Finish Line May Pull Ahead Further Yet

Athletic goods retailer Finish Line is flirting with its 52-week high and recently delivered strong quarterly results, but can it last? While both top and bottom lines beat Wall Street's expectations, it was curious to see no adjustment on forward guidance. Some investors and analysts were looking for a quicker turnaround in the company's operations, especially considering the strong results and commentary coming from manufacturers such as Nike. This may be more a product of conservative management, though, than tepid performance, which bodes well for investors and should intrigue prospective ones.

Earnings recap
For the quarter, Finish Line brought in $0.54 per share -- a 10% premium to the prior year's numbers. Overall, same-store sales showed little improvement over last year; however, investors need to remember last year's number was an enormous 12% gain. Footwear seemed to lead the pack, with a 2% uptick in comparable sales. Recent sneaker launches from Nike are helping keep sales up despite tough comparable quarters from the prior year.

It seems that company-specific elements are only improving, while the macro retail environment remains a short-term concern. Frustrating as that is, macro pressures are far favorable to issues within the company. Furthermore, the reluctance of the market to allow the stock its deserved gains give investors opportunities to capitalize on a potentially undervalued pick.

Finish Line is participating in some innovative experiments, such as setting up branded shops in department-store giant Macy's. On the conference call, management sounded upbeat about the venture (especially considering the holiday season), and mentioned the segment resulted in $30.4 million in sales. The company has 151 stalls in Macy's stores.

At less than 14 times earnings, Finish Line isn't a bargain, nor is it an expensive retail play. But is it possible that both management and the market are too conservative about forward earnings potential?

The road ahead
In the call, Finish Line management bumped up same-store sales figures from flat to low single digits, but kept EPS and sales guidance in line.

The company is growing both organically and via its acquisitions. The 39-store-strong Running Specialty Group is a good addition to the portfolio. Its customers are dedicated fitness enthusiasts and present the company with compelling opportunities to cross-promote and upsell.

Valuation-wise, the stock is most interesting in that the market is following management's conservative estimates. The company trades at 13.7 times current forward estimates and has an EV/EBITDA of 6.85 times. For comparison, Dick's Sporting Goods trades at nearly 18 times forward earnings and has an EV/EBITDA of 9.71 times. The two businesses are not identical in that Dick's has a larger store footprint and a wider range of products. But as two sporting goods stores, Finish Line certainly has a valuation edge. Sales may not be a major growth driver behind the stock, but it could experience multiple correction -- giving current and prospective investors a decent premium to today's sub-$25 share price.

On the path to success
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Fool contributor Michael Lewis has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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