Finish Line Lowers Outlook on Margin Pressure -- 2nd Update

By Chelsey Dulaney 

Finish Line Inc. shares sank to their lowest level in more than a year on Friday after the sporting-apparel retailer warned that it, too, is feeling the impact of a tepid retail environment.

Finish Line lowered its earnings outlook for the year on intense margin pressures, announcing that it would cut spending to protect profitability until the current pricing environment improves.

Sporting-apparel retailers have been a bright spot in a dismal retailing environment characterized by weak traffic and aggressive discounting. Finish Line's warning Friday that it is struggling to sell merchandise at full price indicates a reversal of that trend.

Finish Line shares fell 21% to $22.91 in afternoon trading Friday and, paired with Nike Inc.'s lackluster quarterly report on Thursday, helped send other sports retailers shares down with it. Foot Locker Inc. shares fell 7.9%, while Hibbett Sports Inc. fell 2.2%.

On a call with analysts Friday, Finish Line Chief Executive Glenn Lyon said the company is struggling to keep up with customer's demand for a steady stream of new products. The company's inventory was up 10.6% in the quarter, leading the company to ramp up discounts at the cost of its margins.

Gross margin narrowed to 28.2% from 29.6% a year earlier, as the company cut prices on slow-moving basketball inventory that had built up in the previous quarter. Some of Nike's Jordan brand styles--typically hot sellers in its basketball category--failed to resonate with customers.

Company executives warned Friday that the squeeze on the retailer's margins are likely to continue in the near-term as the company works through stale inventory.

Friday's disappointing outlook came as Finish Line posted a surprise loss of 2 cents a share in the quarter ended Nov. 29, excluding a tax benefit and other one-time items. Analysts polled by Thomson Reuters had expected a per-share profit of a penny.

Same-store sales improved from the previous quarter, increasing 4.5% as sales of key Nike products remained strong.

Overall, the company posted earnings of $2.58 million, up from $2.32 million a year earlier. Sales grew 8.6% to $395.8 million, topping analysts' expectations for $390.95 million in revenue.

For the year ending Feb. 28, Finish Line said it now expects its per-share earnings to be flat, compared with its previous expectations for earnings growth in the high single to low double digits.

Write to Chelsey Dulaney at [e-mail]

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