Finish Line Inc. Earnings Call Nuggets: Promotional Shift, Same-Store Sales

On Friday, Finish Line Inc (NASDAQ:FINL) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Here’s what insider executives shared.

Promotional Shift

Jeff Van Sinderen – B Riley: Let me say congratulations. You guys have really done pretty consistently what you said you would do. I wondered if you just give us more color on the promotional shift and how much that’s impacting gross margin, how much of that I guess is 30% expected EPS decline in Q1 and then how much is due to kind of the investments that you’re making in the business and also how much did occupancy deleverage, maybe we can start there?

Samuel M. Sato – President and Chief Merchandising Officer: I’ll address the first part of your question and then I will turn over the factual information to Ed. As you know, we’ve got three major clearance events a year, and typically the first clearance event of the season occurs in the first week of our second quarter, with the 53rd week shift from this fiscal year we just ended. It moves it into the last two weeks of our Q1, so the historical number from a gross margin perspective is higher due to the markdown cycle occurring historically in Q2.

Edward W. Wilhelm – CFO: When you think about the rest of the year than Jeff, we’re looking at product margins for the rest of the year that are going to be flat to up slightly compared to the prior year. In terms of the SG&A deleverage in Q1, it’s driven by the strategic investing and we’ve got a little higher proportion that’s hitting us in Q1, as we are planning and spending money to plan for a lot of the systems investments and rollouts that we are doing and that’s more operating expenses related as opposed to a capitalizable item. Secondly, if you remember, we started ramping up our strategic investing in the back half of last year, and we did very little in the first quarter of last year. So, this first quarter comparison is the one that will show the highest deleverage on the SG&A side or highest increase in SG&A dollars relative to LY, and again, as we start to work our way through the year, the increases become smaller on a quarterly basis resulting from the strategic investing that we’re doing. Then, the third element that we talked about is occupancy, and again, our strategy here is shifting. If you remember, the last several years, we’ve done a very good job in bringing occupancy cost down through lease renegotiations, we’ve closed the lot of underperforming stores, and frankly, today, have a store base today that’s as profitable as any retailer out there. We have a handful only of stores that lose money on a four-wall basis, so we’ve got a very profitable group of stores. What we’re doing strategically now is we’re looking to lock in longer term leases for our best performing stores. As a result of that, you are going to start to see our occupancy costs tick up and you saw that start in our fourth quarter when occupancy costs were up 3%. For this full year, we’re looking at occupancy cost in dollars that are going to be up mid single-digits, and that’s going to occur every quarter that we’ve got this year, but the benefit there, obviously, is taking our best performing stores and locking them in at today’s lease rates which we think are as favorable as we’re going to get.

Jeff Van Sinderen – B Riley: Then as a follow-up to that, where do you stand on store closures this year?

Edward W. Wilhelm – CFO: For the year that’s coming up, we’re expecting to close 10 to 20 and that is a moving target and that will depend a lot on our ability to move occupancy costs for stores that we look to close, but maybe the landlord will help us. So, again, what we’re estimating for this upcoming year closures of 10 to 20 and then openings of 25 to 30. So, again, this will be the first year in a long time that will be a net store opened.

Jeff Van Sinderen – B Riley: Then maybe we can shift to talk a little bit about the Gart partnership, what prompted that and then, how you’re thinking about it in terms of moving the headquarters for that segment to Denver, and I guess where you stand on making additional acquisition there, and also how will that segment be treated in the P&L going forward?

Glenn S. Lyon – Chairman and CEO: This is Glenn and I’ll give you the vision of this thing. First of all, these guys know how to do this. They’ve done the rollup business. You know that that is unto itself the type of a growth scenario that having the experience can only help us. The other thing that we thought about here was speed. The opportunity to be leaders in this market will dictate because others will join and others will play, but we think we’re out there first, we wanted to be most aggressive, and it gives me the most confident knowing I have these strong partners who know the business, know the game, are highly motivated to grow rapidly and that’s what motivated us to make this decision.

Edward W. Wilhelm – CFO: In the terms of the P&L, Jeff, in (speed), I’ll reiterate what Glenn is saying is critical, because EPS dilution of $0.01 to $0.02 this year is being driven by the fact that we just not earn its scale with this business. To get stores open faster and more effectively will get us to profitability sooner rather than later. Right now we’re looking at probably FY ’15 when this business will turn profitable for us. In terms of the P&L we will have majority ownership of this business, so we’ll consolidate the results into our P&L, and then there will be a minority interest giveback if you will, to reduce the results for the portion that the Garts will own.

Jeff Van Sinderen – B Riley: Then may be just one more question then I’ll let someone else jump in, but obviously you’re investing a lot in Omni-Channel and digital. Maybe you can just talk about some of the new things that we’ll see. I know you’ve got a new store prototype and may be just how some of that technology will work and how it will start to impact your business and so forth?

Steven J. Schneider – President and COO: Jeff, this is Steve. I think we’re really starting from the back of the store and also on the e-commerce side, almost like in the stores we’re totally redoing it, because we’re in the process of putting T1 lines in all the stores. We are going to replace all the registers, the printers, the payment devices, handhelds will be put in the stores by holiday while tablets, and there will be some other technology that people will learn about in our Investor Day. So it’s going to be a totally different experience in the store, and we’re trying to approach it, as if the customer is holding a mobile device in the middle of our store, and inquiring. Whether they are inquiring through the Internet or they are – whatever they are doing socializing and taking pictures. We’re trying to devise the experience around that customer. We think we are making a lot of progress – that’s the word I’m looking for. But I think it’s a big investment. It’s a lot of work, but that’s where we are going to start. We’re also looking at changing all of our supply chain and our core merchandise system as well as CRM systems, all circle around this Omni-Channel, and I will let Sam talk a little bit about the digital side of the business.

Samuel M. Sato – President and Chief Merchandising Officer: Jeff, the biggest is the way we are working towards a much more robust integrated technology platform. So from a digital perspective, we are doing a couple of things in terms of investments. First, from a human capital standpoint, we are investing against capabilities and expertise that we haven’t had in the past. For instance, as this business continues to grow, and the need for a much more – or a much richer technology and product experience, we are investing against digital specific creative teams, merchandising teams, as well as a whole social media group that will focus on engaging and developing relationships with the customer. From a technological standpoint, we are investing against usability and functionality, and really it’s about how are we able to create real time experiences, and make the engagement with our customers, not only seamless and transparent, but really convenient and easy. It’s a lot of heavy lifting, but its foundational requirements that we know we have got to put in place, in order for us to scale longer term.

Glenn S. Lyon – Chairman and CEO: Let me just sum this up. We have 3.5 million square feet out in the malls. We will have less visitors in those stores over the coming years. Omni-Channel has nothing to do with either-or, it’s about all. It’s about a customer coming into the store and having a better experience in whether they want to do business digitally, or through the cash register, doesn’t matter. But if we don’t provide that, I believe we become a dinosaur. So, we’ve got to set these stores up to be more of an asset, as we own the leases and we own the square footage, and by the way, we’ll work with the landlords to enhance all of this, and I think the landlord so far in our meetings with them have embraced us along with our brand partners as well. So, we’re getting a lot of traction with our business partners on this, and it’s not either/or, and that’s we call it omni and not cross-channel and not multichannel, it’s omni.

Jeff Van Sinderen – B Riley: Good luck this quarter.

Edward W. Wilhelm – CFO: Thanks, Jeff.

Same-Store Sales

Robby Ohmes – Bank of America: Couple of questions. Glenn, I think this is maybe a broader question. You’re budgeting a mid single-digit comp for this year. I think you guys said you’re tracking about 10% into this first quarter here. You’re making all these investments. Hypothetically, if you did a 10% comp for the first quarter, should we expect – or for the fiscal year, should we expect upside to the guidance you’re giving, or should we expect sort of a pattern of spending in to upside the same-store sales? It’s an important question because I think even looking at the quarter you just reported, you can make an argument that the same-store sales are much better than probably budgeted by you guys, and it’s being spent into. So, should we as investors sort of take this upcoming fiscal year, and say, they’ve given us a target EPS number and they’re going to manage to that EPS number even if you got significant same-store sales upside on the momentum of the cycle. That would be my first question.

Glenn S. Lyon – Chairman and CEO: Well. So, Robby, I mean obviously the variable costs that go with higher sales, if indeed these strategies that we put in place enable us to perform at higher levels, which at currently they are, then the variable costs will go up, but the fixed costs – we’ve made a plan, and we’ve dug it, and you can see that these capital investments, these people investments; those die as cash. So, we don’t need more people or more technology and we hope that the productivity is higher. But the reality is we built the model around the mid single-digit increase, with a big piece of that coming out digital, although store numbers you can see running well. Without traffic being up – traffic in our stores have been up a little up, traffic in the malls continue to be down. So, I think it would be irresponsible for us to project too much change in that as we go through time. I think that’s a sea-change. So, we’re seeing traffic in digital, we’re going to continue to invest in it, we want to lead. I hope that answered it for you, Robby.

Robby Ohmes – Bank of America: It does a little bit. I still am trying to get at whether if the stores end up contributing more than you’re expecting this year. Whether you would up or accelerate your investments into that, so you shouldn’t expect to see EPS upside if the same-store sales are significantly higher than your budget. But my second question is related to the occupancy going up. You’ve got 3.5 million square feet. You expect less visitors; I think is what you said earlier, but now you’re locking in long-term leases in an environment where you’re expecting less visitors in the malls. Can you sort of rectify to me that sort of conflicting thinking, why you would be locking in more expensive longer term leases if you think malls are going to have negative traffic going forward and everything is going to digital?

Steven J. Schneider – President and COO: Robby, it’s Steve. I would tell you, as we look at our traffic within our stores, the A and B malls are still seeing traffic increase. It’s the C and D malls that are not. Really what we’re trying to lock in the longer term deals are on the A and B malls, which will provide more expense to us. But we feel we’re optimistic there. Overall our business in general has been good, and a number of our leases are variable as well. So as the sales go up, you pay more in dollars there as well. Then on the terms of number of stores, I think Ed said 25 to 30 new stores. We feel optimistic that that number is certainly able to be gotten and maybe more, but we will see; and then we’re optimistic that maybe we don’t close 20 stores. As Ed said, we’re down to I think it’s even less than 10 stores that don’t make money on its overall basis, but it’s a very small number. We have closed 72 stores in the last three fiscal years, so that’s over 10% on the base. So we’ve really rationalized our store base and feel very good about where we are with the existing stores, and we’ve gone through the last three years of working with our landlords to develop some pretty good occupancy deals that quite frankly as business continues to be better and those roll off, because we had a lot of one year or two year tick outs that we moved out. Now you’re getting to a part where you have to make some decisions. So you go out longer with those or you just keep them on a low percentage rent deal and depending on how they are feeling, more times than not, we’re feeling better. So we’re locking a little bit longer term. So that’s kind of in a nutshell why we feel like the occupancy is going to be going up, but we also believe there’s going to be related sales increase too.

To contact the reporter on this story: Lindsey Grossman at staff.writers@wallstcheatsheet.com

To contact the editor responsible for this story: Damien Hoffman at editors@wallstcheatsheet.com