This story is definitely looking good to me. Earlier this week I noted my inclination to swap out of FL and into FINL after Nike’s FY1Q09 report. I was concerned about the stocks into the numbers, which turned out to be a bad bet on my part. Good tone from Nike on a good market day sent the group up big. Keith subsequently added FINL to the Hedgeye portfolio after the Nike report. Anyone else who followed him had a good day. As much as I am in tune with (and appreciate) a day’s worth of alpha, I think hindsight 12 months out will show that a buck move here or there will prove to have been a rounding error with this story.
With the numbers I’m seeing out of FINL, my conviction continues to grow in the margin levers as the product cycle turns in favor of the athletic specialty retailers – despite stress in the global footwear supply chain. For the quarter, comps accelerated on a 1, 2 and 3-year basis (+4.7, 0.0%, -2.2%), while gross margins were up 230bps, SG&A down in absolute dollars despite a 3% sales increase, and a 12 day improvement in days inventory on hand – despite facing the toughest yy compare in inventories. Check out the quad chart below. Looks golden.
Going forward, the product cycle should start to improve more meaningfully this fall – thanks to Under Armour stimulating the competitive fires at Nike, K Swiss, New Balance, Asics, and Adidas. This industry competes on product – not price. So a product cycle inherently helps retail in its early stages (i.e. 2001/02). Nike’s US footwear futures and ASP growth support this beginning. I think that we’ll see both traffic and ticket pick up at FINL – ending a 3-year slump in comps. With Paiva gone, Man Alive being downsized, and apparel under control, FINL is focusing back on its core. Good timing. Inventories remain bloated relative to history, and SG&A still has room to come down. I think that this company has the potential to get to a 5-6% EBIT margin within 2 years. Not bad given a 2% print in FY08.
Why do I prefer this one over Foot Locker (i.e. a change of tone for me)? First is that FL’s international exposure concerns me with recent moves in the dollar. Second is that with FINL, you actually get a little square footage growth – albeit low single digits. Lastly, this is a management team that I can actually trust – unlike FL.
With the numbers I’m seeing out of FINL, my conviction continues to grow in the margin levers as the product cycle turns in favor of the athletic specialty retailers – despite stress in the global footwear supply chain. For the quarter, comps accelerated on a 1, 2 and 3-year basis (+4.7, 0.0%, -2.2%), while gross margins were up 230bps, SG&A down in absolute dollars despite a 3% sales increase, and a 12 day improvement in days inventory on hand – despite facing the toughest yy compare in inventories. Check out the quad chart below. Looks golden.
Going forward, the product cycle should start to improve more meaningfully this fall – thanks to Under Armour stimulating the competitive fires at Nike, K Swiss, New Balance, Asics, and Adidas. This industry competes on product – not price. So a product cycle inherently helps retail in its early stages (i.e. 2001/02). Nike’s US footwear futures and ASP growth support this beginning. I think that we’ll see both traffic and ticket pick up at FINL – ending a 3-year slump in comps. With Paiva gone, Man Alive being downsized, and apparel under control, FINL is focusing back on its core. Good timing. Inventories remain bloated relative to history, and SG&A still has room to come down. I think that this company has the potential to get to a 5-6% EBIT margin within 2 years. Not bad given a 2% print in FY08.
Why do I prefer this one over Foot Locker (i.e. a change of tone for me)? First is that FL’s international exposure concerns me with recent moves in the dollar. Second is that with FINL, you actually get a little square footage growth – albeit low single digits. Lastly, this is a management team that I can actually trust – unlike FL.
