Finish Line is regional sportswear retailer in the United States and few of the significant peers of the firm are Dick’s Sporting Goods and Foot Locker. In the past 5 years, the revenue of Finish Line, Foot Locker and Dick’s Sporting Goods increased at a CAGR of 8.4%, 7.1% and 8.7% respectively as shown in the below graph.
The revenue growth was due to an increase in Finish Line stores. The company was on a growth trajectory and its stores increased since 2011 at an overwhelming CAGR of 19%. The below chart shows the growth in the number of stores from 2011 to 2014.
In addition, the below charts depict the average revenue per store and average revenue per square foot for all the above three entities.
In the sportswear retail industry in the US, there is a strong competition among the players. The average revenue per store for Finish Line saw a decline in the last 5 years.
Finish Line also sells its goods through e-commerce channels and in 2015, 15.5% of its sales originated from e-commerce. But, it lost a portion of the market share to the e-commerce giant Amazon. However, this could not deter the profit erosion. One of the reasons for the fall in revenue per store for Finish Line was the narrow range of sports goods sold by the company. It mostly sells athletic footwear and apparels, nearly 90% of its revenue is derived from footwear sales and the rest from sports apparel sales.
On the other hand, Dick’s Sporting Goods sells a broad range of products that also include sports equipment. Moreover, around 40% of Dick’s Sporting Goods revenue is derived from equipment sales, 19% from footwear sales and the rest from sports apparels. Its stores are 15 times the size of Finish Line’s. It is, therefore, more natural for a consumer to visit a Dick’s Sporting Goods outlets and get access to a wide range of products than visiting a Finish Line. The average revenue per store for Dick’s Sporting Goods in the footwear segment (2015) was more than that of Finish Line and was about USD 1 million. Hence, the alternative for Finish Line was to include a broad range of products. However, they had a high inventory turnover period of 100 days. Therefore, taking into account the space constraints, this was not a viable option for the company. Additionally, another possibility was to open larger stores like Dick’s Sporting Goods and sell a broader range of products. However, this is a relatively long-term solution. Although the average revenue per store for Finish Line went on decreasing, its average revenue per square foot went on increasing in the last 5 years. The inventory turnover days for Finish Line was also increasing. The same store sales growth was initially high as seen in the below chart. Over the period of time as the store count went on increasing, this value however declined. Thus, it can be stated that Finish Line had the twain portfolio of high-performing and underperforming stores. Furthermore, all its new stores opened in the last 5 years and did not perform well.
Finish Line witnessed a continuous decreasing profitability in the 5 year period as compared to Dick’s Sporting Goods and Foot Locker. Finish Line’s EBITDA per store and EBITDA per square foot witnessed a sharp decline. Although Finish Line’s revenue per square foot increased, its EBITDA per square foot decreased. This was on account of increasing SG&A expenses and rental expenses per square foot. A high monthly rental and maintenance expenses were required to run several new stores. Its quarterly results on EBITDA per store recorded a negative EBITDA of USD minus 23,640 in the quarter ending December 2015. The market dynamics necessitated an immediate solution and improvement in operational performance, the best recourse was to close the underperforming stores. Thus, the company closed 30 stores in February 2016 and no new stores were opened in the subsequent period. The CEO of the firm, Samuel Sato stated in a press release that the company plans to close around 150 underperforming stores by the end of 2018.
Finish Line closed 53 stores in the trailing 12 months, ending September 2016. Televisory analysed and compared the results of September 2015 quarter with September 2016 quarter. The EBITDA per square foot decreased by 6.8% from USD 12.56 to USD 11.70 as can be seen from the below EBITDA bridge. This decline was still better than the sharp decline at a CAGR of 8.8% over the past 5 years. However, the EBITDA per square foot decreased, the revenue per square foot increased by USD 9.60. The chart beneath shows that the average number of employees per store has increased. This will result in a better customer experience. The inventory turnover period improved from 103 days to 95 days. The below chart depicts that the average revenue per store has also improved. This shows that Finish Line rightly identified the underperforming stores. This, in turn, also improved the cash conversion cycle from 72.1 days to 57.1 days. The EBITDA margin decreased, however, this decrease would have been more if the underperforming stores were still operating.
The market dynamics entailed the company to adopt a defensive strategy. This was the best possible approach for the firm. It helped the company to sustain and as announced, it can continue to close its underperforming stores. However, if the company wants to open a new store during this phase, it should select the location after a proper market research.
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