Analysis: The Finish Line stumbles
While Finish Line notched up reasonable overall sales growth in its third quarter, this has been overshadowed by both very weak comparables and an almost doubling of net losses to $40.4 million.
Overall, the results are markedly worse than last quarter when total sales grew by 5.4%, aided by a 5.1% growth in comparables.
This softening comes over a period when many footwear, apparel, and sports retailers saw sales strengthen thanks to improved consumer sentiment and softer prior year comparatives. Unfortunately these tailwinds do not seem to have blown in favor of Finish Line. Especially so for apparel and soft lines which deteriorated sharply over the quarter.
Fortunately the core footwear business, and the shop-in-shops within Macy’s, have performed better. The latter is a particular success story, especially given Macy’s general challenges with customer traffic over the period. Even so, neither was sufficient to offset the weaknesses in other parts of the business. In our view, this was driven by two main factors.
The first of these is the high level of promotional activity last quarter. As much as this was a necessary evil to clear down inventory, and as much as it aided sales volumes, there is no doubt that it pulled forward some sales that may otherwise have happened in the third quarter. Fortunately this should prove to be a one-off blip, and consumer demand should start to rebuild in the final quarter and beyond.
The second is the much tougher competition on the apparel front. This is now a fairly saturated segment of the market with players like Under Armour – through its own stores – building up traction and recognition with consumers. While we would not argue that this has made Finish Line’s soft business irrelevant, we maintain that it needs to be much more strongly differentiated in order to compete and grow. To be fair, Finish Line has done some work in strengthening its assortment, but more work is needed – especially to shift the perception of it being a destination for sports apparel as much as it is for sports footwear.
The new format, which continues to be rolled out, will also help Finish Line compete better with other sports specialists. Sales trends for the stores that have been converted are more favorable than the rest of the estate, and from our data customer conversions and average transaction values are better. While 50 stores will be converted this year, the pace of refresh will need to be accelerated for this work to have a material impact on the top line.
This refresh will come at a cost and needs to be accompanied by strong comparable growth to keep Finish Line in the black. The current savings initiatives being pursued will also help longer term. However, thanks to this quarter’s weak performance, this fiscal will be a meagre one in terms of profit.
Neil Saunders is the CEO of retail research and consulting firm Conlumino.