Finish Line Could Recapture Margins In 2H, Says Brean Capital

Brean Capital said Finish Line Inc FINL has significant opportunity to recapture margins in the second half of the year, as the operating margin headwinds begin to subside.

"Given our belief that fulfillment metrics including inventory accuracy and out-of-stock rates have normalized (while cancellation, click-to-door rates have surpassed previous highs), we see 2H as an opportunity for OM re-capture (FY16 OM down nearly -350 bps over last two years) as FINL laps 3Q16 supply chain disruption and inventory growth normalizes, even as some pressures (incentive comp, wages, increased D&A) likely persist," analyst Eric Tracy wrote in a note.

Apart from waning fulfillment headwinds and easing compares, the analyst sees "1) an enhanced in-store experience, 2) more effective digital marketing, and 3) a continued focus on store level productivity" to boost top-line and margins in FY17 and beyond."

Related Link: Finish Lines Q1 Results Show Potential fr Upside in 2ha At the time of writing, shares of Finish Line were down 5.13 percent on the day at $19.40. Tracy has raised the price target on the stock by $2 to $24.

The analyst, who maintained a Buy rating on the stock, mentioned the company's aggressive digital marketing and store closures as "particularly impactful" amid weak mall traffic. In addition, Tracy said Finish Line's lack of international exposure may shield the company from heightened uncertainty following Brexit.

"We are modeling 2Q/FY17 EPS of $0.55/$1.54, with our 2Q estimate $0.09 lower than our previous $0.64, reflecting slightly softer comp assumptions (now modeling +3 percent vs.prior 4 percent), -40bps of GM contraction, and ~100 bps of SG&A de-leverage," Tracy noted.

However, the analyst's FY17 EPS estimate is unchanged at $1.54, based on conservative comp growth of 3.6 percent (vs. guidance for 3–5 percent), gross margin expansion of +70bps, and flat year-over-year SG&A.

Finish Line reported first quarter EPS of $0.23 versus consensus estimate of $0.22 amid against a tough retail backdrop. The company delivered comp growth of +1.5 percent coming against the toughest compare of FY16, as benefits from better allocations by key vendor partners continue to manifest.