Why Finish Line Earnings Could Fall Short

Finish Line (FINL +0.00%) will release its quarterly report on Friday, and the stock has managed to hang on to gains earned earlier in the year. But without growth in earnings, the company could languish in its ongoing battle to keep market share despite strong competition from Foot Locker (FL +0.00%) and other retail rivals.

Finish Line has benefited from the general trend toward greater athletic activity, with the popularity of products from Nike (NKE 0.20%) and other shoe and apparel makers drawing shoppers to its stores. But the big question the company faces is how to take its business to the next level even as the retail athletic-gear space gets increasingly crowded. Let's take an early look at what's been happening with Finish Line over the past quarter and what we're likely to see in its report.

Stats on Finish Line

Source: Yahoo! Finance.

Can Finish Line earnings finish strong this quarter?
Analysts have largely kept their views on Finish Line earnings unchanged in recent months, keeping estimates steady for the quarter that contained August and adding just a single penny per share to full-year fiscal 2014 projections. The stock has done a bit better than that, climbing about 6% since late June.

Finish Line managed to make investors happy with its quarterly earnings results for the quarter that ended in May. The company saw a nearly 60% drop in net income during the quarter, but that came largely from costs related to its partnership with Macy's (M 0.42%). The deal places Finish Line specialty shops inside Macy's locations, which gives Finish Line a chance to get its running and fitness products in front of shoppers who wouldn't ordinarily visit its own proprietary sites. Same-store sales for the quarter rose 2.4%, and both earnings and revenue came in ahead of expectations, with overall revenue gains of about 10%.

But competition remains fierce in the industry. Foot Locker has a much larger network of stores, with 3,500 locations scattered across 23 countries around the world. With comparable-store sales up a stronger 3.5%, Foot Locker has found an expansion strategy that emphasizes the most profitable prospective locations and a willingness to be brutal about cutting stores that aren't performing to expectations.

Moreover, Finish Line has to deal with pricing power that's largely set by its suppliers. Nike is a particularly important supplier to the athletic shoe-retail industry, as half of the inventory purchases that Finish Line and Foot Locker make goes toward buying Nike products. That gives Nike substantial ability to set pricing and limit the retailers' margins. Competition from Under Armour (UA 2.82%) might eventually change that dynamic if it forces Nike to make concessions in order to maintain its presence at retail stores. But as Under Armour's products become more popular, it too could gain leverage over Foot Locker and Finish Line, creating another conundrum for the retailers.

In the Finish Line earnings report, take a close look at whether recent weakness from shoemaker Adidas filters through to Finish Line's results. As long as Finish Line customers are buying some of the retailer's products, it doesn't necessarily matter whose products they are. In addition, look closely at guidance for the current and future quarters to see if any temporary weakness is likely to be short-lived.

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