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Nike malaise dragging down Finish Line, analysts say

August 29, 2017

Analysts on Tuesday said a lack of innovation from The Finish Line Inc.’s chief supplier, Nike Inc., is a big reason the Indianapolis-based shoe and apparel retailer is experiencing swooning sales and a falling stock price.

Investors thrashed Finish Line shares Monday evening and Tuesday morning after the company estimated that per-share profit for the second fiscal quarter, which ended Aug. 26, would be 8 cents to 12 cents—far short of the 37 cents forecast by analysts polled by FactSet.

Sales for the quarter are expected to come in at $470 million, just $7 million less than forecast. But company officials acknowledged in a press release Monday that they achieved those sales through aggressive discounting.

Camilo Lyon, a veteran analyst with Cannaccord Genuity, pointed the finger of blame squarely at Oregon-based Nike, which accounts for some 70 percent of Finish Line’s merchandise purchases.

“We firmly believe that this downturn in the athletic category is product driven, and it starts and ends with NKE,” Lyon said in a report, referring to the shoe giant by its ticker symbol.

“We have seen little to no material innovation from this company in more than two years, with the exception of the Vapor Max [shoe]. To stem its market share losses, NKE pressed Jordan into the market to such an extent that it too has begun slowing at an accelerated pace.”

Jefferies analyst Randal Konik had a similar take, saying that Finish Line and its archrival, Foot Locker, will need to build their turnarounds on shifting their product mix “to brands that are working,” such as Adidas.

Finish Line shares tumbled more than 20 percent in after-hours trading Monday night and rebounded only slightly Tuesday. In early afternoon, the shares were fetching $8.50, down $1.94, or 19 percent from the close of regular trading Monday.

Finish Line told investors after the market’s close Monday that same-store sales tumbled 4.6 percent in the second fiscal quarter and are expected to be below forecasts for the final two quarters of the year. 

The company also announced that its board had unanimously adopted a shareholder-rights plan, also called a poison pill, aimed at thwarting unwanted takeover advances.

“The board believes that it is in the best interests of Finish Line and our shareholders to adopt a shareholder rights plan given the current market conditions and recent share accumulations,” Finish Line Chairman Glenn Lyon said in a statement.

He did not name potential suitors, but United Kingdom-based Sports Direct International has garnered headlines in recent months for scarfing up Finish Line shares.

The company, which operates the United Kingdom's largest sportswear retailer, owns 7.9 percent of Finish Line outright. In addition, it holds 21.7 percent through a form of derivative known as “contract for difference” that’s not available to U.S. investors. In total, it holds a 29.6 percent interest in Finish Line, though it doesn’t have voting rights on the contract-for-difference shares.

Sports Direct has not publicly stated its intentions, though some analysts have speculated that its end-game is to take over Finish Line, which at its current stock price has a market value of about $418 million.

The shareholder-rights plan uses the issuance of rights to purchase preferred stock to prevent an investor that owns less than 12.5 percent of the stock from boosting its stake beyond 12.5 percent. Any shareholder that already has more than a 12.5 percent stake is blocked from buying additional stock.

Such moves often are criticized by corporate governance experts for entrenching existing management. However, in an SEC filing, Finish Line said its board adopted the plan “to protect against any coercive or abusive takeover tactics, and help ensure that the company’s shareholders are not deprived of the opportunity to realize the full and fair value of their investment.”

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