Finish Line Downgraded; Beware The Coming Cash Burn

Finish Line Inc FL shares are plummeting following an analyst downgrade, as well as continued investor fears of major athletic brands shifting away from athletic retailers in order to grow e-commerce.

Nike Inc NKE and adidas (AG) (ADR) ADDYY stated they're moving away from "undifferentiated retail" and at the moment Finish Line is nearly unrecognizable from its competition.

The Analyst

Cowen’s John Kernan.

The Rating

Downgrade from Underperform from Market Perform. Kernan also lowered his price target from $10 to $7.

The Thesis

Finish Line’s attempt to aggressively undercut Nike, Adidas and Under Armour Inc UAA on price is not sustainable, “as brands eliminate allocations to undifferentiated retailers and focus on digital and differentiated experiences,” said Kernan.

Catalysts for the undifferentiated retailer look slim. As a result, Kernan is modeling for Finish Line to burn cash as margins and inventory turn to deteriorate, expecting same-store sales to decrease 7 percent in the third quarter.

The footwear retailer gross margins have declined for 20 of the past 22 quarters and this trend will undoubtedly continue as Finish Line continues to underprice brands’ own websites.

With recent merger rumors propping up shares, most recently with rumors of a takeover from British Retailer Sports Direct, Kernan doesn't foresee M&A activity in the near future.

“We do not see the rationale for M&A at this point with management’s poison pill and deteriorating results lowering probability for a takeout,” he concluded.

Price Action

Finish Line shares traded down 12 percent on Friday, at last check trading around $8.82.

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