31 Aug Finish Line Slashes Forecast, Adopts ‘Poison Pill’
The Finish Line Inc. said it expects a steep decline in earnings in both the second quarter and fiscal year ended March 3 while also indicating it is adopting a shareholder-rights plan aimed at thwarting unwanted takeover advances.
Second Quarter Guidance
For the second quarter ended August 26, consolidated net sales were $469.4 million, down 3.3 percent compared with the year-ago period, driven by a 4.6 percent decrease in Finish Line comparable sales. Based on the decline in sales and pressure on gross margin from increased markdowns, the company expects to report second-quarter earnings per share in the range of 8 to 12 cents a share.
Wall Street on average had expected earnings of 38 cents a share, and Finish Line earned 53 cents in the 2016 second quarter.
“The marketplace for athletic footwear became much more promotional as our second quarter progressed, resulting in challenging sales and gross margin trends,” said Sam Sato, chief executive officer of Finish Line. “Despite these headwinds, we remained disciplined in managing our inventories and expect to end the quarter with inventory levels down approximately 7 to 8 percent compared with a year ago.”
Based on year-to-date results and the expectation that sales and gross margin trends remain challenging through the remainder of the current fiscal year, the company now expects Finish Line comparable sales to decrease 3 percent to 5 percent versus its previous guidance for an increase in the low-single-digit range. Adjusted earnings per share are now expected to be in the range of 50 to 60 cents for the 53-week fiscal year ending March 3, 2018, versus the previous guidance range of $1.12 to $1.23, and compared with adjusted earnings per share of $1.06 for the fiscal year ended February 25, 2017, which was a 52-week year. The company estimates that the additional week will contribute approximately 6 cents per share to fourth-quarter and full-year fiscal 2018 results.
For the third quarter ending November 25, 2017, the company expects Finish Line comparable sales to decrease 3 percent to 5 percent and adjusted loss per share to be in the range of 32 cents to 40 cents, compared with an adjusted loss per share of 24 cents for the same period last year.
For the fourth quarter ending March 3, 2018, a 14-week quarter, the company expects Finish Line comparable sales to decrease 3 percent to 5 percent and adjusted earnings per share to be in the range of 50 to 58 cents inclusive of the 6 cents per share contribution from the extra week, compared with earnings per share of 50 cents for the fourth quarter ended February 25, 2017, a 13-week quarter.
Sato continued, “We believe it is prudent to adjust our outlook as we expect the environment to remain highly competitive and promotional throughout the remainder of the year. In light of our disappointing second quarter results and revised projections for fiscal 2018, we will remain very disciplined in managing our expenses and inventories throughout the remainder of the year. Looking ahead, we are optimistic that the work we are doing with our vendor partners to enhance our merchandise assortments will start benefiting our top-line results early next year. At the same time, we continue to focus on building our omnichannel capabilities to strengthen our customer connections, improve our service levels and further capitalize on the shift toward digital commerce. We are also making good progress rightsizing the business to better compete in the current environment. In the past 12 months, we’ve made a number of changes that have created a more nimble organization and generated approximately $6 million in annualized savings, and over the past two years we’ve closed approximately 80 underperforming stores. We remain steadfastly focused on executing our strategic plan to drive increased shareholder value over the longer term.”
Finish Line plans to report actual second quarter fiscal 2018 results on September 22, 2017.
Shareholder Rights Plan
Finish Line announced that its Board of Directors has unanimously adopted a shareholder rights plan to protect the best interests of Finish Line shareholders. The Rights Plan is intended to reduce the likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the Board of Directors determines are not in the best interests of the company and its shareholders.
Sports Direct International PLC, the British sporting gear retailer, disclosed last week in a securities filing it owned 7.9 percent of Finish Line common stock and has an economic interest, but no voting power, in an additional 20.13 percent of shares. BlackRock Fund Advisors was the largest shareholder in Finish Line as of June 30, reporting it held more than 11 percent of the company’s shares outstanding.
“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,” said Glenn S. Lyon, chairman of Finish Line. “The plan is designed to ensure that the company’s board of directors is able to appropriately consider whether proposals, if any, are in the best interests of all our shareholders. The company remains positioned to fully capture the opportunities we foresee to optimize value for all our shareholders.”
“While the marketplace for athletic footwear is highly competitive and promotional, we remain committed to increasing value for all our shareholders by continuing to execute on our growth plans and maintaining disciplined expense management,” said Sato. “We continue to focus on executing our strategic plan and fortifying our customer experience through enriched omnichannel capabilities and with every customer interaction to deliver a personalized, fast and consistent experience.”
In connection with the adoption of the Rights Plan, the Board of Directors declared on August 25, 2017 a dividend of one preferred stock purchase right for each outstanding share of common stock of the company. The dividend is payable to shareholders of record on September 11, 2017. Each right initially entitles the registered holder to purchase from the company one ten-thousandth of a share of a newly created series of the company’s preferred stock at a price of $26 per right in the event the rights become exercisable, subject to adjustment.
In general, the rights will become exercisable if a person or group becomes the beneficial owner of 12.5 percent or more of the outstanding common stock of the company. In the event that the rights become exercisable due to the triggering threshold being crossed, each right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of common stock having a market value at that time of twice the right’s exercise price. Rights held by the triggering person or group will become void and will not be exercisable to purchase any shares. The Board, at its option, may exchange each right (other than rights owned by the triggering person or group that have become void) in whole or in part, at an exchange ratio of one share of common stock per outstanding right, subject to adjustment.
Persons or groups that beneficially own 12.5 percent or more of the outstanding company common stock prior to the company’s announcement of the Rights Plan will not cause the rights to be exercisable until such time as those persons or groups become the beneficial owner of any additional shares of company common stock.
The Rights Plan has an expiration date of August 28, 2020, or earlier if shareholder approval of the Rights Plan has not been obtained at or before the company’s 2018 Annual Meeting of Shareholders. The Board of Directors will, in general, be entitled to redeem the rights at $0.0001 per right at any time before the triggering threshold is crossed.