FL: 3.5 Weeks Not Enough To Kill A Year

Mr. Mo did not like the comp deceleration in the first 3.5 weeks of Sept. But I think FINL has 2 points of margin over a year, which is tough for me to find anywhere at 4.1x EBITDA.

Ok, I get it. Comps decelerated for the first 3.5 weeks of September. But a double digit hit to the stock? Clearly Mr. Mo had high expectations into this one. While he heads for the exit, I’m staying put fundamentally. Management’s cautious tone on the past few weeks will keep estimates low, and as noted this morning I think that FINL’s business and margins are on the upswing. I think FINL has 2 points of margin over a year, which is tough for me to find anywhere.

A couple of points to consider about the company’s tone…
  • 1) The way I am doing the math, if I assume the first 3.5 week’s erosion carries through the quarter, and then assume very little change in the multi-year run rate, I still get to a positive comp number by 4Q and EPS better than consensus. Beyond the overly simplistic ‘extend the trend’ mindset, I’m still firm in my view that we’ll see competition heat up between the major brands over the next 12 months, which will incrementally help FINL. I’m at a 5% comp by 4Q and earnings a dime (15%) better than consensus for the year. I’ll take that at 4.1x EBITDA.
  • 2) The trajectory of comp guidance is also noteworthy. The company had a massive miss one year ago. The tone suggested +lsd comps, and they ended coming in -4.7%. Not good. Then FINL’s business and tone about the upcoming quarter were cautious in January and April, and FINL came spot-on with plan. But then in 1Q09, FINL faced another significant deceleration after the first 3 weeks. Still reeling from wounds from a year ago (and from the past three years of pain), FINL does itself no justice in setting a high bar going into the back half.

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