Finish Line's Shin Splints: Poor Quarterly Pre-Announcement Pummels Stock, Downgrade Follows

Shares of Finish Line Inc FINL plummeted 30 percent after the retail sportswear chain surprised investors with its second-quarter earnings pre-announcement. As a result of the poor report, Buckingham Research Group's Scott Krasik downgraded Finish Line's stock from Neutral to Underperform with a price target slashed from $14 to $5.

Finish Line's pre-announcement should result in investors becoming incrementally more concerned with the company's ability to boost sales and improve margins, Krasik commented in a research report.

The outlook looks particularly poor when factoring in the overall athletic footwear industry, which is seeing slower growth trends, while its product assortment is "less differentiated" than its biggest rival, Foot Locker, Inc. FL.

Perhaps more importantly, Finish Line's outlook for "modest" free cash flow over the coming two years could put its dividend at risk.

"In the past, consistent growth in the athletic footwear market had supported FINL, but with the category in a downturn and the future for brick and mortar retailers uncertain at best, it is unclear to us how FINL can reaccelerate growth in the next two to three years," Krasik wrote.

Finally, the analyst's revised $5 price target is based on a 9x multiple on his fiscal 2019 earnings per share estimate of $0.52. This represents a discount versus the company's three- and five-year averages of 12x and in line with Foot Locker's multiple. Also, this multiple is "warranted and not necessarily conservative" given low expectations for any re-acceleration in either sales or margins.

The Market In 5 Minutes

A Peek Into The Markets: U.S. Stock Futures Signal Lower Start On Wall Street