Why Shares of The Finish Line Dropped Today

Why Shares of The Finish Line Dropped Today

What happened

Shares of footwear retailer The Finish Line (NASDAQ: FINL) slumped on Friday following an analyst downgrade. This comes less than two months after the company reported its second-quarter results, which featured a comparable-store sales decline and slashed full-year earnings guidance. Finish Line stock was down about 12% at 11:30 a.m. EST.

So what

Cowen downgraded shares of Finish Line on Friday, dropping its rating to underperform from market perform, and slashing its price target to $7 from $10. The reason for the downgrade was the belief that the company’s promotional activity is unsustainable, which will hurt not only margins but also relationships with major brands.

A Finish Line display inside a Macy's store.

Image source: The Finish Line.

Through the first six months of 2017, Finish Line has seen its operating income tumble by 64% year over year, the result of comparable sales declines and a slumping gross margin. Gross margin was 28.7% in the first half of the year, down from 31.3% during the same period last year. This suggests that Finish Line is engaging in significant discounting.

Finish Line now expects to report adjusted earnings per share of $0.50 to $0.60 in fiscal 2018, down from $1.06 in fiscal 2017. It also expects comparable-store sales to slump by 3% to 5%.

Now what

Competition from online retailers and a shift toward direct-to-consumer for major brands like Nike have put Finish Line in a tough spot. Profits are in free fall as the company ramps up its promotional activity, and there was no sign in the second-quarter report that any aspect of the business is improving.

The stock is now down about 57% over the past year and 72% since peaking in late 2014. If Finish Line can’t stabilize its business in the coming quarters, the stock could be headed even lower.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike. The Motley Fool has a disclosure policy .

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