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This is not your average ‘in-line quarter.’ In fact, we chalk this one up as a miss and will likely watch it from the sidelines through 1H before getting more constructive.

Yes, EPS of $0.81 came in-line with Street estimates of $0.81E, but the composition of earnings was significantly different. The key delta relative to our numbers was in the SG&A line, which came in up +23% yy on +19% sales growth accounting for $0.07 in EPS. We were looking for EPS of $0.86 on +15.5% SG&A growth. In addition to announcing a new partnership and $10mm capital infusion from Gart Capital to build out the company’s run specialty business, FINL’s commitment to investment spending (IT, personnel, etc.) over the intermediate-term is clearly more substantial than we had anticipated.

The call here is not that underlying fundamentals have changed – in fact they were good (comps up +10.8%, GMs +120bps, and sales/inv spread up +5%), but that variable spending is headed higher, much higher near-term. As a result, management is taking Q1 EPS expectations down by (-30%) vs. +20%E. That’s not good for any stock in this tape. The company is also guiding earnings growth of MSD this year and low-to-mid-teen next year. That implies earnings power of $2 over the next two-years, but with greater risk and volatility along the way which does not support multiple expansion - rather quite the opposite.

While March sales up +10% month-to-date suggests the industry demand remains strong, the strategic commitment to building out the FINL organization will significantly curb earnings growth over the intermediate-term. As such, we’ll watch this one from the sidelines through 1H before getting more constructive.

Casey Flavin

Director

FINL: Committed - FINL S