Finish Line's Q1 Results Show Potential For Upside In 2H

The company's Q1 EPS of $0.23 beat Canaccord's $0.20 estimate (consensus was $0.22), as a softer comp (+1.5 percent vs. Canaccord's 3 percent estimate) and gross margin was more than offset by strong expense controls, an aggressive buyback and favorable tax rate.

"FINL's Q1 result was another step in the right direction as an improving product assortment (both in brand and category), a stabilizing supply chain, and a focus on basic blocking and tackling is setting up the 2H for an earnings recovery," analyst Camilo Lyon wrote in a note.

Related Link: Finish Line's First Quarter Reviewed By Barclays

Lyon, who maintains a Buy rating and $25 price target on the stock, expects gross margin to expand in the second half, driven by more full-price selling (better assortment) and easier comparisons (particularly in the third quarter).

"We believe management's strategic focus on more consistent execution across all aspects of its business will start paying dividends in 2H," Lyon added.

Lyon Is Bullish

Here is why Lyon is bullish on the stock:

1. "Increasing exposure to Under Armour Inc UA and adidas AG (ADR) ADDYY."
2. "Strong momentum/product pipeline in Adidas (Superstar/Stan Smith in classics, Kanye increator/influencer, Ultra Boost in performance, and NMD in innovation) and UnderArmour (Curry sell-throughs are exceptional)."
3. "Emergence of a broader momentum in running, which could signal a trend shift in FINL's favor (solid Nike Free RN sell-throughs)."
4. "FINL is less exposed to the slowing parts of basketball (i.e. Nike's signature basketball), as Jordan comprises the vast majority of the category (75 percent–80 percent)."

Furthermore, Lyon highlighted, "Q1 trends have continued in Q2 with casual and retro running performing well as basketball continues decelerating (with the exception of UA's Curry and Brand Jordan). The company reported Q2 QTD comp of +LSD and given the tough prior year comparison (+7.9 percent in June), we believe it is a good start."

Given the challenging macro environment, the company maintained full-year guidance of 3–5 percent comp growth and $1.50–$1.56 EPS. The analyst still believes there is potential for upside versus the guidance.

At the time of writing, shares of Finish Line were down 5.43 percent at $19.34 on the day.