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    MARKET EDGES

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Conclusion:  Finish Line comps were light, but not all points of comp are created equal.  With questions surrounding market-share gains and losses within the mall-based athletic footwear space, we remind investors that a point of same-store sales at Foot Locker represents 3.2 times the revenue dollars as a point of growth at Finish Line.  Same store sales beats and misses simply don’t tell the true market share story, nor are they worth over-analyzing when a product tailwind is building.

With the reporting of Finish Line and Nike results lat last week there’s been a large amount of data shed on the athletic wholesale and retail landscape.  On one hand we got confirmation from Nike that the domestic outlook appears to be accelerating over the back half of the year with the reporting of a 14% increase in domestic futures.  On the other hand we got a glimpse of monthly volatility in the mall at retail and the inherent risk of running inventories too low when demand appears to be picking up.  That was Finish Line. 

As a result of the data flood, we were also faced with a whole bunch of speculation surrounding the momentum and trends at Foot Locker, athletic retail’s 800-lb gorilla.  As most of you know, we’ve been bullish on the opportunity for FL and its shares going back to February of this year.  Along the way there have been zigs and zags with the quarterly results, but the overall trajectory of earnings, sales, and stock performance has been positive and in line with the thesis we originally laid out.  With each data point, we check our thesis against reality as any analyst would do.  This time is no different, as we’re challenged to rectify the sales miss at Finish Line with a decade-high futures number from Nike.

One of the main issues or topics coming out of this week’s results surrounds market share amongst the mall based athletic chains.  We’re often baffled by the Street’s obsession with same-store sales and this time is no exception.  For the first time since we laid out our bullish thesis on FL, we’re now getting questions about possible share gains at the expense of FINL.  For the past year, the question was centered on Foot Locker’s share loss. 

However, the reality is, this is not about comps.  All comp points are not created equal.  Given that both FL and FINL are no longer growing their store base, it’s a fairly simple exercise to figure out what a comp point really means for revenue at each company.  It turns out that if you exclude international from FL’s total and look at the domestic business, a point of same store sales is worth about $35 million to the topline ($50 million on a global basis).  At FINL, a comp point yields about $11 million in incremental revenue for the chain.  So in other words, a point of domestic comp at Foot Locker is worth 3.2x the revenue dollars at Finish Line.  Again, not surprising given that Foot Locker is running 2,732 domestic stores to Finish Line’s 667 (productivity accounts for the discrepancy between sales and stores). 

The bottom line here is it is entirely possible that Foot Locker may out “comp” Finish Line in their 3Q.  For those “comp junkies” this is good news. We are hearing that apparel is taking hold, and in fact is running up double-digits at the Lady Foot Locker sub-brand.  This is all part of the plan to turn the business around and it is largely on track.  However, the Street is overly focused on one chain winning, the other losing, and using same store sales as the barometer.  In aggregate, the market it robust, the product pipeline continues to improve, ASP’s remain strong, and the comparisons are fairly easy.  We expect both FINL and FL to perform well against this backdrop. 

With that said, FINL needs to produce a same store sales result 3.2x as good as Foot Locker’s to maintain market share neutrality.  This is something to watch, especially as FL’s merchandising efforts begin to take hold and the inevitable market share debate rolls on. 

Eric Levine

Director