Finish Line Downgraded Ahead Of Earnings

Piper Jaffray downgraded shares of Finish Line Inc FINL ahead of its earnings. The company is due to report its fiscal-year second-quarter results before the market open on Sept. 22.

As such, the firm downgraded shares of Finish Line from Neutral to Underweight, while it maintains its price target unchanged at $8, which suggests 24 percent downside from current levels.

In pre-market trading, shares of Finish Line were down 2.29 percent at $10.25.

Multi-Brand Retailers Missing The Boat

Analyst Erinn Murphy attributed the downgrade to her belief that there is further downside risk to estimates. The analyst pointed to the firm's broader call on the athletic space last week, wherein it presented its finding that 119 percent of all athletic dollar growth in North America in the first half came from vendor direct-to-consumer.

The telling proof for the trend came from the calendar year second quarter results of Finish Line, Foot Locker, Inc. FL, Hibbett Sports, Inc. HIBB, Big 5 Sporting Goods Corporation BGFV and Dicks Sporting Goods Inc DKS, all of which missed consensus estimates. These firms also materially lowered their calendar year 2018 outlook.

Murphy believes this poses an ongoing threat to multi-branded athletic retailers, which are seeing negative comps.

See also: Which Shoe Retailers Mirror Nike's Performance?

Hurricane Hit

Given Finish Line's above-average exposure to the regions hit by Hurricane Harvey and Hurricane Irma, Piper Jaffray thinks the impact of hurricanes could pressure third-quarter comps and earnings estimates. The firm clarified that the company has 27 percent of its store base in Florida and Texas, combined. Conservatively, the firm estimates a hit of 150–200 basis points to comps.

The firm also noted that even as the Hurricane Harvey just hit, Finish Line made a negative pre-announcement on Aug. 28.

That said, Piper Jaffray maintains its already-depressed 2019 earnings per share estimate unchanged at 30 cents, while the consensus estimate is at 67 cents.

Leadership Rotation Underway

Piper Jaffray indicated that athletic trends are slowing in North America, as brand leadership rotation is underway. The firm is of the view that the lack of needle-moving innovation out of Nike Inc NKE has challenged retailers such as Finish Line, which gets 71 percent of its sales from Nike.

"While we believe FINL is getting allocations from adidas AG (ADR) ADDYY (brand that is in more demand on the margin), we worry the significant exposure to NIKE could create a headwind for FINL for longer," the firm said.

The firm said it looks forward to hearing about Nike's next steps for innovation, most likely at or around its Investor Day on Oct. 25.

At time of publication, shares of Finish Line were down 5.15 percent at $9.95.

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