and the ability to deliver unique content in the new store environment through weekend integration.

The App will spearhead our MobileFirst strategy and help build on the strong trends in mobile we experienced in this past year. For Q4 digital sales were up 17% driven by a 25% increase in mobile traffic. For fiscal 2017 mobile traffic increased 26% and now accounts for more than two thirds of our total digital traffic. These results powered the increase in digital penetration to approximately 22% of overall Finish Line sales in fiscal 2017 up 250 basis points from the prior year.

Looking ahead, we see opportunities to take these numbers higher based on the advanced omnichannel capabilities now in our arsenal. Our focus for fiscal year 2018 is to continue delivering frictionless experiences that lead with mobile.

In support of the customers expectation of our personalized, fast and consistent experience anytime and from anywhere we will create and launch initiatives that deliver on these expectations in the short term while building a scalable solution for the ever changing retail landscape.

We are also enhancing our infrastructure and integration to better leverage our customer data and are heavily focused on increasing our levels of personalization across all marketing channels placing relevant content and offers in front of our customers where they are and when they are ready to shop.

On the store front we took significant steps in fiscal 2017 toward improving the experience with them and profitability of our brick-and-mortar channel. We debuted our newest store format between a bold and modernized the design talent including a complete refresh of the Finish Line logo, store front, floor, fixture and shoe walls. Following the successful checks of 15 stores including 8 in the Chicago area during the second quarter we expanded the program with a focus on key strategic markets across the country.

In total we updated 42 stores in fiscal 2017 with the new design and remain on schedule to touch the significant portion of the fleet over the next several years. As we got further along in the process we gained greater efficiencies in executing a remodel allowing us to lower the overall costs per location. This is adding to our confidence in achieving our targeted low double-digit ROI on a mid single-digit comp lift.

As part of our store optimization strategy we continually evaluate our store portfolio to ensure we are operating the number of locations to serve our customers while maximizing profitability. To that end, we closed 24 underperforming locations this past fiscal year bringing the total number of closures to 78 over the last 24 months.

Looking ahead we've identified and planned to close another 15 to 20 locations in fiscal 2018. We remain confident that trimming our fleet of underperforming stores and refocusing resources on our remaining stores while retaining our most loyal customers will help improve comp store sales and increase store contribution margins by approximately 100 basis points over time.

Throughout fiscal '17, we continued to strengthen our brand through our Epic Finish campaign the largest integrated brand investment in company history. This investment encompasses initiatives that drive brand awareness, enhance the Finish Line store experience and combined with digital programs work together to create a seamless experience for our customer.

Our ongoing efforts to increase brand awareness continued in fiscal year '17 with our Shoes So Fresh campaign featuring new digital content with hip-hop star 2 Chainz. According to a recent Google brand study this program drove improvements in key brand metrics including higher brand awareness and increased brand interest.

All our brand investments culminate in our new store format that provides opportunities for consumer engagement and enhance storytelling by leveraging the investments we’re making in our digital properties, content creation and brand partnerships. We remain committed to improving our creative executions to drive further affinity for Finish Line in fiscal '18 and beyond.

A real bright spot from the past year was the strong performance of our Macy’s business. We've continued to invest in high return initiatives that help drive a 30% increase in annual sales including a 35% gain in the fourth quarter. The programs behind our recent success include: expanding and repositioning shops, increasing the availability and penetration of kids’ and accelerating the penetration of digital.

Beginning with the shop program, we repositioned or expanded another 64 shops in fiscal '17, which continues to drive a meaningful lift in sales and operating profit. For the upcoming year, we plan to touch another 40 to 50 shops including remodeling and expanding our space in Macy’s flagships store at Herald Square.

Turning to kids’ which is now offered in approximately 275 doors compared with approximately 150 at the start of the year. In addition to the physical expansion, we greatly expanded the number of kids’ brands and styles available online to include more of today’s most popular sneakers. Kid's sales grew triple digits in fiscal '17 and represented approximately 14% of our Macy’s business compared with 8% in the prior year. We plan to further capitalize on this burgeoning growth opportunity through the rollout of kids’ to additional shops as well as opening a handful of standalone kid shops in fiscal '18.

Finally, with regard to our Macy’s digital business, we’ve become much better at capitalizing on the high traffic levels on macys.com to drive higher conversions through expanded online assortments and increase store fulfillments. Digital sales surged 105% in the fourth quarter and were up 100% for the full year. Digital penetration for fiscal '17 was approximately 25% up 880 basis points over fiscal '16. Looking ahead, we now expect our Macy’s business to hit the high end of our long-term goal of annual sales of $350 million in the coming year which is ahead of our original timetable.

Lastly, consistent with our goal of determining the future path for JackRabbit we divested the business in February. We were pleased to reach an agreement with CriticalPoint Capital which allows us to now focus 100% on the core Finish Line retail operations and our increasingly profitable Macy’s business. I’d like to thank the entire team at JackRabbit for their years of hard work and commitment to serving the customer.

We are encouraged with the progress we’ve made on each of the fronts I just discussed. That said, there is much more work to do to translate the operational work into the financial gains we know are achievable for the company.

In fiscal 2018, we are committed to building on the improvements we've made to the business. At the same time, we will intensify discussions with our vendor-partners about creating more distinct and relevant product assortments that are right for our customers. We must improve our merchandising efforts to better excite our customer and further distinguish the Finish Line brand in the marketplace as the destination for the latest and greatest sneakers.

To that end, we have exciting plans with several new product launches in fiscal '18. A prime example is adidas PureBOOST which Finish Line has exclusively outside of adidas direct-to- consumer channel. We collaborated on a library of unique digital content featuring Josh Norman of the Washington Redskins and brought this to our stores through an elevated in-store experience highlighting the features and benefits of this model. We also collaborated with adidas as we continue to focus on increasing our brand awareness with the female consumer by bringing relevant products and unique story to her through our #WeAreMore women’s initiative.

We launched the women’s only PureBOOST XPose featuring Ally Love and Chinae Alexander and we continue to see great engagement from our women’s strategy. With Nike, we've got a number of exciting initiatives planned beginning with this month's celebration of Air Max when we have exciting consumer experiences planned leading to this week’s launch of the highly anticipated VaporMax. We believe that this game changing shoe will be another ignition point for the Max Air franchise and we will lead to exciting new innovation in the future.

We will utilize exclusive assets in launching the platform during Air Max Day and will elevate the customer experience across every touch point introducing the new VaporMax to our customer in a way like never before. Additionally, we’ve collaborated on many of the new free products as well as on a new and comprehensive go-to-market strategy across digital and in-store that will drive even deeper engagement with our customer. Our work with Puma resulted in the very successful fiscal '17 both in terms of results and engaging women through our #WeAreMore initiative.

For fiscal year '18, we have partnered to create a comprehensive plan that incorporates footwear, apparel and accessories highlighting our committed position on key items such as Fierce and the limited Fierce Strap fronted by Kylie Jenner. We will continue to collaborate closely with Puma and build on our recent success in the years ahead.

In addition to the specific examples I just cited, we are growing positions in many of the best selling styles across running, basketball and causal platforms. This includes UltraBOOST Uncaged, NMD, Superstar and Tubular Shadow from adidas to name a few. And Nike retro-inspired running styles from franchises such as Huarache, Max Air, and Presto. With regard to basketball it's exciting innovations from signature silhouette including new models and color ways from Kyrie, Paul George and Brand Jordan.

I am confident that our current product selection is more aligned with what our customers are looking for compared with our positioning in the last few quarters. However, we know we must continue to step up our efforts with our vendor partners to further set our merchandising offering apart from the rest in the marketplace and drive sustained footwear comparable sales growth.

With respect to soft goods, we continue to narrow our assortment and work towards aligning our offering with customer demands. This includes enhancing our branded offering with the height and focus on key items while exiting our promotional NCAA licensed fleece programs. We are confident the strategy will result in a smaller, more profitable soft goods business over time. However, it does create a comp headwind until we anniversary the start of this initiative in Q3.

To close, I want to reiterate my disappointment that we are not further along in delivering greater value to shareholders. I am along with the entire senior management team and Board of Directors fully committed to achieving this primary objective. The headwinds we have faced internally and on a macroeconomic level over the past year reaffirm the decision we’ve made around transforming our operations and organization. I am confident that we are now in a better position to execute our growth strategy and drive increased profitability over the long-term. I’m looking forward to updating you on our progress throughout the year.

And with that, I’ll turn the call over to Ed, who will review the financials and our guidance in more detail.

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 $13 million related primarily to store impairment charges and store closures. Please see the financial tables in our new release which reconcile non-GAAP results to GAAP.

Now to our non-GAAP adjusted results. For Q4 consolidated sales decreased 0.4%. This decrease consisted of Finish Line comparable sales that were down 4.5% and sales associated with Macy's of $95.2 million up 35% compared to last year.

With respect to cadence, comps for Finish Line were down 1.9% in December up 10.1% in January and down 15.5% in February. February sales were severely impacted by the IRS’ decision to delay income tax refunds compared with last year as we did not begin to see a meaningful sales lift until February 22 which was a couple of days before the end of our fiscal year.

The negative impact on our fourth quarter comp Finish Line was close to 3.5% to 4% which was higher than the 2% to 3% we originally projected. We were able to partially offset this topline headwind with more aggressive pricing during the month. While comps have improved in March as a result of the shift it doesn't appear that the February shortfall will be fully recovered.

Footwear comps were down 1.6% with men’s down low single-digits, women’s up low double-digit and kids’ down high single-digit. In terms of men’s and women’s category performance running comps were up double-digits, lifestyle was up mid single-digit and basketball declined low double-digits. As you can see, comps varied by category, however, product margins were impacted across the board from less full price selling and higher marked downs.

Soft goods comp was down 27% in the fourth quarter with both apparel and accessories down double-digits. The performance of soft goods was in line with our expectations as we continue to narrow and deepen our assortments and reduce the categories penetration to improve gross margins and profitability. Consolidated gross margins decreased 500 basis points from a year ago to 29.1%. Product margin net of shrink decreased 450 basis points versus last year which was well below our guidance primarily due to higher markdowns to clear slow moving inventory.

We deleveraged occupancy by 50 basis points driven by negative comps. Consolidated SG&A expense was 23.1% of sales down 60 basis points from a year ago as we began benefiting from the cost savings initiatives announced during the third quarter and had a favorable comparison against last year's incremental expense related to the supply chain disruption.

Our effective tax rate for the quarter was 38.8%. On a consolidated basis adjusted net income was $20.4 million or $0.50 per share compared to the net income of $37.6 million or $0.85 per share last year.

Turning to full year results, consolidated sales increased 2.5% to $1.8 billion. This increase included Finish Line comparable sales that were up 0.3% and sales associated with Macy's of $320.7 million up nearly 30% versus last year.

In terms of divisional profitability for fiscal '17 the Macy's division operating margin improved to mid single-digit compared to low single-digits in the prior year. On a consolidated basis adjusted net income for the year was $44 million or $1.06 per share. This was well below our most recent guidance range of $1.24 to $1.30 due to the product margin headwinds we experienced in the fourth quarter from higher markdowns.

Moving now to our balance sheet, inventory was down nearly 5% on a consolidated basis at the end of the fourth quarter with Finish Line inventory down nearly 8% and Macy's inventory up approximately 8%. Capital expenditures were approximately $11 million in the fourth quarter and $71 million for the year. Our capital expenditures were higher than previously forecasted due to our new store design rollout as we remodel more stores in fiscal '17 than originally planned and incurred CapEx in the fourth quarter related to fiscal '18 remodels.

Depreciation expense was $14.3 million in the quarter and $49.4 million for the year. We ended the year with $91 million in cash and no interest bearing debt. During the quarter, we repurchased 250,000 shares totalling $4.4 million. For the full year we repurchased 2.5 million shares totalling $52.8 million. This represents a 6% reduction in outstanding shares from the beginning of the year. We also returned $16.8 million to our shareholders in the form of dividends this fiscal year bringing the total cash returns to our shareholders for the year to almost $70 million. The company has 4.8 million shares remaining on its current board authorized repurchase program.

For Finish Line we ended the year with 573 stores including six openings and 24 closings, seven of which were closed during the fourth quarter. For fiscal '18 we plan to close approximately 15 to 20 stores and remodel 45 to 60 as part of the planned store investment strategy, Sam discussed earlier. Our yearend count for Macy's stores with branded shops was 374 due to the specific store closures Macy’s announced earlier this calendar year. We completed the repositioning and expansion of 64 Finish Line shops at Macy's in fiscal '17.

The shops after conversion produced an acceleration in sales to strong double-digit increases and a significant increase in profitability. We expect to complete another 40 to 50 shop conversions in fiscal '18 which will bring the total number of shops we've touched life to date to approximately 200.

Now moving to our outlook, for fiscal 2018 which is a 53-week year, we expect earnings per share to be in the range of $1.12 to $1.23 which is an increase of approximately 6% to 16% compared with non-GAAP EPS of a $1.06 in fiscal '17 which was a 52-week year. We estimate the additional week will contribute approximately $0.06 per share to our fourth-quarter and full-year fiscal 2018 results.

The following are the assumptions used in developing our full-year EPS guidance. First, with respect to the sales, for Finish Line we expect comp sales to increase low single-digit. We expect our Macy's business to generate between $345 million and $355 million in sales with an operating margin in the high single digits.

Product margins are expected to be flat to up slightly driven by improvements in soft goods beginning in the second half of the year. We expect occupancy to be flat to down slightly as a percent of sales. With respect to SG&A we will continue to be disciplined and focused on expense management in fiscal 2018.

We expect SG&A as a percent of sales to deleverage slightly as our previously discussed cost savings will be offset by increased depreciation costs and higher incentive compensation expense. Our guidance is based on an anticipated effective tax rate of approximately 38.3% which is 200 basis points higher than fiscal 2017 due to tax credit that occurred in fiscal 2017 that won't repeat to the same level in fiscal 2018.

On a year-over-year basis, the increase in depreciation and incentive compensation costs combined with higher tax rate creates a headwind of approximately $0.15 per share in fiscal '18. We expect fully diluted shares outstanding to be approximately $40 million. Capital expenditures are expected to be approximately $45 million to $50 million comprised of store investments of approximately $30 million with the majority dedicated to the previously discussed store remodel program.

Approximately $10 million to $15 million will be spent on technology investments with a focus on our MobileFirst strategy and continued enhancements to our digital site to further CRM loyalty management capabilities and information security enhancements. Lastly, we will spend approximately $5 million to reposition and expand another 40 to 50 Macy's shops.

That summarizes our key assumptions used in developing our EPS guidance for the year. Lisa, we’re now ready to open the call up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question comes from the line of Susan Anderson from FBR Incorporated. Your line is open.

Susan Anderson

Hi, good morning. Thanks for taking my question. I guess I wanted to drill down a little bit just on the guidance for the year. It sounds like you expect most of the improvement at least in gross margin to come in the back half of the year, so I guess how should we think about the cadence of same store sales and gross margin kind of as we go throughout the year?

Ed Wilhelm

Yep, so Susan that’s right and the gross margin this is driven primarily by the soft goods category, will be a bit of a headwind for us in the first half to our soft goods strategy is fully in place and then we expect improvement in both cost sales and margin in the soft goods category beginning in the back half of the year.

I'd say with respect to quarterly cadence, while we don’t give specific quarterly guidance, comps by quarter will be within our full-year range of low single-digits. The effective tax rate, higher depreciation cost, higher incentive compensation cost have a bigger negative impact in Q2 and then to a lesser degree in Q3. So those quarters in particular will likely show declines in EPS year-over-year. Outside of that nothing else from a quarterly standpoint, quarterly cadence standpoint would go, truly jumps out.

Susan Anderson

Great, okay and then just one more question, I guess on just differences between the Macy's performance in the Finish Line stores. I guess one, I know you've talked about in the past you think it's a different customer, but do you think it's cannibalizing the Finish Line stores at all and then also I guess if it's a different customer is it are the Macy’s stores generally carrying the same product or different product which may be leads to then just the product to not resonate with consumers in the Finish Line stores?

Ed Wilhelm

Yes, so different customer for sure, target customers Finish Line 18 to 29-year-old, target customer for Macy's is older, mom shopping for her and her family. Assortments due differ by brand because of that. So, I think they are two distinct businesses for sure. In terms of cannibalization we continue to measure that and haven’t seen any cannibalization since we really started the program.

Susan Anderson

Got it, okay great. Thanks so much. Good luck next quarter.

Ed Wilhelm

Thanks.

Operator

Our next question comes from the line of Robby Ohmes from Bank of America. Your line is open.

Unidentified Analyst

Hi, good morning its [indiscernible] this is Sean for Robby. Thanks for taking our questions. Sam, can you talk about how quickly you can adjust the assortments and then how much more do you feel you have to shift before you'll be able to return to positive comps in footwear?

Sam Sato

Yes, I mean, you know that the buying cycle in our industry is upwards of nine months out and we continue to try to pull different levers to move products up from a delivery perspective via different transportation modes to affect change faster. The good news is as you've heard from many of our top suppliers that they continue to work hard on manufacturing that is both domestic and quicker to market, I believe the Nike guys talked about that on their call, Tuesday I think about their express line and they’re doubling down of increasing innovation as well as production timing to market.

And we’re starting to see some of that product be shown to us that will affect us sooner this year than haven’t been on its regular timeframe. Having said that, I believe as we move into the back half of the year and especially as we get through the soft goods headwind along the footwear items I mentioned and lot of the new innovations that’s coming to market were in a really place there, our positions are growing.

We are exciting new innovation that continues to come to market be it multiple BOOST platforms or net Uppers obviously this Sunday is release of the new Nike, VaporMax have got us all on our toes a bit because not only do we think it’s innovative and great. What we’re seeing from consumers in terms of the conversations happening around VaporMax is really exciting and we think that that can again be an ignition point for the innovation engine and more importantly I think just continue to elevate the excitement in our industry.

Unidentified Analyst

And then just on the promotional environment overall what's sort of driving that, is that just that there are some styles that weren't working, so you had to clear it through them and that’s sort of one time hit or do you think the overall athletic footwear environment is more promotional than it has been in the past?

Sam Sato

Yes, again I think as you saw by our brand suppliers as well as other folks the broader marketplace is a bit more promotional. Obviously there is certain segments of the business that are good, but the broader marketplace is promotional and we've seen this now for a couple of quarters.

Again, our brand partners talk about the marketplace being a bit more promotional and so we have to take appropriate price action to both keep our inventories fresh and move through slow sellers as well as be competitive with the broader marketplace and that’s effectively what you saw in Q4.

Unidentified Analyst

Thanks for the color.

Operator

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

Erinn Murphy

Great, thanks. Good morning. I was hoping you could speak a little bit more about your basketball platform. You didn’t call out bas Curry or any of the Under Armour products when you were kind of naming the brands that you are seeing in improved allocation of funds. So we're just curious to see how that performed during the quarter and kind of what you're expecting from that platform in 2018?

Ed Wilhelm

Yes, interestingly enough basketball there has been all kinds of discussion around that. Prior to February our basketball business was pretty good and we continue to see great sell-throughs on number of these signature models like the ones I mentioned the [indiscernible] or Paul George. Soldier 10 from LeBron may be good.

Curry, actually we continue to sell and I think you’ve heard from others and we're not different than that, sell-throughs are good, not as good as some of the previous models, but nonetheless we’re selling Curry and so the whole basketball business was impacted by the tax shift to a larger extent than the running category or the casual category, for a couple of reasons one being the price points and two being the further you get away from a tax return money standpoint that is, the further you get away from NBA All-Star weekend excitement, you lose some of the momentum. So I think that this tax shift getting pushed out to as far as they did in February really weird it suddenly had in our basketball category.

Erinn Murphy

Okay, that’s helpful and then just, I guess I’m struggling a little bit on the comp guidance for fiscal '18 to be up low single digits again and I think as you said kind of see low single digits in every quarter. Maybe can you just speak to your underlying assumptions and now with kind where mall traffic has been what’s your assumptions for store traffic versus ticket?

I meant even just going back to the basketball conversation it seems like a lot of the traction in basketball is happening between that $100 and $150 price points, so lower than it's been historically, so just struggling to kind get to the drivers to see that positive comps.

Ed Wilhelm

Yes, so low single digit comp will be driven by the digital business within Finish Line, so still seeing nice growth, nice momentum in our digital business. Store traffic is still challenging and we’d expect it to be somewhat choppy kind of throughout fiscal '18 but the digital will be the primary driver of the overall kind of low single digit comp lift for Finish Line.

Within the driver specifically average transactions we expect to be up ASP's were challenging in the fourth quarter down mid-single digit, but still up kind of 1% for the year and we’d expect ASPs for the year upcoming to be up low single digits. And then, the other driver with respect to stores will be our continuation through the remodel program. When Sam alluded in his prepared remarks we’re seeing a mid-single digit comp lift in stores that get remodelled, we’re going to do more of those in the upcoming year another 45 to 60, so that will be a driver of the sales within stores as well.

Erinn Murphy

Okay and if I can just sneak in one more, I think Sam during your prepared remarks you discussed bringing may be some talent in from the outside and just trying to improve execution internally, can you talk about some of the functions or people you may be adding to the team? Thank you.

Sam Sato

Yes, so Erinn, we actually announced this throughout last year we've made some significant hires starting with at the executive team level, we’ve hired a new Chief Merchant as well as head of all of our customer facing areas. We hired a new Chief Information Officer with years of experience as well. And then in the Finish Line Merchandising Group hired a new GMM and then also hired a new Head, a Senior Head of Planning and Allocation.

So those areas combined with some back of the house support, we hired a really experienced leader for supply chain and so I think all of those changes have brought a new level of energy and experience through the Finish Line which we believe that as we look into the future will obviously help benefit us.

Erinn Murphy

Thank you and I go back.

Sam Sato

Thank you, Erinn.

Operator

Our next question comes from the line of Kate McShane from Citi Research. Your line is open.

Kate McShane

Good morning. Thanks for taking my question. I just wanted to understand with regards to the technical product that’s being introduced with the BOOST and the VaporMax, how you expect to, how do you expect that do when it still seems there is a fairly strong fashion, casual style?

Sam Sato

Well, I mean what’s wonderful Kate is that our brands are have for a long period of time recognized the mash up between performance attributes, but stylish or fashion driven Uppers and BOOST technology yes, very performance driven, but the products they’re designing to sit on top of that platform aesthetically is trending really well.

Similar with Nike, not only with VaporMax but with a number of their other products, they continue to innovate their Uppers and continue to be one of the leaders in fashion and trendsetting from an athletic perspective. VaporMax is also new technology which in itself is relevant and trendsetting and so we really expect that VaporMax itself is not only going to do well, but the influence it has on future design is going to be I think revolutionary.

Kate McShane

Okay, great. That’s helpful and just one more question on basketball not to beat a dead horse, but since your commentary was that basketball was doing pretty well until February, do you attribute most of that decline then to the delay in the tax refund checks and is this a category that gets more impacted by that than others?

Sam Sato

Yes, I would say that’s a big part of it, because those Signature products in particular that I mentioned Paul George has not been affected because it really was a March release so to speak, but the other products, be it Kairi or different retros from Jordan or LeBron Soldier and what not were all doing very well throughout December and January. When we got February you're obviously up against bigger comps with those items and so with the tax refund delay I think it squashed a little bit of the open to buy for consumers.

Kate McShane

Thank you.

Operator

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

Jonathan Komp

Yes, hi thank you. First question, if you can may be just going back to the fourth quarter quantify the comps and the gross profit impact from the discounting actions, and as part of that I think part of the issue is related to products on the footwear side that did not resonate, so you could may be just give a little more detail on what the merchandise miss was if you will?

Ed Wilhelm

Yes, so we talked about Jonathan in our prepared remarks that the product margin was the biggest factor that fell short of our expectations. So that was driven by a number of factors, so promotional environment to a degree, sell-through of that markdowns that were necessary to sell-through slow-moving product again to a degree, shifting the tax business out of February, again a lot of that is full price selling, so that we didn't get to the same level that we thought, that also negatively affected the margins in the quarter to a degree and Sam talked about, the strategies that we're undertaking to drive improvement in FY '18.

Jonathan Komp

Okay and then may be asking about the guidance in a different way, I think at last quarter you were pointing to a higher base year for 2017, I think a $1.24 to $1.30 and at that time you had been talking about double-digit earnings growth in 2018 off of that base, so if you could may be just kind help to rectify changes in the 2018 outlook now relative to your prior views then?

Ed Wilhelm

That’s obviously the fourth quarter didn’t deliver it, it lowered the base and we’ve got up. All I would say is a pretty low base at a $1.06 per share for sure, but we were very careful in crafting our guidance. Look we've got to put some guidance out there that we feel confident we can deliver and this is guidance that we feel confident we can deliver. There are some headwinds that we're up against which I outlined. We’ve got an effective tax rate working against us. We've got depreciation and incentive compensation cost kind of working against us and that is a negative impact of about $0.15 per share.

The tax shift didn't materialize to benefit March to the degree that we thought it would, so that tailwind kind of comes down a bit, but most importantly we've got guidance out there that we feel confident we can deliver and it’s reflected in the assumptions that I went through. So low single digit comp Finish Line, Macy's sales within a range that we feel confident we can deliver flat margins reflecting the promotional environment that we think will continue, plus giving us the opportunity to adjust our soft goods category and stay focused on costs and deliver. Again we have a high degree of confidence that we have we can deliver the guidance that’s out there.

Jonathan Komp

Okay, thank you.

Operator

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

Paul Trussell

Hey good morning. Sam, just kind of big picture, if you can just help us parse through your view or outlook still for overall sneaker demand in the product pipeline and maybe parse that from ongoing mall traffic issues, tax delay impact and Finish Line kind of maybe some execution or product issues, just help us as we think about your results and in your outlook how you kind of bucket each of those things?

Sam Sato

Yes, so from a product perspective as I shared in my prepared remarks, there's a lot of exciting stuff coming down the pipeline and it’s undeniable that you know the innovation that is being driven by many of our core suppliers is really helping the business. At the same time its competitive out there and there is product that don't resonate that for us specifically we took big positions on and unfortunately didn’t sell-through at the rate we needed them too.

And so that puts pressure on us both from a topline because we had sales plans against those initiatives as well as on the bottom line because you've got to take mark downs and it puts pressure on your product margin. So, the promotional activity around I think is real and again I'll reference a number of comments that are out there relative to our industry from both retailers as well as our brand partners that the marketplace in North America is more promotional today than it’s been probably in a while and everybody is working hard to get it cleaned up and at the same time continue to deliver really exciting new products.

And I can't reiterate enough the excitement that we have around this weekend launch. It’s such a exciting new technology that people have been talking about for a while and the day is finally upon us and ranges to see truly how it impacts the business as well as influences the future. But across the board we're seeing some items, some franchises that are doing really well and our positions continue to grow there and that gives us confidence that that combined with our store optimization strategy, getting to a level of stores that are relevant and will create the right experiences, remodelling those stores that are generating a return for us, our continued investment in our digital strategy.

And importantly, as I said in my prepared remarks, we continue to embark on our biggest continuous brand investment in the company's history. We will continue to do that. We do it quietly, but it’s quiet because it is loud in the channels that it needs to be loud in relative to who our target consumer is and we’re making good progress there as well. So I think combined we're setting ourselves up for sustainable growth, albeit feeling some pain in the near-term.

Paul Trussell

Got it. That’s helpful and then just a quick clarifying question. I know you don’t want to get into all the details, but just taking this week in hype into consideration, how should we kind of understand your March comments Ed? You mentioned that March was better than February, but maybe not to the bounce that you hoped for, are footwear comps still negative?

Ed Wilhelm

Yes, we’re not going to comment specifically, but we did say things improved Paul. So as we expected, so the shift did occur, did help us in March, but what I did say, we at this point the tax season has largely played out and we, it appears that we're not going to recover everything that we lost in February and March. But having said that, the low single digit comp guidance for the year, I commented can be applied to each of the quarters throughout the year.

Paul Trussell

Got it, that’s helpful. Thank you.

Ed Wilhelm

Thanks.

Operator

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

Michael Binetti

Hey guys, good morning thanks for all the help with all the detail here today. I just want to make sure I understand one thing, it sounds like what’s the product margin planned flat up slightly, I know soft goods sort of become a problem for you guys last quarter, but in this quarter, I think it was more in the footwear size, is there a reason why you don't call back more of the footwear margin on the product margin side within the guidance for next year?

Ed Wilhelm

Yes, Michael just our view that the environment is going to remain promotional for us and that, that’s reflected in the guidance that we've given with respect to flat gross margins, flat up slightly gross margins.

Michael Binetti

Okay and then as I look ahead obviously you guys are not in isolation here on the tax rebate commentary, but as you look ahead to the next year and you think about the comps you laid out for the year with this tax shift hurting so much, is your expectation that the basketball consumer spending power comes back in early February next year, did the tax rebate shift earlier or I guess another way to say it is there a go forward problem with the mismatch and the timing of the NBA All-Star game and when your customer is going to get that burst of spending power?

Ed Wilhelm

Hard to say, in terms of what tax refunds will look like next year. We've assumed that they follow the same pattern as this year, so later in February, but again that’s it's hard to say there is going to be a lot that happens between now and then around the government and improving their systems and controls so that they can broad screen more effectively and possibly get to a faster distribution, but that’s not what we’re assuming in our assumptions. So again, we're assuming that the tax refund timing is the same next year as it was this year.

Michael Binetti

Okay, that’s very helpful and if I could sneak in one more on the kids business, I know you called that out as one of your big opportunities I think you called the category out as a negative high single digit comp during the quarter, I feel like there is may be nuances that we don’t understand and then maybe you could just help shape the kids standalone shop opportunity that you talk about? Thanks.

Ed Wilhelm

So there's two points I think you’re asking, one is the kids business within Finish Line down high single digits. I mean that’s driven in part due by adult takedowns that were not as effective in the quarter. Kids are also affected by basketball to a large degree, so we saw softness in February in particular in kids, again driven we believe by some of the shift in tax refunds. And then separately, you talked about standalone kid shops. That's within Macy's. Michael, in the Macy’s business we see an opportunity to do a handful of standalone kids shops within some very high-volume Macy's stores and were going to do a couple of those in FY '18.

Michael Binetti

Okay, great. Thanks.

Operator

Our next question comes from the line of Mitch Kummetz from B. Riley. Your line is open.

Mitch Kummetz

Yes, thanks for taking my questions. I just wanted to followup, Jon asked a question earlier about the elements of footwear that didn’t resonate, I don’t think guys really got around to answering that. So I understand the basketball side with the tax refunds, but was there something really from a product standpoint in the quarter that just didn’t work well for you guys?

Sam Sato

Yes, so Mitch this is Sam. As I said there is elements within each category that didn't do well. We tried to be clear in our prepared remarks around the category performance of running was up double-digits, but all categories were significantly under product margin pressure. And so within running we had a number of, of items that we took big positions on that didn’t resonate and that caused us to be more aggressive there, more than any other category in marking down products aggressively to get through. So that drove topline number that didn't necessarily translate to the bottom line.

Mitch Kummetz

Okay. And then on the tax refunds, so obviously February was challenged because of that March was better but you are not fully recovering. Any sense as to why that is? I mean, do you think that those dollars being spent elsewhere or do you think that everybody is so promotional that it’s just not translating into a stronger result like the dollars are getting spent, but because you guys have marked things down that it is not benefiting you as much like what’s the reason why you’re not getting that recovery doing you think?

Ed Wilhelm

That’s hard to say Mitch for sure. I mean a lot of times when these things shift around you don’t always fully recover and that's certainly what we’re seeing there. Sam talked about – with the later refunds getting further away from the NBA All-Star game around mid February and us seeing kind of the biggest negative impact to the shift in our basketball category you know that could be a driver. But it's really hard to say.

Mitch Kummetz

Okay. And then last question maybe just sort of bigger picture one, can you talk a little bit, Sam, about stores size? I mean you guys, your stores average I think about 5,500 square feet. A fair amount of that real estate is occupied by soft goods which is obviously challenged.

I mean, is this an issue for you guys, I mean as apparel and soft goods get scaled back, I mean how are you looking to kind of reallocate some of that square footage and is there enough to kind of put towards footwear to kind of makeup for what you might be taking away from apparel or I don’t even know if that make sense so?

Ed Wilhelm

Yes so Mitch our average store size is about 5,500 square feet as you said, remembering we've got men's, women's and kids’ all under that roof. Our stores are appropriately sized and I don't know if you've had a chance to see one of our new design stores yet, but the footage that we use in the new store design is absolutely appropriate to do the merchandise storytelling that we want to do, particularly around leading brands, leading product from the brands and that’s a head to toe storytelling with the greatest sneakers that are available from adidas, Nike, Puma, Under Armour, et cetera. And then head to toe apparel around those sneakers. So we’re appropriately sized and not a problem in terms of going forward.

Mitch Kummetz

And is there are anything that you can say about the stores that you've remodeled with the new format, I mean are you seeing a pickup in terms of comp or?

Ed Wilhelm

Yes, so we’re seeing better traffic, higher conversion and mid single-digit comp lift in these stores compared to the control group. And again as Sam talked about as we looked at the FY ’18 program we've been able to reduce our costs of the remodel and get a lot better. It’s kind of remodel program itself and it’s going to drive towards that low double-digit ROI that we’ve targeted.

Mitch Kummetz

Got it, all right, thanks guys.

Ed Wilhelm

Okay.

Operator

Our next question comes from the line of Jay Sole from Morgan Stanley. Please limit further questions to one question only. Your line is open. Jay Sole your line is open.

Jay Sole

Hello, hi.

Ed Wilhelm

Hey, Jay.

Jay Sole

Can you hear me?

Ed Wilhelm

Yes, I can now.

Sam Sato

Yes.

Jay Sole

Okay great. So I wanted to ask about the store remodels just to followup on some of the other commentary already on the call, 45 to 60 remodels for this year, why is that the number? Is it that you don't feel 100% confident with what the remodels will do or is it more like you a CapEx budget situation, if you can talk more about that that would be terrific?

Ed Wilhelm

Yes, so we talked about the returns in the sales list that we’re driving in these remodels and the program is working. The number is really contagious because of our organizational capabilities. We can't do many more than what we’re assuming and these remodels will be largely frontloaded this year, but there's two times of the year when we can do these, one is in the spring as we are embarking upon now leading up to the back-to-school busy season making sure that they're done before back-to-school.

And then the other is immediately following back-to-school in early fall making sure that we have the time to get those done before holiday ramps up. So between seasonal parts of the year when these can be done and organizational capacity within those times of the year that's when the - that's why we're focusing on the number that we are.

Jay Sole

Got it, thanks Ed.

Operator

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

Christopher Svezia

Thanks for taking my questions. I got a clarification question and then a follow up. I guess Ed for you, earlier there was a question talking about cadence, and you made some comment about tax and incentives comp and D&A are pressuring I think more the second quarter than the third quarter, but you expected EPS declines in each of those quarters. Could you just clarify what you meant by that?

Ed Wilhelm

Yes, what I meant was what you said. So the impacts of tax rate headwinds the depreciation headwinds and incentive compensation headwinds that we talked about are more pronounced in the second quarter and then to a little lesser degree in the third quarter. So in those two quarters in particular as I look at the cadence of our guidance for the year those two quarters will be pressured again more significantly in Q2 to a little lesser degree in Q3.

Outside of that there is nothing else from a cost standpoint, margin standpoint other than what we've already talked about that would affect kind of the EPS comparisons within the quarters.

Christopher Svezia

Okay is it fair to say Q1 would see also declines just because you are still seeing some of those pressure points or no?

Ed Wilhelm

No I didn’t say that, just the Q the ones I called out were Q2 most significantly and to a lesser degree Q3.

Christopher Svezia

Okay, got it. With regard to the gross margin pressure as it relates to apparel how much of the fourth quarter was related to that? And when you think about your footwear business are you at a point right now that you are, your footwear businesses where it needs to be or do you feel like there is still stuff you need to get rid of, move, whatever until you get little bit closer to the back half, without talking about obviously VaporMax talked about? So I'm just curious where you are now on the footwear side.

Ed Wilhelm

Yes, so soft goods did pressure our margins in the fourth quarter, but as Sam talked about it was in line with the expectations. So we expect it coming out of the third quarter some topline and gross margin pressure from soft goods we in fact saw that in the fourth quarter but that was within our expectations.

As we ended the year we ended the year with inventories down 5% and that's down 8% at Finish Line which is where most of the promotional activity occurred. So our inventories are clean. As we finished the year they are lean. As we finished the year and it is a good starting point for us in FY '18 as we know look to drive sales and margin, but also increasing inventory turns, which is an opportunity for us our inventory turns have slipped a bit below three times. We're going to drive our inventory turns back to three times plus which again will help drive some profitability for us as well.

Christopher Svezia

Okay thank you and all the best. I appreciate it.

Sam Sato

Thank you.

Operator

I would now like to turn the call back to the presenters for closing remarks.

Sam Sato

Well, thank you again for joining us this morning. This concludes today's call. We look forward to speaking with you again on our Q1 call in June.

Operator

This concludes today's conference call. You may now disconnect.

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