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AP
Sector Glance: Sporting-Goods Retailers
Wednesday January 9, 4:32 pm ET
Deteriorating Consumer Spending Seen Hurting Sporting-Goods Retailers, Shares End Lower
NEW YORK (AP) -- Shares of sporting-goods retailers declined on Wednesday, as an analyst lowered her target price on Cabela's Inc. based on fear of a deteriorating consumer landscape.
Cabela's, a direct marketer and retailer of outdoor and hunting gear, said in November third-quarter earnings fell 12 percent due to more promotions and disappointing sales at two stores opened last year.
ADVERTISEMENT
Since then, its share price has slid 36 percent, but Credit Suisse analyst Paul Lejuez said there is more downside to come.
Lejuez said Cabela's is facing both company-specific problems as well as a difficult consumer environment in which customers are pressured to cut spending due to high gas prices, and a weakening housing and credit sector.
He cut his price target to $11 from $17 and kept his "Underperform" rating on the stock.
Shares fell across the sector. One exception was Hibbett Sports Inc., which rose after Sterne Agee analyst Sam Poser initiated the company with a "Buy" rating.
He said he expects Hibbett will be pressured during the first half of fiscal 2009 due to the tough environment, but expects results to improve on better execution by the second half of the year.
Here's how sporting goods retailers fared on Wednesday.
Hibbett, up 85 cents, or 5.2 percent, to $17.22.
Cabela's, down 81 cents, or 5.8 percent, to $13.16.
Finish Line, down 16 cents, or 8.6 percent, to $1.71.
Dicks Sporting Goods Inc., down 72 cents, or 2.6 percent, to $27.49.
Foot Locker Inc., down 23 cents, or 2 percent, to $11.61.
Form 10-Q for FINISH LINE INC /IN/
--------------------------------------------------------------------------------
9-Jan-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as "believe", "expect", "anticipate", "intend", "plan", "foresee", "may", "will", "estimates", "potential", "continue" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, costs, potential liabilities, and other events relating to the Company's Merger Agreement with Genesco and the related litigation; product demand and market acceptance risks; the effect of economic conditions; the effect of competitive products and pricing; the availability of products; management of growth, and the other risks detailed in the Company's Annual Report on Form 10-K for the year ended March 3, 2007 and this Form 10-Q under the heading "Item 1A. Risk Factors." Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
General
The following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition, including Critical Accounting Policies, included in the Company's Annual Report on Form 10-K for the year ended March 3, 2007 (fiscal 2007).
The following table sets forth store and square feet information of the Company by brand for each of the following periods:
Thirteen weeks ended Thirty-nine weeks ended
December 1, November 25, December 1, November 25,
2007 2006 2007 2006
Number of Stores:
Finish Line
Beginning of period 697 672 690 657
Opened 7 21 18 40
Closed (3 ) (1 ) (7 ) (5 )
End of period 701 692 701 692
Man Alive
Beginning of period 95 76 86 51
Opened 1 12 11 37
Closed - - (1 ) -
End of period 96 88 96 88
Paiva
Beginning of period 15 6 13 -
Opened - 6 2 12
Closed (15 ) - (15 ) -
End of period - 12 - 12
Total
Beginning of period 807 754 789 708
Opened 8 39 31 89
Closed (18 ) (1 ) (23 ) (5 )
End of period 797 792 797 792
--------------------------------------------------------------------------------
December 1, 2007 November 25, 2006
Square feet information as of:
Finish Line
Square feet 3,875,297 3,854,382
Average store size 5,528 5,570
Man Alive
Square feet 331,909 287,987
Average store size 3,457 3,273
Paiva
Square feet - 47,087
Average store size - 3,924
Total
Square feet 4,207,206 4,189,456
Results of Operations
The following table sets forth net sales of the Company by major category for
each of the following periods (in thousands):
Thirteen Weeks Ended
December 1, 2007 November 25, 2006
(unaudited) (unaudited)
Category
Footwear $ 203,073 76 % $ 211,663 76 %
Softgoods 65,626 24 % 68,362 24 %
Total $ 268,699 100 % $ 280,025 100 %
Thirty-Nine Weeks Ended
December 1, 2007 November 25, 2006
(unaudited) (unaudited)
Category
Footwear $ 714,697 80 % $ 716,448 79 %
Softgoods 179,712 20 % 189,794 21 %
Total $ 894,409 100 % $ 906,242 100 %
The following table and subsequent discussion sets forth operating data of the Company as a percentage of net sales for the periods indicated below. All amounts reflect the results of the Company's continuing operations unless otherwise noted.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
December 1, November 25, December 1, November 25,
2007 2006 2007 2006
(unaudited) (unaudited)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (including occupancy costs) 74.0 72.1 72.2 70.6
Gross profit 26.0 27.9 27.8 29.4
Selling, general and administrative expenses 31.0 28.9 28.4 26.9
Merger related costs 3.6 - 1.1 -
Operating (loss) income (8.6 ) (1.0 ) (1.7 ) 2.5
Interest income, net 0.1 - 0.1 0.1
(Loss) income from continuing operations before income taxes (8.5 ) (1.0 ) (1.6 ) 2.6
Income tax (benefit) expense (3.4 ) (0.4 ) (0.5 ) 1.0
(Loss) income from continuing operations (5.1 )% (0.6 )% (1.1 )% 1.6 %
--------------------------------------------------------------------------------
Thirteen Weeks Ended December 1, 2007 Compared to Thirteen Weeks Ended November 25, 2006
Consolidated net sales decreased 4.0% to $268.7 million for the thirteen weeks ended December 1, 2007 from $280.0 million for the thirteen weeks ended November 25, 2006. This decrease in net sales was primarily attributable to a 3.6% decrease in comparable store sales for the thirteen weeks ended December 1, 2007. Also, due to the shift of one week in the retail calendar caused by last year's 53-week year, the thirteen weeks ended November 25, 2006 included approximately $6.7 million of additional sales due to an additional week of the Back-to-School selling season. Comparable footwear net sales for the thirteen weeks ended December 1, 2007 decreased approximately 1.6%. Comparable softgood net sales decreased approximately 9.5% for the comparable period. The 1.6% decline in comparable footwear net sales is primarily the result of continued weakness in women's footwear partially offset by men's footwear which was positive for the thirteen weeks ended December 1, 2007. The 9.5% decrease in comparable softgood net sales was primarily due to a continued decline in the urban market related to Man Alive and weakness in Finish Line's men's and women's jackets/outerwear, men's fleece, and hats during the thirteen weeks ended December 1, 2007.
Gross profit for the thirteen weeks ended December 1, 2007 was $69.9 million, a decrease of $8.2 million (10.5%) from $78.1 million for the thirteen weeks ended November 25, 2006. During this same period, gross profit decreased to 26.0% of net sales versus 27.9% for the prior year. This 1.9% decrease as a percentage of net sales was due to a 1.3% increase in occupancy costs as a percentage of net sales and a 0.6% decrease in margin for product sold as a percentage of net sales. The 1.3% increase in occupancy costs as a percentage of net sales was primarily a result of deleveraging due to the 4.0% decline in consolidated net sales for the thirteen weeks ended December 1, 2007. The 0.6% decrease in product margin as a percentage of net sales was due to the promotional retail environment primarily the first month after the Back-to-School selling season to get inventory aligned for the holiday season.
Selling, general and administrative expenses increased $2.3 million (2.9%) to $83.3 million (31.0% of net sales) for the thirteen weeks ended December 1, 2007 from $80.9 million (28.9% of net sales) for the thirteen weeks ended November 25, 2006. The increase is primarily attributable to the operating costs related to operating 17 additional stores (9 net Finish Line stores and 8 net Man Alive stores) at December 1, 2007 compared to November 25, 2006. The 2.1% increase in selling, general and administrative expenses as a percentage of net sales was primarily related to an increase in payroll expense primarily due to deleveraging caused by the negative comparable store net sales along with changes to the store compensation program to remain competitive (1.3%), and an increase in advertising expense related to continued investment in driving direct-to-consumer business as well as continued branding (0.6%).
Merger related costs were $9.7 million (3.6% of net sales) for the thirteen weeks ended December 1, 2007 compared to none for the thirteen weeks ended November 25, 2006. The $9.7 million consisted of $3.2 million of purchase price costs incurred during the thirteen weeks ended December 1, 2007, $2.6 million of legal fees related to the ongoing litigation, $2.4 million of previously deferred costs as of September 1, 2007 that no longer met the threshold for capitalization and $1.5 million in integration expense. Merger related costs will continue in the future until the matter is resolved and these costs may include fees of third parties who may try to recover such fees from the Company under agreements with those third parties. The amount of these ongoing merger related costs cannot currently be reasonably estimated.
Net interest income was $0.2 million for the thirteen weeks ended December 1, 2007 compared to net interest income of zero for the thirteen weeks ended November 25, 2006. The increase of $0.2 was primarily due to higher cash and marketable securities balances during the thirteen weeks ended December 1, 2007 as compared to the thirteen weeks ended November 25, 2006 as well as no short-term borrowings during the thirteen weeks ended December 1, 2007 as compared to net short-term borrowings during the thirteen weeks ended November 25, 2006 of $20.4 million.
--------------------------------------------------------------------------------
The Company's provision for income taxes reflects a benefit of $9.0 million for the thirteen weeks ended December 1, 2007, compared to a benefit of $1.0 million for the thirteen weeks ended November 25, 2006. This $8.0 million change was due to a loss from continuing operations before income taxes of $22.8 million for the thirteen weeks ended December 1, 2007 compared to a loss from continuing operations before income taxes of $2.8 million for the thirteen weeks ended November 25, 2006, along with an increase in the effective tax rate from 37.3% for the thirteen weeks ended November 25, 2006 to 39.6% for the thirteen weeks ended December 1, 2007.
Loss from continuing operations was $13.8 million for the thirteen weeks ended December 1, 2007 compared to loss from continuing operations of $1.8 million for the thirteen weeks ended November 25, 2006. Loss from continuing operations per diluted share was $.29 for the thirteen weeks ended December 1, 2007 compared to loss from continuing operations per diluted share of $.04 for the thirteen weeks ended November 25, 2006. Diluted weighted average shares outstanding were 47.2 million and 46.9 million for the thirteen weeks ended December 1, 2007 and November 25, 2006, respectively.
Thirty-Nine Weeks Ended December 1, 2007 Compared to Thirty-Nine Weeks Ended November 25, 2006
Net sales decreased 1.3%, or $11.8 million, to $894.4 million for the thirty-nine weeks ended December 1, 2007 from $906.2 million for the thirty-nine weeks ended November 25, 2006. This decrease was primarily due to a comparable store net sales decrease of 4.1%, partially offset by an additional $4.0 million from the 2.2% increase in the number of stores open (780 at November 25, 2006 to 797 at December 1, 2007) as well as a $24.2 million increase in net sales from the existing stores open only part of the first thirty-nine weeks of last year. Comparable footwear net sales for the thirty-nine weeks ended December 1, 2007, decreased approximately 1.9%. The 1.9% decline is primarily related to the continued poor performance of women's footwear during the thirty-nine weeks ended December 1, 2007. Comparable softgood net sales decreased approximately 12.8% for the comparable period. The 12.8% decrease in comparable softgood net sales was primarily due to a continued decline in the urban market related to Man Alive and weakness in Finish Line's men's and women's jackets/outerwear and t-shirts, men's fleece, and hats during the thirty-nine weeks ended December 1, 2007.
Gross profit for the thirty-nine weeks ended December 1, 2007 was $248.2 million, a decrease of $17.9 million (6.7%) over the $266.1 million for the thirty-nine weeks ended November 25, 2006. Gross profit was 27.8% of net sales for the thirty-nine weeks ended December 1, 2007 compared to 29.4% for the thirty-nine weeks ended November 25, 2006. This 1.6% decrease as a percentage of net sales was due to a 0.8% increase in occupancy costs as a percentage of net sales and a 0.8% decrease in margin for product sold as a percentage of net sales. The 0.8% increase in occupancy costs as a percentage of net sales was primarily a result of deleveraging due to the 4.1% decrease in comparable store net sales for the thirty-nine weeks ended December 1, 2007. The 0.8% decrease in margin for product sold was primarily related to being more promotional during the thirty-nine weeks ended December 1, 2007 compared to the thirty-nine weeks ended November 25, 2006 due to the Company's efforts to maintain the appropriate inventory mix and levels based on current consumer demand.
Selling, general and administrative expenses increased $9.9 million (4.0%) to $253.4 million (28.4% of net sales) for the thirty-nine weeks ended December 1, 2007 from $243.5 million (26.9% of net sales) for the thirty-nine weeks ended November 25, 2006. The 1.5% increase of selling, general and administrative expenses as a percentage of net sales was primarily related to an increase in payroll expense as a percentage of net sales primarily due to deleveraging caused by the negative comparable store net sales (0.6%), an increase in depreciation expense as a percentage of net sales primarily due to deleveraging caused by the negative comparable store net sales (0.3%) and an increase in advertising expense related to continued investment in driving direct-to-consumer business as well as continued branding (0.3%).
--------------------------------------------------------------------------------
Merger related costs were $9.9 million (1.1% of net sales) for the thirty-nine weeks ended December 1, 2007 compared to none for the thirty-nine weeks ended November 25, 2006. The $9.9 million consisted of $5.6 million of purchase price costs incurred during the thirty-nine weeks ended December 1, 2007 that did not meet the threshold for capitalization, $2.6 million of legal fees related to the ongoing litigation and $1.7 million in integration expense. Merger related costs will continue in the future until the matter is resolved and these costs may include fees of third parties who may try to recover such fees from the Company under agreements with those third parties. The amount of these ongoing merger related costs cannot currently be reasonably estimated.
Net interest income was $0.9 million (0.1% of net sales) for the thirty-nine weeks ended December 1, 2007 and November 25, 2006.
The Company's benefit for federal and state income taxes was $4.6 million (0.5% of net sales) for the thirty-nine weeks ended December 1, 2007 compared to income tax expense of $9.0 million (1.0% of net sales) for the thirty-nine weeks ended November 25, 2006. The $13.6 million change in income taxes is due to a loss from continuing operations before income taxes of $14.1 million for the thirty-nine weeks ended December 1, 2007 compared to income from continuing operations before income taxes of $23.4 million for the thirty-nine weeks ended November 25, 2006 offset partially by additional state tax expense recorded in the thirty-nine weeks ended December 1, 2007 related to specific events occurring during the period.
Loss from continuing operations was $9.5 million for the thirty-nine weeks ended December 1, 2007 compared to income from continuing operations of $14.5 million for the thirty-nine weeks ended November 25, 2006. Loss from continuing operations per diluted share was $.20 for the thirty-nine weeks ended December 1, 2007 compared to income from continuing operations per diluted share of $.30 for the thirty-nine weeks ended November 25, 2006. Diluted weighted average shares outstanding were 47.2 million and 47.9 million for the thirty-nine weeks ended December 1, 2007 and November 25, 2006, respectively.
Liquidity and Capital Resources
The Company used net cash of $22.3 million in its operating activities during the thirty-nine weeks ended December 1, 2007 as compared to net cash used in its operating activities of $22.9 million during the thirty-nine weeks ended November 25, 2006.
Consolidated merchandise inventories were $338.7 million at December 1, 2007 compared to $287.3 million at March 3, 2007 and $356.9 million at November 25, 2006. On a per square foot basis, consolidated merchandise inventories at December 1, 2007 decreased 5.5% compared to November 25, 2006, and were 17.1% higher than at March 3, 2007. The 5.5% decrease was a continued concerted effort by management based on sales trends to continue to align inventory to be better positioned going into holiday season. The 17.1% increase from March 3, 2007 is due to the seasonality of the business and building inventory in November for the holiday season in December, which is consistent with prior years.
The Company had working capital of $236.2 million at December 1, 2007, a decrease of $1.3 million from the working capital of $237.5 million at March 3, 2007.
The Company used net cash of $25.1 and $15.5 million for its investing activities for the thirty-nine weeks ended December 1, 2007 and November 25, 2006, respectively. In the thirty-nine weeks ended December 1, 2007, the $25.1 million was primarily used for constructing new stores and remodeling existing stores.
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At December 1, 2007 the Company had cash and cash equivalents of $14.1 million and no interest bearing debt. Cash equivalents are primarily invested in tax-exempt instruments with daily liquidity. If the Company fails to complete its Merger with Genesco, Genesco is likely to pursue monetary damages against the Company allegedly suffered by Genesco as a result of the Company's failure or inability to complete the Merger. The Company would resist any such claim. If the Chancery Court finds that damages are recoverable by Genesco, the Company will contend that recoverable damages may not include any lost Merger premium, and believes the law supports this position. See discussion of these potential damages under Item 1 of Part II of this Form 10-Q. The Company has no reason to believe, if the Chancery Court finds that damages are recoverable by Genesco, that any damage award likely to be assessed could not be satisfied from its cash on hand and/or commercial credit facilities.
For the year ending March 1, 2008, the Company has opened 18 Finish Line stores and 11 Man Alive stores as well as remodeled 18 existing Finish Line stores and 2 existing Man Alive stores. There are no additional new stores to be opened or planned remodels for either Finish Line or Man Alive for the remainder of fiscal 2008. In addition, the Company has various other corporate projects. The Company expects capital expenditures for the current fiscal year to approximate $27.0 to 30.0 million (excluding the Genesco acquisition discussed in "Genesco Acquisition"). In fiscal 2009, the Company currently plans to open 12-15 new Finish Line stores and no new Man Alive stores. The Company also currently plans to remodel 14-17 Finish Line stores and 2-4 Man Alive stores. Management believes that cash on hand, operating cash flow and the Company's existing $75.0 million bank facility, which expires on February 25, 2010, will provide sufficient capital to complete the Company's current store expansion program and to satisfy the Company's other capital requirements in the foreseeable future (excluding the Genesco acquisition discussed in "Genesco Acquisition").
On July 22, 2004, the Company's Board of Directors approved a stock repurchase program in which the Company is authorized to purchase on the open market or in privately negotiated transactions through December 31, 2007, up to 5,000,000 shares of the Company's outstanding Class A Common Stock. There were no shares repurchased during the thirty-nine weeks ended December 1, 2007. During the thirty-nine weeks ended November 25, 2006, the Company purchased 1,260,017 shares of its Class A Common Stock at an average price of $12.40 per share for an aggregate amount of $15.6 million. As of December 1, 2007, the Company has 2,415,383 shares still available for repurchase under the program.
In determining whether and at what level to declare a dividend, we considered a number of financial factors, including sustainability and financial flexibility, as well as other factors including operating performance and capital resources. In light of the previously announced Agreement and Plan of Merger entered into with Genesco and the costs and uncertainties surrounding the litigation related to that Agreement, the Board of Directors decided to suspend future quarterly dividends beginning with the quarter ended September 1, 2007 until further notice. Further declaration of dividends, if any, remain at the discretion of the Company's Board of Directors.
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Loss from Discontinued Operations
On August 27, 2007, the Board of Directors of the Company approved management's recommendation to proceed with the closure of the Company's Paiva stores. The Company notified affected employees of this decision on August 27, 2007. The decision to take this action resulted from a thorough assessment and analysis, which revealed the concept was not demonstrating the potential necessary to deliver an acceptable long-term return on investment. The Company closed all 15 Paiva stores and online business during the thirteen weeks ended December 1, 2007. The Company records amounts in discontinued operations as required by Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). Paiva's net assets primarily consisted of property and equipment of $14.1 million and $12.0 million and inventory of $3.4 million and $2.1 million as of November 25, 2006 and March 3, 2007, respectively. In accordance with FAS 144, the results of operations of Paiva are classified in discontinued operations for all periods presented. The financial results of the Paiva operations, which are included in discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented, were as follows (in millions):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
December 1, November 25, December 1, November 25,
2007 2006 2007 2006
(unaudited) (unaudited)
Net sales $ 1.6 $ 1.5 $ 7.2 $ 2.9
Loss from discontinued
operations, before income tax
benefit $ (3.6 ) $ (2.0 ) $ (20.3 ) $ (5.2 )
Income tax benefit 1.4 0.8 8.1 2.0
Loss from discontinued
operations, net of income tax
benefit $ (2.2 ) $ (1.2 ) $ (12.2 ) $ (3.2 )
For the thirteen weeks ended December 1, 2007, the loss from discontinued operations of Paiva included operating losses as well as $3.1 million of lease expense resulting from $3.9 million of estimated future rent payments, including estimated lease termination payments, offset by $0.8 million of reversal of step rent liability previously included within "Deferred credits from landlords" on the Consolidated Balance Sheets. For the thirty-nine weeks ended December 1, 2007, the loss from discontinued operations of Paiva included operating losses as well as $11.5 million related to the impairment of long-lived assets and $4.0 million of lease expense resulting from $5.2 million of estimated future rent payments, including estimated lease termination payments, offset by $1.2 million of reversal of step rent and construction allowance liability previously included within "Deferred credits from landlords" on the Consolidated Balance Sheets. For the thirteen and thirty-nine weeks ended November 25, 2006, losses from discontinued operations of Paiva shown in the table above represent operating losses only.
Based on the Company's current estimates as of December 1, 2007, future lease payments, including estimated lease termination payments, are expected to result . . .
AP
Sector Glance: Sporting-Goods Retailers
Wednesday January 9, 4:32 pm ET
Deteriorating Consumer Spending Seen Hurting Sporting-Goods Retailers, Shares End Lower
NEW YORK (AP) -- Shares of sporting-goods retailers declined on Wednesday, as an analyst lowered her target price on Cabela's Inc. based on fear of a deteriorating consumer landscape.
Cabela's, a direct marketer and retailer of outdoor and hunting gear, said in November third-quarter earnings fell 12 percent due to more promotions and disappointing sales at two stores opened last year.
ADVERTISEMENT
Since then, its share price has slid 36 percent, but Credit Suisse analyst Paul Lejuez said there is more downside to come.
Lejuez said Cabela's is facing both company-specific problems as well as a difficult consumer environment in which customers are pressured to cut spending due to high gas prices, and a weakening housing and credit sector.
He cut his price target to $11 from $17 and kept his "Underperform" rating on the stock.
Shares fell across the sector. One exception was Hibbett Sports Inc., which rose after Sterne Agee analyst Sam Poser initiated the company with a "Buy" rating.
He said he expects Hibbett will be pressured during the first half of fiscal 2009 due to the tough environment, but expects results to improve on better execution by the second half of the year.
Here's how sporting goods retailers fared on Wednesday.
Hibbett, up 85 cents, or 5.2 percent, to $17.22.
Cabela's, down 81 cents, or 5.8 percent, to $13.16.
Finish Line, down 16 cents, or 8.6 percent, to $1.71.
Dicks Sporting Goods Inc., down 72 cents, or 2.6 percent, to $27.49.
Foot Locker Inc., down 23 cents, or 2 percent, to $11.61.
Form 10-Q for FINISH LINE INC /IN/
--------------------------------------------------------------------------------
9-Jan-2008
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This quarterly report on Form 10-Q may contain certain statements that we believe are, or may be considered to be, "forward-looking" statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements generally can be identified by use of statements that include phrases such as "believe", "expect", "anticipate", "intend", "plan", "foresee", "may", "will", "estimates", "potential", "continue" or other similar words or phrases. Similarly, statements that describe our objectives, plans or goals also are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, costs, potential liabilities, and other events relating to the Company's Merger Agreement with Genesco and the related litigation; product demand and market acceptance risks; the effect of economic conditions; the effect of competitive products and pricing; the availability of products; management of growth, and the other risks detailed in the Company's Annual Report on Form 10-K for the year ended March 3, 2007 and this Form 10-Q under the heading "Item 1A. Risk Factors." Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this report and we undertake no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
General
The following discussion and analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition, including Critical Accounting Policies, included in the Company's Annual Report on Form 10-K for the year ended March 3, 2007 (fiscal 2007).
The following table sets forth store and square feet information of the Company by brand for each of the following periods:
Thirteen weeks ended Thirty-nine weeks ended
December 1, November 25, December 1, November 25,
2007 2006 2007 2006
Number of Stores:
Finish Line
Beginning of period 697 672 690 657
Opened 7 21 18 40
Closed (3 ) (1 ) (7 ) (5 )
End of period 701 692 701 692
Man Alive
Beginning of period 95 76 86 51
Opened 1 12 11 37
Closed - - (1 ) -
End of period 96 88 96 88
Paiva
Beginning of period 15 6 13 -
Opened - 6 2 12
Closed (15 ) - (15 ) -
End of period - 12 - 12
Total
Beginning of period 807 754 789 708
Opened 8 39 31 89
Closed (18 ) (1 ) (23 ) (5 )
End of period 797 792 797 792
--------------------------------------------------------------------------------
December 1, 2007 November 25, 2006
Square feet information as of:
Finish Line
Square feet 3,875,297 3,854,382
Average store size 5,528 5,570
Man Alive
Square feet 331,909 287,987
Average store size 3,457 3,273
Paiva
Square feet - 47,087
Average store size - 3,924
Total
Square feet 4,207,206 4,189,456
Results of Operations
The following table sets forth net sales of the Company by major category for
each of the following periods (in thousands):
Thirteen Weeks Ended
December 1, 2007 November 25, 2006
(unaudited) (unaudited)
Category
Footwear $ 203,073 76 % $ 211,663 76 %
Softgoods 65,626 24 % 68,362 24 %
Total $ 268,699 100 % $ 280,025 100 %
Thirty-Nine Weeks Ended
December 1, 2007 November 25, 2006
(unaudited) (unaudited)
Category
Footwear $ 714,697 80 % $ 716,448 79 %
Softgoods 179,712 20 % 189,794 21 %
Total $ 894,409 100 % $ 906,242 100 %
The following table and subsequent discussion sets forth operating data of the Company as a percentage of net sales for the periods indicated below. All amounts reflect the results of the Company's continuing operations unless otherwise noted.
Thirteen Weeks Ended Thirty-Nine Weeks Ended
December 1, November 25, December 1, November 25,
2007 2006 2007 2006
(unaudited) (unaudited)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (including occupancy costs) 74.0 72.1 72.2 70.6
Gross profit 26.0 27.9 27.8 29.4
Selling, general and administrative expenses 31.0 28.9 28.4 26.9
Merger related costs 3.6 - 1.1 -
Operating (loss) income (8.6 ) (1.0 ) (1.7 ) 2.5
Interest income, net 0.1 - 0.1 0.1
(Loss) income from continuing operations before income taxes (8.5 ) (1.0 ) (1.6 ) 2.6
Income tax (benefit) expense (3.4 ) (0.4 ) (0.5 ) 1.0
(Loss) income from continuing operations (5.1 )% (0.6 )% (1.1 )% 1.6 %
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Thirteen Weeks Ended December 1, 2007 Compared to Thirteen Weeks Ended November 25, 2006
Consolidated net sales decreased 4.0% to $268.7 million for the thirteen weeks ended December 1, 2007 from $280.0 million for the thirteen weeks ended November 25, 2006. This decrease in net sales was primarily attributable to a 3.6% decrease in comparable store sales for the thirteen weeks ended December 1, 2007. Also, due to the shift of one week in the retail calendar caused by last year's 53-week year, the thirteen weeks ended November 25, 2006 included approximately $6.7 million of additional sales due to an additional week of the Back-to-School selling season. Comparable footwear net sales for the thirteen weeks ended December 1, 2007 decreased approximately 1.6%. Comparable softgood net sales decreased approximately 9.5% for the comparable period. The 1.6% decline in comparable footwear net sales is primarily the result of continued weakness in women's footwear partially offset by men's footwear which was positive for the thirteen weeks ended December 1, 2007. The 9.5% decrease in comparable softgood net sales was primarily due to a continued decline in the urban market related to Man Alive and weakness in Finish Line's men's and women's jackets/outerwear, men's fleece, and hats during the thirteen weeks ended December 1, 2007.
Gross profit for the thirteen weeks ended December 1, 2007 was $69.9 million, a decrease of $8.2 million (10.5%) from $78.1 million for the thirteen weeks ended November 25, 2006. During this same period, gross profit decreased to 26.0% of net sales versus 27.9% for the prior year. This 1.9% decrease as a percentage of net sales was due to a 1.3% increase in occupancy costs as a percentage of net sales and a 0.6% decrease in margin for product sold as a percentage of net sales. The 1.3% increase in occupancy costs as a percentage of net sales was primarily a result of deleveraging due to the 4.0% decline in consolidated net sales for the thirteen weeks ended December 1, 2007. The 0.6% decrease in product margin as a percentage of net sales was due to the promotional retail environment primarily the first month after the Back-to-School selling season to get inventory aligned for the holiday season.
Selling, general and administrative expenses increased $2.3 million (2.9%) to $83.3 million (31.0% of net sales) for the thirteen weeks ended December 1, 2007 from $80.9 million (28.9% of net sales) for the thirteen weeks ended November 25, 2006. The increase is primarily attributable to the operating costs related to operating 17 additional stores (9 net Finish Line stores and 8 net Man Alive stores) at December 1, 2007 compared to November 25, 2006. The 2.1% increase in selling, general and administrative expenses as a percentage of net sales was primarily related to an increase in payroll expense primarily due to deleveraging caused by the negative comparable store net sales along with changes to the store compensation program to remain competitive (1.3%), and an increase in advertising expense related to continued investment in driving direct-to-consumer business as well as continued branding (0.6%).
Merger related costs were $9.7 million (3.6% of net sales) for the thirteen weeks ended December 1, 2007 compared to none for the thirteen weeks ended November 25, 2006. The $9.7 million consisted of $3.2 million of purchase price costs incurred during the thirteen weeks ended December 1, 2007, $2.6 million of legal fees related to the ongoing litigation, $2.4 million of previously deferred costs as of September 1, 2007 that no longer met the threshold for capitalization and $1.5 million in integration expense. Merger related costs will continue in the future until the matter is resolved and these costs may include fees of third parties who may try to recover such fees from the Company under agreements with those third parties. The amount of these ongoing merger related costs cannot currently be reasonably estimated.
Net interest income was $0.2 million for the thirteen weeks ended December 1, 2007 compared to net interest income of zero for the thirteen weeks ended November 25, 2006. The increase of $0.2 was primarily due to higher cash and marketable securities balances during the thirteen weeks ended December 1, 2007 as compared to the thirteen weeks ended November 25, 2006 as well as no short-term borrowings during the thirteen weeks ended December 1, 2007 as compared to net short-term borrowings during the thirteen weeks ended November 25, 2006 of $20.4 million.
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The Company's provision for income taxes reflects a benefit of $9.0 million for the thirteen weeks ended December 1, 2007, compared to a benefit of $1.0 million for the thirteen weeks ended November 25, 2006. This $8.0 million change was due to a loss from continuing operations before income taxes of $22.8 million for the thirteen weeks ended December 1, 2007 compared to a loss from continuing operations before income taxes of $2.8 million for the thirteen weeks ended November 25, 2006, along with an increase in the effective tax rate from 37.3% for the thirteen weeks ended November 25, 2006 to 39.6% for the thirteen weeks ended December 1, 2007.
Loss from continuing operations was $13.8 million for the thirteen weeks ended December 1, 2007 compared to loss from continuing operations of $1.8 million for the thirteen weeks ended November 25, 2006. Loss from continuing operations per diluted share was $.29 for the thirteen weeks ended December 1, 2007 compared to loss from continuing operations per diluted share of $.04 for the thirteen weeks ended November 25, 2006. Diluted weighted average shares outstanding were 47.2 million and 46.9 million for the thirteen weeks ended December 1, 2007 and November 25, 2006, respectively.
Thirty-Nine Weeks Ended December 1, 2007 Compared to Thirty-Nine Weeks Ended November 25, 2006
Net sales decreased 1.3%, or $11.8 million, to $894.4 million for the thirty-nine weeks ended December 1, 2007 from $906.2 million for the thirty-nine weeks ended November 25, 2006. This decrease was primarily due to a comparable store net sales decrease of 4.1%, partially offset by an additional $4.0 million from the 2.2% increase in the number of stores open (780 at November 25, 2006 to 797 at December 1, 2007) as well as a $24.2 million increase in net sales from the existing stores open only part of the first thirty-nine weeks of last year. Comparable footwear net sales for the thirty-nine weeks ended December 1, 2007, decreased approximately 1.9%. The 1.9% decline is primarily related to the continued poor performance of women's footwear during the thirty-nine weeks ended December 1, 2007. Comparable softgood net sales decreased approximately 12.8% for the comparable period. The 12.8% decrease in comparable softgood net sales was primarily due to a continued decline in the urban market related to Man Alive and weakness in Finish Line's men's and women's jackets/outerwear and t-shirts, men's fleece, and hats during the thirty-nine weeks ended December 1, 2007.
Gross profit for the thirty-nine weeks ended December 1, 2007 was $248.2 million, a decrease of $17.9 million (6.7%) over the $266.1 million for the thirty-nine weeks ended November 25, 2006. Gross profit was 27.8% of net sales for the thirty-nine weeks ended December 1, 2007 compared to 29.4% for the thirty-nine weeks ended November 25, 2006. This 1.6% decrease as a percentage of net sales was due to a 0.8% increase in occupancy costs as a percentage of net sales and a 0.8% decrease in margin for product sold as a percentage of net sales. The 0.8% increase in occupancy costs as a percentage of net sales was primarily a result of deleveraging due to the 4.1% decrease in comparable store net sales for the thirty-nine weeks ended December 1, 2007. The 0.8% decrease in margin for product sold was primarily related to being more promotional during the thirty-nine weeks ended December 1, 2007 compared to the thirty-nine weeks ended November 25, 2006 due to the Company's efforts to maintain the appropriate inventory mix and levels based on current consumer demand.
Selling, general and administrative expenses increased $9.9 million (4.0%) to $253.4 million (28.4% of net sales) for the thirty-nine weeks ended December 1, 2007 from $243.5 million (26.9% of net sales) for the thirty-nine weeks ended November 25, 2006. The 1.5% increase of selling, general and administrative expenses as a percentage of net sales was primarily related to an increase in payroll expense as a percentage of net sales primarily due to deleveraging caused by the negative comparable store net sales (0.6%), an increase in depreciation expense as a percentage of net sales primarily due to deleveraging caused by the negative comparable store net sales (0.3%) and an increase in advertising expense related to continued investment in driving direct-to-consumer business as well as continued branding (0.3%).
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Merger related costs were $9.9 million (1.1% of net sales) for the thirty-nine weeks ended December 1, 2007 compared to none for the thirty-nine weeks ended November 25, 2006. The $9.9 million consisted of $5.6 million of purchase price costs incurred during the thirty-nine weeks ended December 1, 2007 that did not meet the threshold for capitalization, $2.6 million of legal fees related to the ongoing litigation and $1.7 million in integration expense. Merger related costs will continue in the future until the matter is resolved and these costs may include fees of third parties who may try to recover such fees from the Company under agreements with those third parties. The amount of these ongoing merger related costs cannot currently be reasonably estimated.
Net interest income was $0.9 million (0.1% of net sales) for the thirty-nine weeks ended December 1, 2007 and November 25, 2006.
The Company's benefit for federal and state income taxes was $4.6 million (0.5% of net sales) for the thirty-nine weeks ended December 1, 2007 compared to income tax expense of $9.0 million (1.0% of net sales) for the thirty-nine weeks ended November 25, 2006. The $13.6 million change in income taxes is due to a loss from continuing operations before income taxes of $14.1 million for the thirty-nine weeks ended December 1, 2007 compared to income from continuing operations before income taxes of $23.4 million for the thirty-nine weeks ended November 25, 2006 offset partially by additional state tax expense recorded in the thirty-nine weeks ended December 1, 2007 related to specific events occurring during the period.
Loss from continuing operations was $9.5 million for the thirty-nine weeks ended December 1, 2007 compared to income from continuing operations of $14.5 million for the thirty-nine weeks ended November 25, 2006. Loss from continuing operations per diluted share was $.20 for the thirty-nine weeks ended December 1, 2007 compared to income from continuing operations per diluted share of $.30 for the thirty-nine weeks ended November 25, 2006. Diluted weighted average shares outstanding were 47.2 million and 47.9 million for the thirty-nine weeks ended December 1, 2007 and November 25, 2006, respectively.
Liquidity and Capital Resources
The Company used net cash of $22.3 million in its operating activities during the thirty-nine weeks ended December 1, 2007 as compared to net cash used in its operating activities of $22.9 million during the thirty-nine weeks ended November 25, 2006.
Consolidated merchandise inventories were $338.7 million at December 1, 2007 compared to $287.3 million at March 3, 2007 and $356.9 million at November 25, 2006. On a per square foot basis, consolidated merchandise inventories at December 1, 2007 decreased 5.5% compared to November 25, 2006, and were 17.1% higher than at March 3, 2007. The 5.5% decrease was a continued concerted effort by management based on sales trends to continue to align inventory to be better positioned going into holiday season. The 17.1% increase from March 3, 2007 is due to the seasonality of the business and building inventory in November for the holiday season in December, which is consistent with prior years.
The Company had working capital of $236.2 million at December 1, 2007, a decrease of $1.3 million from the working capital of $237.5 million at March 3, 2007.
The Company used net cash of $25.1 and $15.5 million for its investing activities for the thirty-nine weeks ended December 1, 2007 and November 25, 2006, respectively. In the thirty-nine weeks ended December 1, 2007, the $25.1 million was primarily used for constructing new stores and remodeling existing stores.
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At December 1, 2007 the Company had cash and cash equivalents of $14.1 million and no interest bearing debt. Cash equivalents are primarily invested in tax-exempt instruments with daily liquidity. If the Company fails to complete its Merger with Genesco, Genesco is likely to pursue monetary damages against the Company allegedly suffered by Genesco as a result of the Company's failure or inability to complete the Merger. The Company would resist any such claim. If the Chancery Court finds that damages are recoverable by Genesco, the Company will contend that recoverable damages may not include any lost Merger premium, and believes the law supports this position. See discussion of these potential damages under Item 1 of Part II of this Form 10-Q. The Company has no reason to believe, if the Chancery Court finds that damages are recoverable by Genesco, that any damage award likely to be assessed could not be satisfied from its cash on hand and/or commercial credit facilities.
For the year ending March 1, 2008, the Company has opened 18 Finish Line stores and 11 Man Alive stores as well as remodeled 18 existing Finish Line stores and 2 existing Man Alive stores. There are no additional new stores to be opened or planned remodels for either Finish Line or Man Alive for the remainder of fiscal 2008. In addition, the Company has various other corporate projects. The Company expects capital expenditures for the current fiscal year to approximate $27.0 to 30.0 million (excluding the Genesco acquisition discussed in "Genesco Acquisition"). In fiscal 2009, the Company currently plans to open 12-15 new Finish Line stores and no new Man Alive stores. The Company also currently plans to remodel 14-17 Finish Line stores and 2-4 Man Alive stores. Management believes that cash on hand, operating cash flow and the Company's existing $75.0 million bank facility, which expires on February 25, 2010, will provide sufficient capital to complete the Company's current store expansion program and to satisfy the Company's other capital requirements in the foreseeable future (excluding the Genesco acquisition discussed in "Genesco Acquisition").
On July 22, 2004, the Company's Board of Directors approved a stock repurchase program in which the Company is authorized to purchase on the open market or in privately negotiated transactions through December 31, 2007, up to 5,000,000 shares of the Company's outstanding Class A Common Stock. There were no shares repurchased during the thirty-nine weeks ended December 1, 2007. During the thirty-nine weeks ended November 25, 2006, the Company purchased 1,260,017 shares of its Class A Common Stock at an average price of $12.40 per share for an aggregate amount of $15.6 million. As of December 1, 2007, the Company has 2,415,383 shares still available for repurchase under the program.
In determining whether and at what level to declare a dividend, we considered a number of financial factors, including sustainability and financial flexibility, as well as other factors including operating performance and capital resources. In light of the previously announced Agreement and Plan of Merger entered into with Genesco and the costs and uncertainties surrounding the litigation related to that Agreement, the Board of Directors decided to suspend future quarterly dividends beginning with the quarter ended September 1, 2007 until further notice. Further declaration of dividends, if any, remain at the discretion of the Company's Board of Directors.
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Loss from Discontinued Operations
On August 27, 2007, the Board of Directors of the Company approved management's recommendation to proceed with the closure of the Company's Paiva stores. The Company notified affected employees of this decision on August 27, 2007. The decision to take this action resulted from a thorough assessment and analysis, which revealed the concept was not demonstrating the potential necessary to deliver an acceptable long-term return on investment. The Company closed all 15 Paiva stores and online business during the thirteen weeks ended December 1, 2007. The Company records amounts in discontinued operations as required by Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("FAS 144"). Paiva's net assets primarily consisted of property and equipment of $14.1 million and $12.0 million and inventory of $3.4 million and $2.1 million as of November 25, 2006 and March 3, 2007, respectively. In accordance with FAS 144, the results of operations of Paiva are classified in discontinued operations for all periods presented. The financial results of the Paiva operations, which are included in discontinued operations in the accompanying Consolidated Statements of Operations for all periods presented, were as follows (in millions):
Thirteen Weeks Ended Thirty-Nine Weeks Ended
December 1, November 25, December 1, November 25,
2007 2006 2007 2006
(unaudited) (unaudited)
Net sales $ 1.6 $ 1.5 $ 7.2 $ 2.9
Loss from discontinued
operations, before income tax
benefit $ (3.6 ) $ (2.0 ) $ (20.3 ) $ (5.2 )
Income tax benefit 1.4 0.8 8.1 2.0
Loss from discontinued
operations, net of income tax
benefit $ (2.2 ) $ (1.2 ) $ (12.2 ) $ (3.2 )
For the thirteen weeks ended December 1, 2007, the loss from discontinued operations of Paiva included operating losses as well as $3.1 million of lease expense resulting from $3.9 million of estimated future rent payments, including estimated lease termination payments, offset by $0.8 million of reversal of step rent liability previously included within "Deferred credits from landlords" on the Consolidated Balance Sheets. For the thirty-nine weeks ended December 1, 2007, the loss from discontinued operations of Paiva included operating losses as well as $11.5 million related to the impairment of long-lived assets and $4.0 million of lease expense resulting from $5.2 million of estimated future rent payments, including estimated lease termination payments, offset by $1.2 million of reversal of step rent and construction allowance liability previously included within "Deferred credits from landlords" on the Consolidated Balance Sheets. For the thirteen and thirty-nine weeks ended November 25, 2006, losses from discontinued operations of Paiva shown in the table above represent operating losses only.
Based on the Company's current estimates as of December 1, 2007, future lease payments, including estimated lease termination payments, are expected to result . . .
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