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EX-32 - EXHIBIT 32 - FINISH LINE INC /IN/finl82915ex32.htm
EX-31.1 - EXHIBIT 31.1 - FINISH LINE INC /IN/finl82915ex311.htm
EX-31.2 - EXHIBIT 31.2 - FINISH LINE INC /IN/finl82915ex312.htm


 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________________________________
FORM 10-Q 
______________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 29, 2015

OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number: 0-20184 
______________________________________________
The Finish Line, Inc.
(Exact name of registrant as specified in its charter) 
______________________________________________
Indiana
 
35-1537210
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
3308 North Mitthoeffer Road Indianapolis, Indiana
 
46235
(Address of principal executive offices)
 
(zip code)
317-899-1022
(Registrant’s telephone number, including area code)
(Former name, former address, and former fiscal year, if changed since last report.) 
______________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x  No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares of the registrant’s Class A Common Stock outstanding on September 11, 2015 was 44,846,131.
 
 
 
 
 




PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
 
August 29,
2015
 
August 30,
2014
 
February 28,
2015
 
 
(unaudited)
 
(unaudited)
 
 
ASSETS
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
100,234

 
$
190,583

 
$
149,569

Accounts receivable, net
 
17,575

 
15,252

 
16,663

Merchandise inventories, net
 
366,335

 
329,924

 
343,403

Income taxes receivable
 
1,238

 

 
8,963

Other
 
25,450

 
11,852

 
12,059

Total current assets
 
510,832

 
547,611

 
530,657

Property and equipment:
 
 
 
 
 
 
Land
 
1,557

 
1,557

 
1,557

Building
 
43,758

 
43,300

 
43,637

Leasehold improvements
 
252,596

 
248,049

 
248,399

Furniture, fixtures, and equipment
 
194,772

 
176,036

 
187,404

Construction in progress
 
106,122

 
80,960

 
102,944

 
 
598,805

 
549,902

 
583,941

Less accumulated depreciation
 
320,400

 
303,228

 
309,581

Total property and equipment, net
 
278,405

 
246,674

 
274,360

Goodwill
 
44,507

 
29,458

 
34,719

Other assets, net
 
9,101

 
9,013

 
10,119

Total assets
 
$
842,845

 
$
832,756

 
$
849,855

 
See accompanying notes.


2



THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(in thousands, except per share data)
 
 
 
August 29,
2015
 
August 30,
2014
 
February 28,
2015
 
 
(unaudited)
 
(unaudited)
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable
 
$
122,316

 
$
127,601

 
$
133,053

Employee compensation
 
21,249

 
14,349

 
19,093

Accrued property and sales tax
 
10,306

 
11,481

 
10,499

Income taxes payable
 

 
1,251

 

Deferred income taxes
 
4,956

 
5,327

 
6,215

Other liabilities and accrued expenses
 
29,556

 
26,273

 
28,637

Total current liabilities
 
188,383

 
186,282

 
197,497

Commitments and contingencies
 


 


 


Deferred credits from landlords
 
31,503

 
29,856

 
29,143

Deferred income taxes
 
20,327

 
2,339

 
21,182

Other long-term liabilities
 
11,953

 
18,934

 
12,299

Redeemable noncontrolling interest, net
 

 
563

 
90

Shareholders’ equity:
 
 
 
 
 
 
Preferred stock, $.01 par value; 1,000 shares authorized; none issued
 

 

 

Common stock, $.01 par value; 110,000 shares authorized; 60,145 shares issued
 
 
 
 
 
 
Shares outstanding—(August 29, 2015 – 44,845; August 30, 2014 – 47,796; February 28, 2015 – 46,052)
 
601

 
601

 
601

Additional paid-in capital
 
230,383

 
222,946

 
227,006

Retained earnings
 
665,423

 
598,489

 
633,910

Treasury stock—(August 29, 2015 – 14,913; August 30, 2014 – 11,963; February 28, 2015 – 13,706)
 
(305,728
)
 
(227,254
)
 
(271,873
)
Total shareholders’ equity
 
590,679

 
594,782

 
589,644

Total liabilities and shareholders’ equity
 
$
842,845

 
$
832,756

 
$
849,855

See accompanying notes.


3



THE FINISH LINE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29,
2015
 
August 30,
2014
 
August 29,
2015
 
August 30,
2014
Net sales
 
$
483,150

 
$
466,880

 
$
926,544

 
$
873,411

Cost of sales (including occupancy costs)
 
323,943

 
311,760

 
628,361

 
589,411

Gross profit
 
159,207

 
155,120

 
298,183

 
284,000

Selling, general, and administrative expenses
 
117,604

 
111,882

 
234,061

 
220,778

Impairment charges and store closing costs
 
160

 
379

 
328

 
2,693

Operating income
 
41,443

 
42,859

 
63,794

 
60,529

Interest income (expense), net
 
1

 
(1
)
 
(1
)
 
6

Income before income taxes
 
41,444

 
42,858

 
63,793

 
60,535

Income tax expense
 
15,583

 
16,699

 
24,198

 
23,721

Net income
 
25,861

 
26,159

 
39,595

 
36,814

Net loss (income) attributable to redeemable noncontrolling interest
 
41

 
(2
)
 
96

 
1,778

Net income attributable to The Finish Line, Inc.
 
$
25,902

 
$
26,157

 
$
39,691

 
$
38,592

 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.57

 
$
0.54

 
$
0.87

 
$
0.80

Basic weighted average shares
 
44,866

 
47,789

 
45,151

 
47,859

 
 
 
 
 
 
 
 
 
Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.57

 
$
0.54

 
$
0.86

 
$
0.79

Diluted weighted average shares
 
45,207

 
48,202

 
45,463

 
48,281

 
 
 
 
 
 
 
 
 
Dividends declared per share
 
$
0.09

 
$
0.08

 
$
0.18

 
$
0.16

See accompanying notes.


4



THE FINISH LINE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Twenty-Six Weeks Ended
 
August 29, 2015
 
August 30, 2014
Operating activities:
 
Net income
$
39,595

 
$
36,814

Adjustments to reconcile net income to net cash provided by operating activities:
 
Impairment charges and store closing costs
328

 
2,693

Depreciation and amortization
20,395

 
19,401

Deferred income taxes
(1,726
)
 
2,302

Loss on disposals of property and equipment
32

 
282

Gain on settlement of contingent consideration
(329
)
 
(1,103
)
Share-based compensation
4,162

 
4,244

Excess tax benefits from share-based compensation
(284
)
 
(1,646
)
Changes in operating assets and liabilities:
 
Accounts receivable, net
(912
)
 
1,082

Merchandise inventories, net
(22,299
)
 
(24,360
)
Other assets
(12,491
)
 
6,483

Accounts payable
(1,182
)
 
5,368

Employee compensation
2,156

 
(9,920
)
Income taxes receivable/payable
8,016

 
(4,888
)
Other liabilities and accrued expenses
(628
)
 
(196
)
Deferred credits from landlords
2,360

 
2,198

Net cash provided by operating activities
37,193

 
38,754

Investing activities:
 
 
 
Capital expenditures for property and equipment
(35,012
)
 
(43,949
)
Acquisitions, net of cash acquired
(8,278
)
 
(4,674
)
Proceeds from disposals of property and equipment
20

 
16

Cash paid for investment

 
(750
)
Net cash used in investing activities
(43,270
)
 
(49,357
)
Financing activities:
 
 
 
Dividends paid to shareholders
(8,282
)
 
(7,763
)
Proceeds from issuance of common stock
1,683

 
5,727

Excess tax benefits from share-based compensation
284

 
1,646

Purchases of treasury stock
(35,922
)
 
(22,243
)
Purchase of redeemable noncontrolling interest
(1,000
)
 
(9,000
)
Proceeds from repayment of related-party promissory note

 
4,090

Cash paid for settlements of contingent consideration
(21
)
 
(350
)
Net cash used in financing activities
(43,258
)
 
(27,893
)
Net decrease in cash and cash equivalents
(49,335
)
 
(38,496
)
Cash and cash equivalents at beginning of period
149,569

 
229,079

Cash and cash equivalents at end of period
$
100,234

 
$
190,583

Supplemental disclosure of noncash operating and investing activities:
 
 
 
Capital expenditures incurred but not yet paid as of August 29, 2015 and August 30, 2014
$
3,356

 
$
9,996

Capital expenditures incurred but not yet paid as of February 28, 2015 and March 1, 2014
$
13,532

 
$
9,200

See accompanying notes.

5



THE FINISH LINE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation. The accompanying unaudited consolidated financial statements of The Finish Line, Inc., along with its consolidated subsidiaries (individually and collectively referred to as the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. Preparation of the financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, considered necessary for a fair presentation, have been included. All intercompany transactions and balances have been eliminated.
The Company has experienced, and expects to continue to experience, significant variability in sales, net income, and merchandise inventories from reporting period to reporting period. Therefore, the results of the interim periods presented herein are not necessarily indicative of the results to be expected for any other interim period or the full year.
These financial statements should be read in conjunction with the financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended February 28, 2015 (“fiscal 2015”), as filed with the Securities and Exchange Commission (“SEC”) on April 29, 2015.
Segment Information. The Company is a premium retailer of athletic shoes, apparel, and accessories for men, women, and kids, throughout the United States and Puerto Rico, through multiple operating segments. The Company’s operating segments have similar economic characteristics, which include a similar nature of products sold, type of customer, and method of distribution. As such, the Company’s operating segments are aggregated into one reportable segment. The following table sets forth net sales of the Company by major category for each of the following periods (in thousands):

 
 
Thirteen Weeks Ended
Category
 
August 29, 2015
 
August 30, 2014
Footwear
 
$
432,323

 
89
%
 
$
417,827

 
89
%
Softgoods
 
50,827

 
11
%
 
49,053

 
11
%
Total net sales
 
$
483,150

 
100
%
 
$
466,880

 
100
%

 
 
Twenty-Six Weeks Ended
Category
 
August 29, 2015
 
August 30, 2014
Footwear
 
$
834,501

 
90
%
 
$
787,017

 
90
%
Softgoods
 
92,043

 
10
%
 
86,394

 
10
%
Total net sales
 
$
926,544

 
100
%
 
$
873,411

 
100
%
Recent Accounting Pronouncements. In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for fees paid in cloud computing arrangements, which provides guidance to assist entities in determining whether a cloud computing arrangement contains a software license. The guidance states that if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and account for related costs in accordance with existing applicable U.S. GAAP. This guidance is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial position, results of operations, and cash flows.

6



In May 2014, the FASB issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB approved a one year deferral of the effective date, to make it effective for annual or interim reporting periods beginning after December 15, 2017. The guidance allows for either a full retrospective or a modified retrospective transition method. The Company is currently assessing the new guidance and its potential impact to its consolidated results of operations, financial position, and cash flows.
In July 2015, the FASB issued guidance on simplifying the measurement of inventory. The guidance, which applies to inventory that is measured using any method other than the last-in, first-out (LIFO) or retail inventory method, requires that entities measure inventory at the lower of cost or net realizable value. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. The Company is currently assessing the potential impact of adopting this guidance, but does not, at this time, anticipate a material impact to its consolidated results of operations, financial position, or cash flows.
Other recently issued accounting guidance did not, or are not believed by management to have a material effect on the Company’s present or future consolidated results of operations, financial position, or cash flows.
2. Acquisitions and Goodwill
During the twenty-six weeks ended August 29, 2015, the Company completed one immaterial acquisition of assets for total consideration of $8.9 million. The entity from which the assets were acquired operated four specialty running stores in New York. In connection with this acquisition, the Company recorded goodwill of $9.1 million. Goodwill is deductible for U.S. federal income tax purposes.
The Company allocated the aggregated preliminary purchase price for the acquisition based upon the tangible and intangible assets acquired, net of liabilities. The allocation of the preliminary purchase price is detailed below (in thousands):

 
Allocation of Preliminary Purchase Price
Goodwill
$
9,136

Tangible assets, net of liabilities
(205
)
Total purchase price
$
8,931

During fiscal 2015, the Company completed seven individually immaterial acquisitions of assets for total consideration of $11.4 million, net of cash acquired. A component of the consideration for two of the transactions included contingent consideration with an estimated fair value of $0.7 million, which was included within other liabilities and accrued expenses on the consolidated balance sheets. The Company determined the estimated fair values based on discounted cash flow analyses and estimates made by management. The entities from which the assets were acquired operated 20 specialty running stores in Colorado, Indiana, Kansas, Michigan, Missouri, North Carolina, and Utah. In connection with these acquisitions, the Company recorded goodwill of $9.7 million.

7



During the twenty-six weeks ended August 29, 2015, the Company made the final working capital payments for two of the fiscal 2015 acquisitions, which did not have a material effect on the preliminary purchase price allocation. The Company allocated the aggregated preliminary purchase prices based upon the tangible and intangible assets acquired, net of liabilities. The allocation of the preliminary purchase prices for the fiscal 2015 acquisitions is detailed below (in thousands):

 
Allocation of Purchase Price
Goodwill
$
9,719

Tangible assets, net of liabilities
1,699

Total purchase price
$
11,418

A reconciliation of goodwill is detailed below (in thousands):

 
Goodwill
Balance as of March 1, 2014
$
25,608

Acquisitions
9,067

Other
44

Balance as of February 28, 2015
34,719

Acquisitions
9,136

Other
652

Balance as of August 29, 2015
$
44,507

3. Fair Value Measurements
Fair value measurements are determined based upon the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive of any transaction costs. The Company utilizes a fair value hierarchy based upon the observability of inputs used in valuation techniques as follows:

Level 1:
  
Observable inputs such as quoted prices in active markets;
 
 
 
Level 2:
  
Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
 
 
 
Level 3:
  
Unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.
The following table provides a summary of the recognized assets and liabilities that are measured at fair value on a recurring basis (in thousands):

 
 
August 29, 2015
 
August 30, 2014
 
February 28, 2015
 
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-qualified deferred compensation plan
 
$
6,102

 
$

 
$

 
$
6,279

 
$

 
$

 
$
6,424

 
$

 
$

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contingent consideration liabilities
 
$

 
$

 
$
420

 
$

 
$

 
$
800

 
$

 
$

 
$
650

Included in Level 1 assets are mutual fund investments under a non-qualified deferred compensation plan. The Company estimates the fair value of these investments on a recurring basis using readily available market prices.
Included in Level 3 liabilities are the contingent consideration liabilities related to the Company’s acquisitions. The liabilities are adjusted to fair value each reporting period. The categorization of the framework used to price the liabilities is considered Level 3, due to the subjective nature of the unobservable inputs used to determine the fair value.

8



There were no transfers into or out of Level 1, Level 2, or Level 3 assets or liabilities for any of the periods presented.
Level 3 Valuation Techniques
Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, or similar techniques and at least one significant model assumption or input is unobservable.
The following table provides a reconciliation of the Company’s Level 3 contingent consideration liabilities during the twenty-six weeks ended August 29, 2015 (in thousands):

 
Level 3
Liabilities
Balance as of February 28, 2015
$
650

Contingent consideration from acquisition
120

Settlement of contingent consideration
(350
)
Balance as of August 29, 2015
$
420

The Company has certain assets that are measured at fair value on a non-recurring basis and are adjusted to fair value under certain circumstances that include those described in Note 7, Impairment Charges and Store Closing Costs. The categorization used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value.
Additionally, in connection with the acquisitions and purchase price allocations that are described in Note 2, Acquisitions and Goodwill, the Company recognized the acquired assets and liabilities at fair value. All amounts are recognized as Level 3 measurements due to the subjective nature of the unobservable inputs used to determine the fair values.
4. Debt Agreement
On November 30, 2012, the Company entered into an unsecured $100 million Amended and Restated Revolving Credit Facility Credit Agreement (the “Amended Credit Agreement”) with certain Lenders, which expires on November 30, 2017. The Amended Credit Agreement provides that, under certain circumstances, the Company may increase the maximum amount of the credit facility in an aggregate principal amount not to exceed $200 million. The Amended Credit Agreement is used by the Company, among other things, to issue letters of credit, support working capital needs, fund capital expenditures, and for other general corporate purposes.
Approximately $1.6 million in stand-by letters of credit were outstanding as of August 29, 2015 under the Amended Credit Agreement. No advances were outstanding under the Amended Credit Agreement as of August 29, 2015. Accordingly, the total revolving credit availability under the Amended Credit Agreement was $98.4 million as of August 29, 2015.
The Company’s ability to borrow monies in the future under the Amended Credit Agreement is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties. The Amended Credit Agreement contains restrictive covenants that limit, among other things, mergers and acquisitions. In addition, the Company must maintain a maximum leverage ratio (as defined in the Amended Credit Agreement) and minimum consolidated tangible net worth (as defined in the Amended Credit Agreement). The Company was in compliance with all such covenants as of August 29, 2015.
The Amended Credit Agreement pricing grid is adjusted quarterly and is based on the Company’s leverage ratio (as defined in the Amended Credit Agreement). The minimum pricing is LIBOR plus 0.90% or Base Rate (as defined in the Amended Credit Agreement) and the maximum pricing is LIBOR plus 1.75% or Base Rate plus 0.75%. The Company is subject to an unused commitment fee based on the Company’s leverage ratio with minimum pricing of 0.10% and maximum pricing of 0.25%. In addition, the Company is subject to a letter of credit fee based on the Company’s leverage ratio with minimum pricing of 0.40% and maximum pricing of 1.25%.
5. Earnings Per Share
Basic earnings per share attributable to The Finish Line, Inc. shareholders is calculated by dividing net income attributable to The Finish Line, Inc. associated with common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share attributable to The Finish Line, Inc. shareholders assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and contingently

9



issuable securities if the effect is dilutive, in accordance with the treasury stock method or two-class method (whichever is more dilutive) discussed in Accounting Standards Codification (“ASC”) 260-10, Earnings Per Share.
ASC 260-10 requires the inclusion of restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shares. During periods of net income, participating securities are allocated a proportional share of net income attributable to The Finish Line, Inc. determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). During periods of net loss, no effect is given to participating securities since they do not share in the losses of the Company. Participating securities have the effect of diluting both basic and diluted earnings per share during periods of net income.
The following is a reconciliation of the numerators and denominators used in computing earnings per share (in thousands, except per share amounts):
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
Net income attributable to The Finish Line, Inc.
 
$
25,902

 
$
26,157

 
$
39,691

 
$
38,592

Net income attributable to The Finish Line, Inc. attributable to participating securities
 
311

 
317

 
476

 
466

Net income attributable to The Finish Line, Inc. available to common shareholders
 
$
25,591

 
$
25,840

 
$
39,215

 
$
38,126

Basic earnings per share attributable to The Finish Line, Inc. shareholders:
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding
 
44,866

 
47,789

 
45,151

 
47,859

Basic earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.57

 
$
0.54

 
$
0.87

 
$
0.80

Diluted earnings per share attributable to The Finish Line, Inc. shareholders:
 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding
 
44,866

 
47,789

 
45,151

 
47,859

Dilutive effect of potential common shares(a)
 
341

 
413

 
312

 
422

Diluted weighted-average number of common shares outstanding
 
45,207

 
48,202

 
45,463

 
48,281

Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.57

 
$
0.54

 
$
0.86

 
$
0.79

(a)
The computation of diluted earnings per share attributable to The Finish Line, Inc. shareholders excludes options to purchase approximately 1.3 million and 0.7 million shares of common stock in the thirteen weeks ended August 29, 2015 and August 30, 2014, respectively, and 1.3 million and 0.6 million shares of common stock in the twenty-six weeks ended August 29, 2015 and August 30, 2014, respectively, because the impact of such options would have been anti-dilutive.
6. Common Stock
On July 21, 2011, the Company’s Board of Directors authorized a share repurchase program (the “2011 Share Repurchase Program”) to repurchase up to 5,000,000 shares of the Company’s common stock outstanding through December 31, 2014. On January 3, 2013, the Company’s Board of Directors amended the 2011 Share Repurchase Program (the “2013 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2017. On March 26, 2015, the Company’s Board of Directors amended the 2013 Amended Program (the “2015 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2018.
The Company purchased 1,416,667 shares at an average price of $25.36 per share for an aggregate amount of $35.9 million during the twenty-six weeks ended August 29, 2015. As of August 29, 2015, there were 4,787,836 shares remaining available to repurchase under the 2015 Amended Program.

10



As of August 29, 2015, the Company held 14,912,977 shares of its common stock as treasury shares at an average price of $20.50 per share for an aggregate carrying amount of $305.7 million. The Company’s treasury shares may be issued upon the exercise of employee stock options, under the Employee Stock Purchase Plan, in the form of restricted stock, or for other corporate purposes. The number of shares of common stock reserved to be issued upon the exercise of options, restricted stock, or other awards is limited as defined in the 2002 Stock Incentive Plan of The Finish Line, Inc. (the “2002 Incentive Plan”) and The Finish Line, Inc. Amended and Restated 2009 Incentive Plan (the “Amended 2009 Incentive Plan”). Further purchases will occur from time to time as market conditions warrant and as the Company deems appropriate when judged against other alternative uses of cash.
On July 16, 2015, the Company announced a quarterly cash dividend of $0.09 per share of the Company’s common stock. The Company declared dividends of $8.2 million during the twenty-six weeks ended August 29, 2015, of which $4.1 million was included in other liabilities and accrued expenses on the Company’s consolidated balance sheet as of August 29, 2015. Further declarations of dividends remain at the discretion of the Company’s Board of Directors.
7. Impairment Charges and Store Closing Costs
During the twenty-six weeks ended August 29, 2015, the Company recorded $0.3 million in store closing costs, which represents the non-cash write-off of fixtures and equipment upon a store or shop within a department store closing.
The $2.7 million in impairment charges and store closing costs that were recorded during the twenty-six weeks ended August 30, 2014 were primarily the result of a $2.1 million charge for the write-off of tangible and indefinite-lived intangible assets related to one of the Company’s websites, as the Company determined that the website was no longer going to be used for its originally intended purpose. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $0.4 million in store closing costs during the twenty-six weeks ended August 30, 2014.
8. Commitments and Contingencies
The Company is subject, from time to time, to certain legal proceedings and claims in the ordinary course of conducting its business. The Company establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. The Company believes there are no pending legal proceedings in which the Company is currently involved which will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
9. Equity Compensation
General
Total share-based compensation expense for both the twenty-six weeks ended August 29, 2015 and August 30, 2014 was $4.2 million.

11



Stock Option Activity
Stock options have been granted to non-employee directors, officers, and other key employees. Generally, options outstanding under the 2002 and Amended 2009 Incentive Plans are exercisable at a price equal to the fair market value on the date of grant, vest over four years, and expire ten years after the date of grant. During the twenty-six weeks ended August 29, 2015 and August 30, 2014, the Company granted approximately 762,000 and 684,000 options, respectively. The estimated weighted-average fair value of the individual options granted during the twenty-six weeks ended August 29, 2015 and August 30, 2014, was $6.57 and $8.58, respectively, on the date of the grant. The fair values for all options were determined using a Black-Scholes option-pricing model with the following weighted average assumptions:

 
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
Dividend yield
 
1.5
%
 
1.2
%
Volatility
 
33.4
%
 
36.9
%
Risk-free interest rate
 
1.4
%
 
1.7
%
Expected life
 
5.0 years

 
5.0 years

The dividend yield assumption is based on the Company’s history and expectation of dividend payouts. The expected volatility assumption is based on the Company’s analysis of historical volatility. The risk-free interest rate assumption is based upon the average daily closing rates during the period for U.S. treasury notes that have a life which approximates the expected life of the option. The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding based on historical exercise experience.
As of August 29, 2015, there was $9.0 million of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options. That expense is expected to be recognized over a weighted average period of 1.8 years.
Restricted Stock Activity
The Company has granted to non-employee directors, officers, and other key employees shares of the Company’s common stock that are subject to restrictions. The restricted stock granted to employees under the 2002 and Amended 2009 Incentive Plans either vest upon the achievement of specified levels of profitability growth over a three-year period or cliff-vest after a three-year period. For performance-based awards, should the profitability criteria not be met over the three-year period, the shares will be forfeited. All restricted stock awards issued to non-employee directors cliff-vest after a one-year period from the grant date. During the twenty-six weeks ended August 29, 2015 and August 30, 2014, the Company granted approximately 208,000 and 208,000 restricted shares, respectively.
As of August 29, 2015, there was $7.8 million of total unrecognized compensation expense, net of estimated forfeitures, related to nonvested restricted stock. That expense is expected to be recognized over a weighted average period of 1.9 years.
10. Redeemable Noncontrolling Interest
On March 29, 2012, GCPI SR LLC (“GCPI”) made a $10.0 million strategic investment in Running Specialty, though the Company remained the majority owner. GCPI had the right to “put” and the Company had the right to “call” after March 4, 2017, under certain circumstances, GCPI’s interest in Running Specialty at an agreed upon price approximating fair value. Also, as part of the transaction, GCPI issued to the Company a $4.0 million related-party promissory note (the “Promissory Note”), which was collateralized with GCPI’s interest in Running Specialty, due March 31, 2021 or earlier depending on certain stipulated events in the control of GCPI.
On April 25, 2014, the Company entered into a Membership Interest Purchase Agreement (“Membership Agreement”) with GCPI to increase the Company’s ownership in Running Specialty for a purchase price of $10.5 million. The Company paid GCPI $9.0 million of the purchase price in cash at closing after deducting the $4.1 million balance of the Promissory Note that was due from GCPI to the Company. The remaining $1.5 million purchase price is due to GCPI upon the earlier of April 30, 2017 or the date of liquidation or consummation of a sale of Running Specialty. The balance of the $1.5 million liability is included in other long-term liabilities on the consolidated balance sheets. In addition, the Membership Agreement provided an additional “put” to GCPI and “call” to the Company of GCPI’s interest in Running Specialty for $1.0 million commencing on April 25, 2015 and ending on June 30, 2015, which was exercised by GCPI on June 29, 2015 and closed on July 31, 2015. After the closing of the purchase on July 31, 2015, Running Specialty is now wholly owned by the Company.

12



The redeemable noncontrolling interest was classified as mezzanine equity and measured at the greater of estimated fair value at the end of each reporting period or the historical cost basis of the redeemable noncontrolling interest, net of the Promissory Note and related accrued interest and adjusted for cumulative earnings or loss allocations. The resulting increases or decreases in the estimated redemption amount were affected by corresponding charges against retained earnings, or in the absence of retained earnings, additional paid-in capital. The redeemable noncontrolling interest was always measured at historical cost basis.
A rollforward of redeemable noncontrolling interest, net, is detailed below (in thousands):

 
Twenty-Six Weeks Ended
 
August 29, 2015
 
August 30, 2014
Redeemable noncontrolling interest, net, beginning of period
$
90

 
$
1,774

Net loss attributable to redeemable noncontrolling interest
(96
)
 
(1,778
)
Purchase of redeemable noncontrolling interest
(1,000
)
 
(10,500
)
Proceeds and interest related to the Promissory Note

 
4,083

Decrease in additional paid-in capital for purchase of redeemable noncontrolling membership interest
618

 
6,984

Decrease in deferred tax liability related to purchase of redeemable noncontrolling membership interest
388

 

Redeemable noncontrolling interest, net, end of period
$

 
$
563


13



Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
This quarterly report on Form 10-Q may contain certain statements that the Company believes are, or may be considered to be, “forward-looking” statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements generally can be identified by use of statements that include, but are not limited to, words or phrases such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “future,” “forecast,” “outlook,” “foresee,” “predict,” “project,” “potential,” “plan,” “goal,” “will,” “will be,” “continue,” “lead to,” “expand,” “grow,” “confidence,” “could,” “should,” “may,” “might,” or other similar words or phrases. Similarly, statements that describe the Company’s objectives, plans, or goals also are forward-looking statements. All of these forward-looking statements are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from those contemplated by the relevant forward-looking statement. The principal risk factors that could cause actual performance and future actions to differ materially from the forward-looking statements include, but are not limited to, the Company’s reliance on a few key vendors for a majority of its merchandise purchases (including a significant portion from one key vendor); the availability and timely receipt of products; the ability to timely fulfill and ship products to customers; fluctuations in oil prices causing changes in gasoline and energy prices, resulting in changes in consumer spending as well as increases in utility, freight and product costs; product demand and market acceptance risks; deterioration of macro-economic and business conditions; the inability to locate and obtain or retain acceptable lease terms for the Company’s stores; the effect of competitive products and pricing; loss of key employees; execution of strategic growth initiatives (including actual and potential mergers and acquisitions and other components of the Company’s capital allocation strategy); cybersecurity risks, including breach of customer data; a major failure of technology and information systems; and the other risks detailed in the Company’s Securities and Exchange Commission filings. Readers are urged to consider these factors carefully in evaluating the forward-looking statements. The forward-looking statements included in this Form 10-Q are made only as of the date of this report and the Company undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
General
The following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Critical Accounting Policies, contained in the Company’s Annual Report on Form 10-K for the year ended February 28, 2015.
The Company is a premium retailer of athletic shoes, apparel, and accessories for men, women, and kids, throughout the United States, through multiple operating segments.
Brick and mortar comparable store sales are sales from Finish Line stores open longer than one year, beginning in the thirteenth month of a store’s operation. Expanded stores are excluded from the brick and mortar comparable store sales calculation until the thirteenth month following the re-opening of the store and temporarily closed stores are excluded during the months that the store is closed. Brick and mortar comparable store sales do not include shops within department stores.
Digital comparable sales are the change in sales year over year for the reporting period derived from finishline.com and m.finishline.com.
Finish Line comparable store sales is the aggregation of brick and mortar comparable store sales and digital comparable sales.
Running Specialty comparable store sales are sales from stores open longer than one year or operated longer than one year after being acquired, including e-commerce sales, beginning in the thirteenth month of a store’s operation or after it was acquired. Expanded stores are excluded from the Running Specialty comparable store sales calculation until the thirteenth month following the re-opening of the store and temporarily closed stores are excluded during the months that the store is closed.

14



The following tables set forth store/shop and square feet information for each of the following periods:
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
Number of stores/shops
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
Finish Line:
 
 
 
 
 
 
 
 
Beginning of period
 
624

 
645

 
637

 
645

Opened
 
3

 
4

 
5

 
7

Closed
 
(7
)
 
(2
)
 
(22
)
 
(5
)
End of period
 
620

 
647

 
620

 
647

Branded shops within department stores:
 
 
 
 
 
 
 
 
Beginning of period
 
395

 
262

 
395

 
185

Opened
 

 
109

 

 
186

Closed
 
(1
)
 
(1
)
 
(1
)
 
(1
)
End of period
 
394

 
370

 
394

 
370

Running Specialty:
 
 
 
 
 
 
 
 
Beginning of period
 
76

 
58

 
71

 
48

Acquired
 

 

 
4

 
8

Opened
 

 

 
1

 
2

Closed
 

 

 

 

End of period
 
76

 
58

 
76

 
58

Total:
 
 
 
 
 
 
 
 
Beginning of period
 
1,095

 
965

 
1,103

 
878

Acquired
 

 

 
4

 
8

Opened
 
3

 
113

 
6

 
195

Closed
 
(8
)
 
(3
)
 
(23
)
 
(6
)
End of period
 
1,090

 
1,075

 
1,090

 
1,075

 
Square feet information
 
August 29, 2015
 
August 30, 2014
Finish Line:
 
 
 
 
Square feet
 
3,395,611

 
3,523,755

Average store size
 
5,477

 
5,446

Branded shops within department stores:
 
 
 
 
Square feet
 
448,861

 
372,672

Average shop size
 
1,139

 
1,007

Running Specialty:
 
 
 
 
Square feet
 
275,571

 
199,905

Average store size
 
3,626

 
3,447

Total:
 
 
 
 
Square feet
 
4,120,043

 
4,096,332


15



Results of Operations
The following tables set forth net sales of the Company by major category for each of the following periods (in thousands):
 
 
 
Thirteen Weeks Ended
Category
 
August 29, 2015
 
August 30, 2014
Footwear
 
$
432,323

 
89
%
 
$
417,827

 
89
%
Softgoods
 
50,827

 
11
%
 
49,053

 
11
%
Total net sales
 
$
483,150

 
100
%
 
$
466,880

 
100
%

 
 
Twenty-Six Weeks Ended
Category
 
August 29, 2015
 
August 30, 2014
Footwear
 
$
834,501

 
90
%
 
$
787,017

 
90
%
Softgoods
 
92,043

 
10
%
 
86,394

 
10
%
Total net sales
 
$
926,544

 
100
%
 
$
873,411

 
100
%
The following table and subsequent discussion set forth operating data of the Company as a percentage of net sales for each of the following periods:
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales (including occupancy costs)
 
67.0

 
66.8

 
67.8

 
67.5

Gross profit
 
33.0

 
33.2

 
32.2

 
32.5

Selling, general, and administrative expenses
 
24.4

 
24.0

 
25.3

 
25.3

Impairment charges and store closing costs
 

 

 

 
0.3

Operating income
 
8.6

 
9.2

 
6.9

 
6.9

Interest income (expense), net
 

 

 

 

Income before income taxes
 
8.6

 
9.2

 
6.9

 
6.9

Income tax expense
 
3.2

 
3.6

 
2.6

 
2.7

Net income
 
5.4

 
5.6

 
4.3

 
4.2

Net loss (income) attributable to redeemable noncontrolling interest
 

 

 

 
0.2

Net income attributable to The Finish Line, Inc.
 
5.4
%
 
5.6
%
 
4.3
%
 
4.4
%

16



Thirteen and Twenty-Six Weeks Ended August 29, 2015 Compared to the Thirteen and Twenty-Six Weeks Ended August 30, 2014
Net Sales
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Brick and mortar stores sales
 
$
337,218

 
$
343,505

 
$
629,409

 
$
638,936

Digital sales
 
60,715

 
54,147

 
128,400

 
104,094

Shops within department stores sales
 
60,780

 
49,993

 
120,302

 
93,840

Running Specialty sales
 
24,437

 
19,235

 
48,433

 
36,541

Total net sales
 
$
483,150

 
$
466,880

 
$
926,544

 
$
873,411

 
 
 
 
 
 
 
 
 
Brick and mortar comparable store sales decrease
 
(0.2
)%
 
(2.1
)%
 
(0.1
)%
 
(0.1
)%
Digital comparable sales increase
 
12.1
 %
 
31.6
 %
 
23.3
 %
 
27.2
 %
Finish Line comparable store sales increase
 
1.5
 %
 
1.5
 %
 
3.4
 %
 
3.1
 %
Running Specialty comparable store sales decrease
 
(4.0
)%
 
N/A

 
(3.7
)%
 
N/A

Net sales increased 3.5% for the thirteen weeks ended August 29, 2015 compared to the thirteen weeks ended August 30, 2014. The increase was attributable to a Finish Line comparable store sales increase of 1.5%, an increase in shops within department stores sales of 21.6%, primarily due to increased shop count, and an increase in Running Specialty sales of 27.0%, primarily due to increased store count, offset partially by a decrease in net sales resulting from a net decrease in Finish Line store count for the thirteen weeks ended August 29, 2015 compared to the thirteen weeks ended August 30, 2014. The Finish Line comparable store sales increase of 1.5% was due to an increase in average dollar per transaction and digital traffic, partially offset by a decrease in store conversion, store traffic, and digital conversion.
Consolidated footwear sales increased 3.5% for the thirteen weeks ended August 29, 2015 compared to the thirteen weeks ended August 30, 2014, which was primarily driven by percentage increases in the low single digits in men’s, mid teens in women’s, and mid single digits in kids’ footwear sales. Consolidated softgoods sales increased 3.6% for the thirteen weeks ended August 29, 2015 compared to the thirteen weeks ended August 30, 2014.
Net sales increased 6.1% for the twenty-six weeks ended August 29, 2015 compared to the twenty-six weeks ended August 30, 2014. The increase was attributable to a Finish Line comparable store sales increase of 3.4%, an increase in shops within department stores sales of 28.2%, primarily due to increased shop count, and an increase in Running Specialty sales of 32.5%, primarily due to increased store count, offset partially by a decrease in net sales resulting from a net decrease in Finish Line store count for the twenty-six weeks ended August 29, 2015 compared to the twenty-six weeks ended August 30, 2014. The Finish Line comparable store sales increase of 3.4% was due to an increase in average dollar per transaction, digital traffic, and digital conversion, partially offset by a decrease in store conversion and store traffic.
Consolidated footwear sales increased 6.0% for the twenty-six weeks ended August 29, 2015 compared to the twenty-six weeks ended August 30, 2014, which was primarily driven by percentage increases in the mid single digits in men’s, high teens in women’s, and mid single digits in kids’ footwear sales. Consolidated softgoods sales increased 6.5% for the twenty-six weeks ended August 29, 2015 compared to the twenty-six weeks ended August 30, 2014.

17



Cost of Sales (Including Occupancy Costs) and Gross Profit
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Cost of sales (including occupancy costs)
 
$
323,943

 
$
311,760

 
$
628,361

 
$
589,411

Gross profit
 
$
159,207

 
$
155,120

 
$
298,183

 
$
284,000

Gross profit as a percentage of net sales
 
33.0
%
 
33.2
%
 
32.2
%
 
32.5
%
The 0.2% decrease in gross profit, as a percentage of net sales, for the thirteen weeks ended August 29, 2015 as compared to the thirteen weeks ended August 30, 2014, was primarily due to a 0.3% increase in occupancy costs, as a percentage of net sales, partially offset by a 0.1% increase in product margin. The 0.3% increase in occupancy costs, as a percentage of net sales, was primarily due to deleveraging against the comparable store sales increase. The 0.1% increase in product margin, net of shrink, as a percentage of net sales, was primarily the result of being slightly less promotional, partially offset by higher shrink in the thirteen weeks ended August 29, 2015 compared to the thirteen weeks ended August 30, 2014.
The 0.3% decrease in gross profit, as a percentage of net sales, for the twenty-six weeks ended August 29, 2015 as compared to the twenty-six weeks ended August 30, 2014, was primarily due to a 0.3% increase in occupancy costs, as a percentage of net sales. The 0.3% increase in occupancy costs, as a percentage of net sales, was primarily due to deleveraging against the comparable store sales increase.
Selling, General, and Administrative Expenses
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Selling, general, and administrative expenses
 
$
117,604

 
$
111,882

 
$
234,061

 
$
220,778

Selling, general, and administrative expenses as a percentage of net sales
 
24.4
%
 
24.0
%
 
25.3
%
 
25.3
%
The $5.7 million increase in selling, general, and administrative expenses for the thirteen weeks ended August 29, 2015 as compared to the thirteen weeks ended August 30, 2014 was primarily due to the following: (1) the increased cost associated with store payroll related to the growth in shops within department stores and growth in Running Specialty stores; and (2) variable costs in fulfillment, Macys.com license fees, and payroll in conjunction with the 3.5% increase in consolidated net sales.
The $13.3 million increase in selling, general, and administrative expenses for the twenty-six weeks ended August 29, 2015 as compared to the twenty-six weeks ended August 30, 2014 was primarily due to the following: (1) the increased cost associated with store payroll related to the growth in shops within department stores and growth in Running Specialty stores; and (2) variable costs in fulfillment, Macys.com license fees, and payroll in conjunction with the 6.1% increase in consolidated net sales.

18



Impairment Charges and Store Closing Costs

 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Impairment charges and store closing costs
 
$
160

 
$
379

 
$
328

 
$
2,693

Impairment charges and store closing costs as a percentage of net sales
 
%
 
%
 
%
 
0.3
%
Number of stores/shops closed
 
8

 
3

 
23

 
6

During the twenty-six weeks ended August 29, 2015, the Company recorded $0.3 million in store closing costs, which represent the non-cash write-off of fixtures and equipment upon a store or shop within a department store closing.
The $2.7 million in impairment charges and store closing costs recorded during the twenty-six weeks ended August 30, 2014, were primarily the result of a $2.1 million charge for the write-off of tangible and indefinite-lived intangible assets related to one of the Company’s websites, as the Company determined that the website was no longer going to be used for its originally intended purpose. Additionally, the Company recorded $0.4 million in store closing costs during the twenty-six weeks ended August 29, 2015.
Interest Income (Expense), Net
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Interest income (expense), net
 
$
1

 
$
(1
)
 
$
(1
)
 
$
6

Interest income (expense), net as a percentage of net sales
 
%
 
%
 
%
 
%
Interest income is earned on the Company’s investments and interest expense is incurred from the unused commitment fee and letter of credit fees related to the Company’s Amended and Restated Revolving Credit Facility Credit Agreement.
Income Tax Expense
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Income tax expense
 
$
15,583

 
$
16,699

 
$
24,198

 
$
23,721

Income tax expense as a percentage of net sales
 
3.2
%
 
3.6
%
 
2.6
%
 
2.7
%
Effective income tax rate
 
37.6
%
 
39.0
%
 
37.9
%
 
39.2
%
The decrease in the effective tax rate is the result of a decrease in state tax expense and other non-deductible expenses incurred during the thirteen and twenty-six weeks ended August 29, 2015 compared to the thirteen and twenty-six weeks ended August 30, 2014.

19



Net Loss (Income) Attributable to Redeemable Noncontrolling Interest
 
 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Net loss (income) attributable to redeemable noncontrolling interest
 
$
41

 
$
(2
)
 
$
96

 
$
1,778

Net loss (income) attributable to redeemable noncontrolling interest as a percentage of net sales
 
%
 
%
 
%
 
0.2
%
The net loss (income) attributable to redeemable noncontrolling interest represents the noncontrolling owner’s portion of the net loss generated by Running Specialty for the applicable period.
Net Income Attributable to The Finish Line, Inc.

 
 
Thirteen Weeks Ended
 
Twenty-Six Weeks Ended
 
 
August 29, 2015
 
August 30, 2014
 
August 29, 2015
 
August 30, 2014
 
 
(dollars in thousands)
 
(dollars in thousands)
Net income attributable to The Finish Line, Inc.
 
$
25,902

 
$
26,157

 
$
39,691

 
$
38,592

Net income attributable to The Finish Line, Inc. as a percentage of net sales
 
5.4
%
 
5.6
%
 
4.3
%
 
4.4
%
Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.57

 
$
0.54

 
$
0.86

 
$
0.79

The $0.3 million decrease in net income attributable to The Finish Line, Inc. for the thirteen weeks ended August 29, 2015 compared to the thirteen weeks ended August 30, 2014 was primarily due to a decrease in gross profit as a percentage of net sales and the increase in selling, general, and administrative expenses to support the increase in sales and shops within department stores and Running Specialty in the current year, partially offset by the increase in net sales and the decrease in impairment charges.
The $1.1 million increase in net income attributable to The Finish Line, Inc. for the twenty-six weeks ended August 29, 2015 compared to the twenty-six weeks ended August 30, 2014 was primarily due to the increase in net sales and the decrease in impairment charges, which were partially offset by a decrease in gross profit as a percentage of net sales and the increase in selling, general, and administrative expenses to support the increase in sales in shops within department stores and Running Specialty in the current year.
Liquidity and Capital Resources
The Company’s primary source of working capital is cash-on-hand and cash flows from operations. The following table sets forth material balance sheet and liquidity measures of the Company (in thousands):
 
 
 
August 29, 2015
 
August 30, 2014
 
February 28, 2015
Cash and cash equivalents
 
$
100,234

 
$
190,583

 
$
149,569

Merchandise inventories, net
 
$
366,335

 
$
329,924

 
$
343,403

Interest-bearing debt
 
$

 
$

 
$

Working capital
 
$
322,449

 
$
361,329

 
$
333,160

Operating Activities
Net cash provided by operating activities for the twenty-six weeks ended August 29, 2015 was $37.2 million compared to net cash provided by operating activities of $38.8 million for the twenty-six weeks ended August 30, 2014. The decrease was primarily the result of a decrease in deferred income taxes, impairment charges and store closing costs, and an increase in cash outflow in working capital balances, partially offset by an increase in net income for the twenty-six weeks ended August 29, 2015 compared to the twenty-six weeks ended August 30, 2014.

20



At August 29, 2015, the Company had cash and cash equivalents of $100.2 million. Cash and cash equivalents consist primarily of cash on hand and highly liquid instruments with a maturity of three months or less at the date of purchase. At August 29, 2015, substantially all of the Company’s cash was invested in deposit accounts at banks.
Merchandise inventories, net, increased 11.0% at August 29, 2015 compared to August 30, 2014, and increased 6.7% from February 28, 2015. The increase in merchandise inventories, net over the prior year quarter is primarily related to a seasonable build due to a later Labor Day which shifted some back to school sales into the third quarter. The increase in merchandise inventories from February 28, 2015 is due to seasonality as the Company increased inventories for the back to school selling season.
Investing Activities
Net cash used in investing activities for the twenty-six weeks ended August 29, 2015 was $43.3 million compared to $49.4 million for the twenty-six weeks ended August 30, 2014. The decrease in cash used in investing activities was primarily the result of a $3.6 million increase in Running Specialty acquisitions, partially offset by an $8.9 million decrease in capital expenditures in the current year.
The Company intends to invest approximately $60 million in capital expenditures during the Company’s fiscal year 2016. Of this amount, approximately $25 million is intended for the construction of new brick and mortar stores and the remodeling or repositioning of 65-80 existing brick and mortar stores, including additional brand shops such as Finish Line’s Nike Track Club and Brand Jordan, as well as other key brand partnerships for “store-within-store” models. In addition, approximately $5-8 million is expected to be spent to reposition and expand 75-100 shops within department stores. The remaining $27-$30 million to be invested is related primarily to projected capital expenditures for technology investments to support new warehouse management, order management, and Macy’s merchandise systems, an upgrade of our digital platform, and enhancements to our customer data and analytics systems. The Company anticipates satisfying all of these capital expenditures through the use of cash-on-hand and operating cash flows.
Financing Activities
Net cash used in financing activities for the twenty-six weeks ended August 29, 2015 was $43.3 million compared to $27.9 million for the twenty-six weeks ended August 30, 2014. The $15.4 million increase in cash used in financing activities was primarily due to a $13.7 million increase in stock repurchases, $4.1 million of proceeds from the repayment of a related-party promissory note in the prior year, a $4.0 million decrease in proceeds from the issuance of common stock, a $1.4 million decrease in excess tax benefits from share-based compensation, the purchase of redeemable noncontrolling interest of $1.0 million, and a $0.5 million increase in dividends paid to shareholders, offset partially by the purchase of redeemable noncontrolling interest of $9.0 million during the twenty-six weeks ended August 30, 2014.
Share Repurchase Program
On July 21, 2011, the Company’s Board of Directors authorized a share repurchase program (the “2011 Share Repurchase Program”) to repurchase up to 5,000,000 shares of the Company’s common stock outstanding through December 31, 2014. On January 3, 2013, the Company’s Board of Directors amended the 2011 Share Repurchase Program (the “2013 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2017. On March 26, 2015, the Company’s Board of Directors amended the 2013 Amended Program (the “2015 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2018.
The Company purchased 1,416,667 shares at an average price of $25.36 per share for an aggregate amount of $35.9 million during the twenty-six weeks ended August 29, 2015. As of August 29, 2015, there were 4,787,836 shares remaining available to repurchase under the 2015 Amended Program.
As of August 29, 2015, the Company held 14,912,977 shares of its common stock as treasury shares at an average price of $20.50 per share for an aggregate carrying amount of $305.7 million. The Company’s treasury shares may be issued upon the exercise of employee stock options, under the Employee Stock Purchase Plan, in the form of restricted stock, or for other corporate purposes. The number of shares of common stock reserved to be issued upon the exercise of options, restricted stock, or other awards is limited as defined in the 2002 Stock Incentive Plan of The Finish Line, Inc. and The Finish Line, Inc. Amended and Restated 2009 Incentive Plans. Further purchases will occur from time to time as market conditions warrant and as the Company deems appropriate when judged against other alternative uses of cash.

21



Dividends
On July 16, 2015, the Company announced a quarterly cash dividend of $0.09 per share of the Company’s common stock. The Company declared dividends of $8.2 million during the twenty-six weeks ended August 29, 2015, of which $4.1 million was included in other liabilities and accrued expenses on the Company’s consolidated balance sheet as of August 29, 2015 and was paid on September 14, 2015 to shareholders of record on August 28, 2015. Further declarations of dividends remain at the discretion of the Company’s Board of Directors.
Contractual Obligations
The Company’s contractual obligations primarily consist of operating leases and open purchase orders for merchandise inventory. For the twenty-six weeks ended August 29, 2015, there were no significant changes to the Company’s contractual obligations from those identified in the Company’s Annual Report on Form 10-K for the year ended February 28, 2015, other than those which occur in the ordinary course of business (primarily changes in the Company’s merchandise inventory related to purchase obligations, which fluctuate throughout the year as a result of the seasonal nature of the Company’s operations, and changes to operating leases due to store openings and closings).
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to adopt accounting policies related to estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. On an ongoing basis, management evaluates the Company’s accounting policies, estimates, and judgments, including those related to inventories, long-lived assets, and contingencies. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.
Item 3.
Quantitative and Qualitative Disclosures About Market Risks
For a discussion of the Company’s market risk associated with interest rates as of February 28, 2015, see “Quantitative and Qualitative Disclosures about Market Risks” in Item 7A of Part II of the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2015. For the twenty-six weeks ended August 29, 2015, there has been no significant change in related market risk factors.
Item 4.
Controls and Procedures
Disclosure Controls and Procedures. With the participation of our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Report. Based upon such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures were effective in ensuring that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities Exchange Commission’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting. There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this Report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

22



PART II - OTHER INFORMATION
 
Item 1.
Legal Proceedings
The Company is subject, from time to time, to certain legal proceedings and claims in the ordinary course of conducting its business. Although it is not possible to predict with certainty the eventual outcome of any litigation, in the opinion of management, the Company’s legal proceedings are not expected to have a material adverse effect on its financial position, results of operations, or cash flows.
Item 1A.
Risk Factors
Risk factors that affect the Company’s business and financial results are discussed in “Risk Factors” in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2015. There has been no significant change to identified risk factors for the twenty-six weeks ended August 29, 2015.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
On July 21, 2011, the Company’s Board of Directors authorized a share repurchase program (the “2011 Share Repurchase Program”) to repurchase up to 5,000,000 shares of the Company’s common stock outstanding through December 31, 2014. On January 3, 2013, the Company’s Board of Directors amended the 2011 Share Repurchase Program (the “2013 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2017. On March 26, 2015, the Company’s Board of Directors amended the 2013 Amended Program (the “2015 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2018.
Details on the shares repurchased under the 2015 Amended Program during the thirteen weeks ended August 29, 2015 are as follows:
 
Period
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share(1)
 
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
 
Maximum Number (or
Approximate Dollar
Value) of Shares that
May Yet Be Purchased
Under the Program
May 31, 2015 – July 4, 2015
 

 
$

 

 
4,954,503

July 5, 2015 – August 1, 2015
 
166,667

 
27.71

 
166,667

 
4,787,836

August 2, 2015 – August 29, 2015
 

 

 

 
4,787,836

 
 
166,667

 
$
27.71

 
166,667

 
 
_______________________
(1)The average price paid per share includes any brokerage commissions.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.

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Item 6.
Exhibits
(a) Exhibits
 
Exhibit
Number
Description
 
 
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.
 
 
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.
 
 
32
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following materials from The Finish Line, Inc.’s Form 10-Q for the quarterly period ended August 29, 2015, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets-unaudited; (ii) Consolidated Statements of Income-unaudited; (iii) Consolidated Statements of Cash Flows-unaudited; and (iv) Notes to Consolidated Financial Statements-unaudited, with detailed tagging of notes and financial statement schedules.

24



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
 
 
 
THE FINISH LINE, INC.
 
 
 
 
Date:
September 25, 2015
By:
/s/ Edward W. Wilhelm
 
 
 
Edward W. Wilhelm
 
 
 
Executive Vice President, Chief Financial Officer

25



EXHIBIT INDEX

Exhibit
Number
Description
 
 
31.1
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.
 
 
31.2
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.
 
 
32
Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101
The following materials from The Finish Line, Inc.’s Form 10-Q for the quarterly period ended August 29, 2015, formatted in an XBRL Interactive Data File: (i) Consolidated Balance Sheets-unaudited; (ii) Consolidated Statements of Income-unaudited; (iii) Consolidated Statements of Cash Flows-unaudited; and (iv) Notes to Consolidated Financial Statements-unaudited, with detailed tagging of notes and financial statement schedules.
 

26