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FINL > SEC Filings for FINL > Form 10-K on 29-Apr-2014All Recent SEC Filings

Show all filings for FINISH LINE INC /IN/

Form 10-K for FINISH LINE INC /IN/


29-Apr-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Executive Summary
During fiscal 2014, there were a few highlights which included record revenues, significant digital sales growth and the success of growth initiatives within Running Specialty and shops within department stores. The Company remained committed to its strategic plan to put capital investments into our people, technology and stores. Also, the Company continued to provide returns to our shareholders through dividends and stock repurchases totaling over $36 million. An overview of the detailed results is discussed below.
Net sales increased 15.7% to $1,670.4 million in fiscal 2014 compared to $1,443.4 million in fiscal 2013.

Finish Line comparable store sales for fiscal 2014 increased 4.2%.

         Finish Line's digital comparable sales (which are included in Finish
          Line comparable store sales) increased 15.1%.


         Net sales per square foot for Finish Line comparable stores increased
          by $13 to $366.


         Net sales associated with shops within department stores increased
          $119.3 million.

Running Specialty net sales increased $22.5 million to $50.2 million.

Gross profit was $547.4 million (32.8% of net sales) in fiscal 2014 compared to $484.4 million (33.6% of net sales) in fiscal 2013.

         $5.8 million (0.3% of net sales) in start-up costs related to inventory
          reserves established for inventory purchased from Macy's.


         0.8% decrease in product margin (including start-up costs), net of
          shrink, as a percentage of net sales.

Occupancy costs remained constant as a percentage of net sales.

SG&A expenses were $424.6 million (25.4% of net sales) in fiscal 2014 compared to $365.9 million (25.3% of net sales) in fiscal 2013.

         0.1% deleverage as a percentage of net sales, primarily due to $2.2
          million in start-up costs associated with shipping and handling for the
          initial inventory takeover and assortment of Macy's athletic footwear.


         Investments in information technology, shops within department stores
          and Running Specialty along with variable costs to support the increase
          in digital sales increased SG&A expenses, however, SG&A expenses were
          consistent as a percentage of net sales.


     Operating income was $120.1 million (7.2% of net sales) in fiscal 2014
      compared to $112.3 million (7.8% of net sales) in fiscal 2013.

$7.8 million increase, or 7.0%, driven by increased sales.

         $2.1 million of impairment charges related to obsolete store technology
          assets and fixtures in fiscal 2014 compared to $5.6 million of
          impairment charges related to the Company's website and the long-lived
          assets associated with six underperforming stores in fiscal 2013.

$8.0 million of start-up costs for shops within department stores.

Net income attributable to The Finish Line, Inc. was $76.9 million (4.6% of net sales) in fiscal 2014 compared to $71.5 million (5.0% of net sales) in fiscal 2013.

$5.4 million increase, or 7.6%.

         Diluted earnings per share attributable to The Finish Line, Inc.
          shareholders increased 11.4% to $1.56 in fiscal 2014 compared to $1.40
          in fiscal 2013.


     Cash and cash equivalents were $229.1 million on March 1, 2014 with no
      interest bearing debt.

Generated cash from operations of $119.0 million in fiscal 2014.

Cash outlay for capital expenditures was $81.7 million, with an additional $9.2 million within accounts payable on March 1, 2014.

Paid $13.7 million of dividends to shareholders in fiscal 2014.


         Repurchased 1.0 million shares of common stock totaling $22.6 million
          during fiscal 2014.


     Opened 22 new and closed 22 Finish Line stores during fiscal 2014, ending
      the year with 645 Finish Line stores.


     Opened branded shops in 183 new department stores and closed a branded shop
      in 1 department store during fiscal 2014, ending the year with branded
      shops in 185 department stores.


     Acquired 15 Running Specialty stores, opened 7 new stores and closed 1
      store during fiscal 2014, ending the year with 48 Running Specialty stores.

Critical Accounting Policies
Management's Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates, including those related to the valuation of inventories, the potential impairment of property and equipment and income taxes. The Company bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.
Management believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of its consolidated financial statements.
Cost of Sales. Cost of sales includes the cost associated with acquiring merchandise from vendors, occupancy costs, license fees, provision for inventory shortages and credits and allowances from our merchandise vendors. Cash consideration received from merchandise vendors after the related merchandise has been sold is recorded as an offset to cost of sales in the period negotiations are finalized. For cash consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of our cost of sales at the time of sale. Because the Company does not include the costs associated with operating its distribution center and freight within cost of sales, the Company's gross profit may not be comparable to those of other retailers that may include all costs related to their distribution centers in cost of sales and in the calculation of gross profit.
Valuation of Inventories. Merchandise inventories are valued at the lower of cost or market using a weighted-average cost method, which approximates the first-in, first-out method. The Company's valuation of merchandise inventory includes markdown adjustments for merchandise that will be sold below cost and the impact of shrinkage. Markdowns are based upon historical information and assumptions about future demand and market conditions. Shrinkage is based on historical information and assumptions as to current shrink trends. Vendor rebates are applied as a reduction to the cost of merchandise inventories. It is possible that changes to the markdowns and shrinkage estimates could be required in future periods due to changes in market conditions.
Impairment of Property and Equipment Review. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated future undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment recognized is measured by comparing projected discounted cash flows to the asset's carrying value. The estimation of fair value is measured by discounting expected future cash flows at the discount rate the Company utilizes to evaluate potential investments. Actual results may differ from these estimates and as a result the estimation of fair values may be adjusted in the future. Operating Leases. The Company leases retail stores under operating leases. Many lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes rent expense for minimum lease payments on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The Company uses a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the leased space for build out. Contingent rents are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in other liabilities and accrued expenses on the consolidated balance sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.


Income Taxes. The Company accounts for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. The deferred tax assets may be reduced by a valuation allowance, which is established when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In addition, management is required to evaluate all available evidence including estimating future taxable income by taxing jurisdictions, the future reversal of temporary differences, tax planning strategies and recent results of operations when making its judgment to determine whether or not to record a valuation allowance for a portion, or all, of its deferred tax assets. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company's consolidated statements of income in the period that includes the enactment date.
The Company calculates an annual effective income tax rate based on annual income, permanent differences between book and tax income and statutory income tax rates. The Company adjusts the annual effective income tax rate as additional information on outcomes or events becomes available. The Company's effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings or losses, the results of tax audits and the level of investment income. The Company's income tax returns, like those of most companies, are periodically audited by tax authorities. These audits include questions regarding the Company's tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating income tax positions. The first step requires the Company to conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by a tax authority. The second step applies if the Company has concluded that the tax position is more likely than not to be sustained upon examination and requires the Company to measure the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon ultimate settlement. The Company adjusts its accrual for uncertain tax positions and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. The Company includes its accrual for uncertain tax positions, including accrued penalties and interest, in other long-term liabilities on the consolidated balance sheets unless the liability is expected to be paid within one year. Changes to the accrual for uncertain tax positions, including accrued penalties and interest, are included in income tax expense on the consolidated statements of income.
Recent Accounting Pronouncements. Recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company's present or future consolidated financial statements. Results of Operations
General. The following discussion and analysis should be read in conjunction with the information set forth under "Selected Financial Data" and the Consolidated Financial Statements and Notes thereto included elsewhere herein. The Company uses a "Retail" calendar. The Company's fiscal year ends on the Saturday closest to the last day of February and included 52 weeks in fiscal 2014 and 2013 and 53 weeks in fiscal 2012.
The Company is a premium retailer of athletic shoes, apparel and accessories for men, women and kids, throughout the United States, through four operating segments: brick and mortar stores, digital (which includes internet, mobile and tablet), shops within departments stores and Running Specialty. The brick and mortar stores and digital operating segments are collectively referred to as "Finish Line" throughout this document.
Brick and mortar comparable store sales are sales from stores open longer than one year, beginning in the thirteenth month of a store's operation. Expanded stores are excluded from the brick and mortar comparable store sales calculation until the thirteenth month following the re-opening of the store and temporarily closed stores are excluded during the months that the store is closed. As a result of the 53rd week in fiscal 2012, the brick and mortar comparable store sales were calculated on a shifted basis by comparing brick and mortar comparable store sales for the 52 weeks ended March 2, 2013 to the 52 weeks ended March 3, 2012.
Digital comparable sales are the change in sales year over year for the reporting period derived from finishline.com. As a result of the 53rd week in fiscal 2012, the digital comparable sales were calculated on a shifted basis by comparing digital sales for the 52 weeks ended March 2, 2013 to the 52 weeks ended March 3, 2012.


Finish Line comparable store sales is the aggregation of brick and mortar comparable store sales and digital comparable sales.
The following tables set forth store and square feet information of the Company for each of the following years:

                                                     Year Ended
Number of stores/shops                     March 1, 2014     March 2, 2013
Finish Line:
Beginning of year                                 645              637
Opened                                             22               29
Closed                                            (22 )            (21 )
End of year                                       645              645
Branded shops within department stores:
Beginning of year                                   3                -
Opened                                            183                3
Closed                                             (1 )              -
End of year                                       185                3
Running Specialty:
Beginning of year                                  27               19
Acquired                                           15                6
Opened                                              7                2
Closed                                             (1 )              -
End of year                                        48               27
Total:
Beginning of year                                 675              656
Acquired                                           15                6
Opened                                            212               34
Closed                                            (24 )            (21 )
End of year                                       878              675



Square feet information                   March 1, 2014    March 2, 2013
Finish Line:
Square feet                                   3,507,865        3,511,128
Average store size                                5,439            5,444
Branded shops within department stores:
Square feet                                     229,685            3,483
Average shop size                                 1,242            1,161
Running Specialty:
Square feet                                     155,930           80,195
Average store size                                3,249            2,970
Total:
Square feet                                   3,893,480        3,594,806


The following table sets forth net sales of the Company by major category for each of the following years (in thousands):

                                              Year Ended
Category             March 1, 2014          March 2, 2013          March 3, 2012
Footwear          $ 1,466,039     88 %   $ 1,237,685     86 %   $ 1,177,114     86 %
Softgoods             204,371     12 %       205,680     14 %       192,145     14 %

Total net sales $ 1,670,410 100 % $ 1,443,365 100 % $ 1,369,259 100 %

The following table and subsequent discussion set forth operating data of the Company as a percentage of net sales for the years indicated below:

                                                                Year Ended
                                             March 1, 2014     March 2, 2013     March 3, 2012
Income Statement Data:
Net sales                                         100.0 %           100.0 %           100.0 %
Cost of sales (including occupancy costs)          67.2              66.4              64.9
Gross profit                                       32.8              33.6              35.1
Selling, general and administrative
expenses                                           25.4              25.3              25.1
Store closing costs                                 0.1               0.1               0.1
Impairment charges                                  0.1               0.4               0.1
Operating income                                    7.2               7.8               9.8
Interest income, net                                  -                 -                 -
Gain on sale of investment                          0.1                 -                 -
Income before income taxes                          7.3               7.8               9.8
Income tax expense                                  2.8               3.0               3.6
Net income                                          4.5               4.8               6.2
Net loss attributable to redeemable
noncontrolling interest                             0.1               0.2                 -
Net income attributable to The Finish
Line, Inc.                                          4.6 %             5.0 %             6.2 %

Fifty-Two Weeks Ended March 1, 2014 Compared to the Fifty-Two Weeks Ended

March 2, 2013
Net Sales

                                                               Year Ended
                                                    March 1, 2014      March 2, 2013
                                                         (dollars in thousands)
Brick and mortar store sales                       $    1,291,863     $    1,234,077
Digital sales                                             208,984            181,551
Shops within department store sales                       119,384                102
Running Specialty sales                                    50,179             27,635
Total net sales                                    $    1,670,410     $    1,443,365

Brick and mortar comparable store sales increase              2.5 %              3.4 %
Digital comparable sales increase                            15.1 %             25.1 %
Finish Line comparable store sales increase                   4.2 %              5.8 %

Net sales increased 15.7% for fiscal 2014 compared to fiscal 2013. The increase was attributable to a Finish Line comparable store sales increase of 4.2%, an increase in net sales associated with the shops within department stores of $119.3 million and an increase in Running Specialty net sales of $22.5 million. The Finish Line comparable store sales increase of 4.2% is due to an increase in average dollars per transaction and digital traffic, partially offset by a decrease in conversion and store traffic.


Cost of Sales (Including Occupancy Costs) and Gross Profit

                                                        Year Ended
                                             March 1, 2014      March 2, 2013
                                                  (dollars in thousands)
Cost of sales (including occupancy costs)   $    1,122,967     $      958,921
Gross profit                                $      547,443     $      484,444
Gross profit as a percentage of net sales             32.8 %             33.6 %

The 0.8% decrease in gross profit, as a percentage of net sales, was primarily due to a 0.8% decrease in product margin, net of shrink, as a percentage of net sales. The 0.8% decrease in product margin, net of shrink, as a percentage of net sales, was primarily due to $5.8 million, or 0.3% of net sales, of start-up costs related to inventory reserves established for inventory purchased from Macy's, as well as higher markdowns as the Company adjusted product assortment to meet customer demands.

Selling, General and Administrative Expenses

                                                                  Year Ended
                                                       March 1, 2014       March 2, 2013
                                                            (dollars in thousands)
Selling, general and administrative expenses         $       424,571     $       365,883
Selling, general and administrative expenses as a
percentage of net sales                                         25.4 %              25.3 %

The $58.7 million increase in selling, general and administrative expenses was primarily due to the following: (1) $2.2 million, or 0.1% of net sales, in start-up costs associated with shipping and handling for the initial inventory takeover and assortment of Macy's athletic footwear; (2) capital investments to support the Company's technology upgrades, digital platform and omnichannel strategy and to support shops within department stores and Running Specialty, which has increased depreciation by $5.1 million, or 16.5%; (3) variable costs in fulfillment, freight and payroll in conjunction with the 15.7% increase in consolidated net sales and (4) the increased cost associated with building a team for the shops within department stores.

Store Closing Costs

                                                               Year Ended
                                                    March 1, 2014      March 2, 2013
                                                         (dollars in thousands)
Store closing costs                                $        713       $        671
Store closing costs as a percentage of net sales            0.1 %              0.1 %
Number of stores/shops closed                                24                 21

Store closing costs represent the non-cash write-off of any fixtures and equipment upon a store or shop closing.

Impairment Charges

                                                             Year Ended
                                                   March 1, 2014     March 2, 2013
                                                       (dollars in thousands)
Impairment charges                                $       2,054     $       5,593
Impairment charges as a percentage of net sales             0.1 %             0.4 %
Number of stores impaired                                     -                 6

The fiscal 2014 impairment charge of $2.1 million was primarily a result of the write-off of obsolete store technology assets and fixtures. The fiscal 2013 impairment charge of $5.6 million was primarily due to a $3.7 million charge associated


with the Company's updated website that was launched but subsequently abandoned, as well as the write-off of long-lived assets of 6 underperforming stores.

Interest Income, Net

                                                                      Year Ended
                                                         March 1, 2014           March 2, 2013
                                                                (dollars in thousands)
Interest income, net                                 $              37        $            198
Interest income, net as a percentage of net sales                    - %                     - %

The decrease of $0.2 million was due to lower invested balances and interest rates in fiscal 2014 compared to fiscal 2013.

Gain on Sale of Investment

                                                                           Year Ended
                                                            March 1, 2014          March 2, 2013
                                                                     (dollars in thousands)
Gain on sale of investment                                $         2,076     $                -
Gain on sale of investment as a percentage of net sales               0.1 %                    - %

During fiscal 2014, the Company sold an investment with a carrying value of $1.0 million for $3.1 million, which resulted in a $2.1 million gain.

Income Tax Expense

                                                             Year Ended
                                                   March 1, 2014     March 2, 2013
                                                       (dollars in thousands)
Income tax expense                                $      47,166     $      43,314
. . .
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