Finish Line's Quarterly Pre-Announcement Complicates Footwear Story As Analysts Revisit Sector

Finish Line Inc FINL's surprising second-quarter preliminary earnings release resulted in some analysts throwing in the towel, but Baird Equity Research's Jonathan Komp is sticking with his Neutral rating. The price target has, however, been lowered from $15 to $8.

Finish Line's announcement was a "tough pill to swallow" although not entirely surprising given weakness in other footwear retailers, Komp said. But investors should remain "reasonably confident" that the company's brand positioning and long-term growth profile remain in place.

However, investors are also justified in wanting to see signs of sustained improvement in the company's financial performance and execution to prove it can recover lost margins, the analyst continued. Should this be accomplished, Finish Line may return to consistent and sustainable growth.

Meanwhile, Finish Line's balance sheet remains "reasonably healthy" and is highlighted by around $2 per share in cash and expectations for a positive free cash flow this year, Komp added. But this may not matter for investors after the earnings pre-announcement, as many metrics of valuation don't matter anymore. Finish Line also needs to show a comp recover after fiscal 2018 in order to remain a profitable company.

Finally, the analyst's revised price target of $8 implies a next-twelve-month P/E multiple of 13x which is below the stock's five-year average of 14.8x. This is justified until there are clear signs of improved fundamental performance before the multiple could be re-rated higher.

Morgan Stanley Defends Foot Locker

As expected, shares of Foot Locker, Inc. FL traded lower in reaction to Finish Line's announcement, but Morgan Stanley's Jay Sole believes Finish Line's problems are mostly structural while Foot Locker's problems are fashion-related and fixable.

Sole maintains an Overweight rating on Foot Locker's stock although with a price target slashed from $65 to $50 as there are three ways for the retailer to recover from its recent woes.

First, investors have reason to be concerned that Amazon.com, Inc. AMZN could flex its muscles in the athletic footwear and apparel space and steal share from Foot Locker, Sole commented. The fact is Amazon will take some share from Foot Locker but Amazon will mostly operate in the mid-tier price point level which isn't Foot Locker's core category.

"Not only do we continue to believe this is the case, but we also still think Amazon fears are incorporated into the stock price," the analyst emphasized.

Second, Nike Inc NKE has several compelling product offerings, such as Air VaporMax and Vaporfly 4%, and Hyperdunk 2017 are expected to reverse poor sales trends moving forward.

Third, Nike and other footwear brands continue to improve the speed at which they develop products and bring them to the market which could prove to be a "game-changer" for Foot Locker.

Finally, while there is no current reason to believe Foot Locker has any M&A deals in its pipeline, the company has acknowledged that it is open to deals, the analyst concluded. The balance sheet boasts $1 billion in cash which presents opportunities for the company to become "bigger and more profitable" while also receiving cash paybacks in less than two years.

At Time Of Writing

• Finish Line shares were down 17.37 percent at $8.61.
• Foot Locker shares were down 1.12 percent at $35.30.
• Nike was down 2.31 percent at $52.49.
• Amazon was relatively flat on the day, up just 0.36 percent from Tuesday's open of $940.

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