XNAS:FINL Annual Report 10-K Filing - 3/3/2012

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Table of Contents

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  For the fiscal year ended March 3, 2012

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 of Incorporation)   (I.R.S. Employer ID No.)

3308 N. Mitthoeffer Road, Indianapolis, Indiana 46235

Registrant’s telephone number, including area code: (317) 899-1022

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of Each Class)

 

(Name of each exchange on which registered)

Class A Common Stock, $.01 par value   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether 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 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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.    x

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   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of the Registrant as of August 27, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $968,987,000, which was based on the last sale price reported for such date by NASDAQ.

The number of shares of the Registrant’s Common Stock outstanding on April 13, 2012 was:

Class A Common Stock: 50,762,124

Class B Common Stock: 1,202,317

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement (to be filed within 120 days after March 3, 2012) for the Annual Meeting of Shareholders to be held on July 19, 2012 (hereinafter referred to as the “2012 Proxy Statement”) are incorporated into Part III.

 

 

 


Table of Contents

PART I

Item 1—Business

General

Throughout this Annual Report on Form 10-K, the 53 weeks ended March 3, 2012 and 52 weeks ended February 26, 2011 and February 27, 2010 are referred to as fiscal 2012, 2011 and 2010, respectively.

The Finish Line, Inc. together with its subsidiaries (collectively the “Company”), is one of the nation’s largest mall-based specialty retailers in the United States, and operates two retail divisions under the Finish Line brand name (“Finish Line”) and Running Specialty Group (“Running Specialty”).

Finish Line. Finish Line is a premium retailer of athletic shoes, apparel and accessories. As of April 13, 2012, the Company operated 637 Finish Line stores averaging approximately 5,400 square feet in 47 states. In addition, the Company operates an e-commerce site, www.finishline.com, as well as mobile commerce via m.finishline.com. Finish Line stores generally carry a large selection of men’s, women’s and kids’ performance and athletic casual shoes, as well as an assortment of apparel and accessories. Brand names offered by Finish Line include Nike, Brand Jordan, Reebok, adidas, Under Armour, Asics, Brooks, New Balance, Mizuno, Lacoste, The North Face and many others. Footwear accounts for approximately 86% of Finish Line’s net sales. Finish Line’s goal is to be the premium athletic footwear retailer, which is defined by offering the most relevant products from the best brands in an engaging and exciting shopping environment with knowledgeable staff trained to deliver outstanding customer service.

Running Specialty. Running Specialty is a specialty running retailer of precision-fitted running shoes, apparel and accessories. As of April 13, 2012, the Company operated 19 Running Specialty stores in seven states and the District of Columbia. In addition, the Company acquired an internet domain name, www.run.com, which will be used as the Running Specialty’s e-commerce site in fiscal 2013. Running Specialty stores generally carry men’s and women’s performance running shoes, as well as an assortment of performance apparel and accessories. Brand names offered include Nike, Reebok, Mizuno, Saucony, Asics, Brooks, New Balance, adidas and Puma. Footwear accounts for approximately 50% of Running Specialty’s net sales. The Running Specialty stores, which average 3,000 square feet, were acquired by the Company on August 31, 2011 when it was an 18-store chain.

The Company’s principal executive offices are located at 3308 N. Mitthoeffer Road, Indianapolis, Indiana 46235, and its telephone number is (317) 899-1022.

Operating Strategies

The Company seeks to be the premium athletic footwear retailer and specialty running retailer in the markets it serves. To achieve this, the Company has developed the following elements to its operating strategy:

Emphasis on Customer Service and Convenience. The Company is committed to providing a premium shopping experience that is relevant and rewarding for customers.

Finish Line seeks to achieve this objective in stores by providing convenient mall-based locations that feature a compelling store design, which in certain stores includes “store-within-a-store” models that feature Nike Track Club and a differentiated customer experience that includes knowledgeable, trained, and courteous customer service professionals as well as a vast selection of fashion-forward and innovative products.

Running Specialty stores carry a deep assortment of performance running shoes, apparel and accessories. The Running Specialty stores have trained experts to advise everyone from beginner to advanced runners and provide free gait analysis to ensure the proper fit. The stores are tightly connected to their communities, hosting regular neighborhood group runs and sponsoring local races.

 

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Through e-commerce and mobile commerce (“digital”), Finish Line and Running Specialty stores seek to provide an easy shopping experience, robust product selection and outstanding service.

Inventory Management. The Finish Line brand stresses effective replenishment and distribution to each store. Finish Line’s advanced information and distribution systems are highly customized and enable it to track inventory in each store by stockkeeping unit (SKU) on a daily basis, giving Finish Line flexibility to merchandise its products effectively. Also, store customer service professionals are able to use the wide area network (“WAN”) and perpetual inventory system to locate and sell merchandise that can then be fulfilled from another store. Finish Line has an advanced merchandise planning and allocation program to provide the ability to have the right merchandise in the right stores at the right time. These systems allow Finish Line to respond promptly to changing customer preferences and to maintain optimal inventory levels in each store. Finish Line’s inventory management system features automatic replenishment driven by point-of-sale (POS) data capture and a highly automated distribution center, which enables Finish Line to ship merchandise to each store every third day.

Product Diversity; Target Customer Appeal. The Company stocks its stores with a combination of the leading and newest brand name merchandise, including in-line offerings and unique products manufactured exclusively for the Company. The focus is on the Company’s stores maintaining its status as a leader in the running category; however, several product categories are represented. Product diversity, in combination with the Company’s store formats and commitment to customer service, is intended to attract a core customer (typically male, age 18-29 for the Finish Line brand and technical and performance runners for the Running Specialty stores) as well as other key demographics. The Company is focused on premium product, meaning the best brands, trend-right styles and most relevant selection; not necessarily dictated by price.

Merchandise

The following table sets forth net sales along with the percentage of net sales attributable to the categories of footwear and softgoods during the years indicated for the Company. These amounts and percentages fluctuate substantially during the different consumer buying seasons. To take advantage of this seasonality, the Company’s stores have been designed to allow for a shift in emphasis in the merchandise mix between footwear and softgoods items.

 

Category

   2012     2011     2010  
     (in thousands)  

Footwear

   $ 1,177,114         86   $ 1,056,586         86   $ 1,005,166         86

Softgoods

     192,145         14     172,416         14     167,249         14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,369,259         100   $ 1,229,002         100   $ 1,172,415         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

All merchandising decisions, including merchandise mix, pricing, promotions and markdowns, are made at the Company’s corporate headquarters. The store sales manager and district sales manager, along with management at the Company’s headquarters, review the merchandise mix to adapt to trends in the marketplace.

Digital

The Company continues to redesign and update its e-commerce site to enhance the quality and functionality of the site. The Company has committed capital and other resources specifically for its growing e-commerce channel, which includes design and content upgrades, mobile and tablet applications, expanded presence on social media, platform enhancements, and the roll out of www.run.com in fiscal 2013 associated with the Running Specialty business. Finishline.com and related mobile sites are the Company’s most visited store with approximately 200,000 visitors per day.

 

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The Company is focused on creating an omni-channel customer experience which will deliver a consistent, seamless brand experience for customers at all touch points – brick and mortar stores, web, mobile, social media, phone, email, and direct mail. The omni-channel strategy is a key initiative and is fundamental to future success.

Marketing

The Company attempts to reach its target audience by using a multifaceted approach to marketing and advertising on national, regional and local levels. The Company utilizes its store windows, direct mail, e-mail, viral media, outdoor and on-line ads in its marketing efforts. Running Specialty also markets through participating in expositions throughout the year at different running events, as well as through local race events.

The Company also takes advantage of advertising and promotional assistance from many of its suppliers. This assistance takes the form of cooperative advertising programs, in-store sales incentives, point-of-purchase materials, product training for employees and other programs. Total advertising expense was 2.0% of net sales after deducting co-op reimbursements in fiscal 2012 compared to 1.6% in fiscal 2011. These percentages fluctuate substantially during the different consumer buying seasons. The Company also believes that it benefits from the multi-million dollar advertising campaigns of its key suppliers, such as Nike, adidas, Reebok and Under Armour.

The Company also has a customer loyalty program called “Winners Circle.” Customers earn a $20 reward certificate for every $200 they spend with Finish Line within a 12 month period, in addition to receiving special member offers and discounts on footwear and apparel. The Company maintains a Winners Circle database with information that it uses to communicate with members regarding key initiatives and promotions as well as other pertinent information. The Company continues to put an emphasis on growing the membership base of the Winners Circle program, which increased 23% in fiscal 2012 and improving the marketing effectiveness of the Winners Circle program to drive sales.

Purchasing and Distribution

In addition to merchandise procurement for both footwear and softgoods, the buying department is also responsible for determining initial pricing and working with the planning and merchandising department to establish appropriate stock levels and product mix. The buying department is also responsible for communicating with store operations to monitor shifts in customer tastes and market trends.

The planning and merchandising department is responsible for merchandise allocation, inventory movements and the automated replenishment system. The department acts as the central processing intermediary between the buying department and stores and also track the effectiveness of each marketing effort to allow the buying department and marketing department to determine the relative success of each promotional program. In addition, this department also manages the implementation of price changes, creation of vendor purchase orders and determination of inventory levels for each store.

The Company believes that its ability to buy in large quantities directly from suppliers enables it to obtain favorable pricing and trade terms. Currently, the Company purchases product from approximately 120 suppliers and manufacturers of athletic and fashion products, the largest of which (Nike) accounted for approximately 64% and 61% of total purchases in fiscal 2012 and 2011, respectively. The Company purchased approximately 84% and 82% of total merchandise in fiscal 2012 and fiscal 2011, respectively, from its five largest suppliers. The Company and its vendors use EDI technology to streamline purchasing and distribution operations.

Nearly all of the Company’s merchandise is shipped directly from suppliers to the distribution center, where the Company processes and ships it by contract and common carriers to its stores. Each day shipments are made

 

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to one-third of the Company’s stores. In any three-week period, each store will receive five shipments. A shipment is normally received by the store one to four days from the date that the order is filled depending on the store’s distance from the distribution center. The Company’s current direct-to-consumer fulfillment systems fulfill 85% from stores and 15% from the distribution center.

Store Operations

The Company’s corporate and regional senior management visit the stores regularly to review the implementation of Company plans and policies, monitor operations, and review inventories and the presentation of merchandise. Accounting and general financial functions for the stores are conducted at the corporate headquarters. Each store has a sales manager or co-sales managers that are responsible for supervision and overall operations, one or more assistant sales managers, and additional full and part-time sales associates.

Finish Line brand regional, district and store sales managers receive a fixed salary (except store managers in California) and are eligible for bonuses, based primarily on sales, payroll and shrinkage performance goals of the stores for which they are responsible. All store sales managers in California, assistant store sales managers and sales associates are paid on an hourly basis. During fiscal 2012, the Company rolled out a national commission program for its Finish Line stores to motivate employees to provide outstanding customer service and drive sales.

Competition

The athletic footwear business is highly competitive. Many of the products the Company sells are also sold in department stores, national and regional full-line sporting goods stores, athletic footwear specialty stores, athletic footwear superstores, discount stores, traditional shoe stores, mass merchandisers and e-tailers. Some of the Company’s primary competitors are large national chains that have substantially greater financial and other resources than the Company. Among the Company’s competition are stores that are owned by major suppliers to the Company. To a lesser extent, the Company competes with local sporting goods and athletic specialty stores. The majority of the Company’s stores are located in enclosed malls or shopping centers in which one or more competitors also operate. Typically, the leases that the Company enters into do not restrict the opening of stores by competitors.

The Company attempts to differentiate itself from its competition by operating more attractive, well-stocked stores in high retail traffic areas, with competitive prices and knowledgeable and courteous customer service. The Company attempts to keep its prices competitive with athletic specialty and sporting goods stores in each trade area, including competitors that are not necessarily located inside the mall. The Company believes it accomplishes this by effectively assorting its stores with the most relevant premium brands and products in the market.

Seasonal Business

The Company’s business follows a seasonal pattern, peaking over a total of approximately 12 weeks during the back-to-school (mid July through early September) and holiday (Thanksgiving through Christmas) periods. During fiscal 2012 and 2011, these periods accounted for approximately 31% and 33%, respectively, of the Company’s annual sales.

Employees

As of March 3, 2012, the Company employed approximately 11,800 persons, 3,500 of whom were full-time and 8,300 of whom were part-time. Of this total, approximately 750 were employed at the Company’s Indianapolis, Indiana corporate headquarters and distribution center and approximately 50 were employed as Regional Vice Presidents and District Sales Managers. Additional part-time employees are typically hired during the back-to-school and holiday seasons. None of the Company’s employees is represented by a union, and employee relations are generally considered good.

 

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Retirement Plan

The Company’s Profit Sharing Plan includes a 401(k) feature. Effective January 1, 2012, the Company amended its Profit Sharing Plan whereby the Company matches 100 percent of employee contributions to the plan on the first 3 percent of employee’s wages and matches an additional 50 percent of employee contributions to the plan up to an additional 2 percent of their wages. Prior to this amendment, the Company matched 50 percent of employee contributions to the plan up to 6 percent of employee wages. The Company contributed matching funds of approximately $1.4 million in fiscal 2012 and $1.0 million in fiscal 2011.

Intellectual Property

The Company has registered in the United States and other countries, trademarks, service marks and domain names relating to its business. The Company believes its registrations are valid, and it intends to be vigilant with regard to infringing or diluting uses by other parties, and to enforce vigorously its rights in its trademarks, service marks and domain names.

Available Information

The Company’s Internet address is www.finishline.com. The Company makes available free of charge through its website the Company’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports and amendments are electronically filed with or furnished to the Securities and Exchange Commission. In addition, the Company’s Code of Ethics and other corporate governance documents are available on its Investor Relations page under “Corporate Governance.”

Item 1A. Risk Factors

Forward-Looking Statements

Forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as elsewhere in this Annual Report on Form 10-K involve risks and uncertainties and are subject to change based on various important factors, many of which may be beyond the Company’s control. Accordingly, future performance and financial results may differ materially from those expressed or implied in any such forward-looking statements. Investors should not place undue reliance on forward-looking statements as a prediction of actual results. You can identify these statements as those that may predict, forecast, indicate or imply future results, performance or advancements and by forward-looking words such as “believe”, “anticipate”, “expect”, “estimate”, “future”, “forecast”, “predict”, “potential”, “should”, “intend”, “plan”, “project”, “goal”, “will”, “will be”, “will continue”, “could”, “may”, “might” or any variations of such words or other words with similar meanings. Forward-looking statements address, among other things, expectations, growth strategies, including plans to open and close stores, projections of future profitability, results of operations, capital expenditures, financial condition or other “forward-looking” information and include statements about net sales, product margin, occupancy costs, selling, general and administrative expenses, operating margins, liquidity, operations and inventory.

The current economic and financial conditions have caused and may continue to cause a decline in consumer spending and may adversely affect the Company’s business, operations, liquidity, financial results and stock price.

The Company’s operating results are affected by the relative condition of the U.S. economy. Business and financial performance may be adversely affected by current and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment

 

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levels, higher energy and fuel costs, rising interest rates, financial market volatility and recession. Additionally, the Company may experience difficulties in operating and growing its operations to react to economic pressures in the U.S.

As a business that depends on consumer discretionary spending, our customers may reduce their purchases due to job losses or fear of job losses, foreclosures, bankruptcies, higher consumer debt and interest rates, reduced access to credit, falling home prices and lower consumer confidence. Decreases in comparable store net sales, customer traffic or average dollar per transaction negatively affect the Company’s financial performance, and a prolonged period of depressed consumer spending could have a material adverse effect on our business. Promotional activities and decreased demand for consumer products could affect profitability and margins. Customer traffic is difficult to forecast and mitigate. As a consequence, sales, operating and financial results for a particular period are difficult to predict, and, therefore, it is difficult to forecast results to be expected in future periods. Any of the foregoing could have a material adverse effect on the business, results of operations, and financial condition and could adversely affect the Company’s stock price.

Additionally, many of the effects and consequences of U.S. and global financial and economic conditions could potentially have a material adverse effect on the Company’s liquidity and capital resources, including the ability to raise additional capital if needed, and the ability of banks to honor draws on the Company’s credit facility, or could otherwise negatively affect the Company’s business and financial results. Although the Company normally generates funds from operations to pay operating expenses and fund capital expenditures, the ability to continue to meet these cash requirements over the long-term may require access to additional sources of funds, including capital and credit markets, and continuing market volatility, the impact of government intervention in financial markets and general economic conditions may adversely affect the ability of the Company to access capital and credit markets.

Global economic conditions may also adversely affect suppliers’ access to capital and liquidity with which to maintain their inventory, production levels and product quality and to operate their businesses, all of which could adversely affect the Company’s supply chain. In addition, suppliers might reduce their offerings of customer incentives and vendor allowances, cooperative marketing expenditures and product promotions. Market instability could make it more difficult for the Company and its suppliers to accurately forecast future product demand trends, which could cause the Company to carry too much or too little merchandise in various product categories. The current financial and economic conditions may also adversely affect landlords and real estate developers of retail space, which may limit the availability of attractive leased store locations. The current conditions may also adversely affect the Company’s product liquidation efforts.

The Company’s business faces a great deal of competitive pressure.

The athletic footwear business is highly competitive. The Company competes for customers, customer service professionals, locations, merchandise, services and other important aspects of its business with many other local, regional, national and branded vendor operated retailers. Those competitors, some of whom have a greater market presence than the Company, include traditional store-based retailers, Internet businesses and other forms of retail commerce. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Company’s performance.

The Company’s business is dependent on consumer preferences and fashion trends.

The athletic footwear and softgood industry is subject to changing fashion trends and customer preferences. The Company cannot guarantee that its merchandise selection will accurately reflect customer preferences when it is offered for sale or that the Company will be able to identify and respond quickly to fashion changes, particularly given the long lead times for ordering much of the Company’s merchandise from vendors. For example, athletic footwear is ordered four to six months prior to delivery to stores. If the Company fails to

 

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anticipate accurately either the market for the merchandise or customers’ purchasing habits, the Company may be forced to rely on markdowns or promotional sales to dispose of excess, slow moving inventory, which may adversely affect performance.

A security breach of the Company’s information technology systems could damage the Company’s reputation and have an adverse effect on operations and results.

The Company accepts electronic payment cards from customers for payment. The Company also receives and maintains certain personal information about customers and employees. A number of retailers have experienced security breaches in which credit and debit card information may have been stolen. While the Company has taken significant steps to prevent the occurrence of security breaches in this respect, including complying with the highest level of Payment Card Industry Security Standards, the Company may, in the future, become subject to claims for purportedly fraudulent transactions arising out of the theft of credit or debit card information, and may also be subject to lawsuits or other proceedings in the future relating to these types of incidents. Any such proceeding could be a distraction to the Company and cause significant unplanned losses and expenses. If the Company’s security and information systems are compromised or employees fail to comply with the applicable laws and regulations and this information is obtained by unauthorized persons or used inappropriately, it could adversely affect the Company’s reputation, as well as results of operations, and could result in litigation, the imposition of penalties, or significant expenditures to remediate any damage to persons whose personal information has been compromised.

Various risks associated with Digital sales may adversely affect the Company’s business.

The Company sells merchandise over the Internet through its website, www.finishline.com as well as mobile at m.finishline.com and beginning in fiscal 2013 through www.run.com. The Digital operations are subject to numerous risks, including unanticipated operating problems, reliance on third party computer hardware and software providers, system failures and the need to invest in additional computer systems. The Digital operations also involve other risks that could have an impact on the Company’s results of operations including hiring, retention and training of personnel to conduct the Digital operations, diversion of sales from the stores, rapid technological change, liability for online content, credit card fraud, risks related to the failure of the computer systems that operate the website and its related support systems, including computer viruses, telecommunication failures and electronic break-ins and similar disruptions. There can be no assurance that the Digital operations will continue to achieve sales and profitability growth or even remain at their current level.

The Company’s operations are dependent on a single distribution center, and the loss of, or disruption in, the distribution center and other factors affecting the distribution of merchandise could have a material adverse effect on the Company’s business and operations.

The distribution functions for the Company are handled from a single facility in Indianapolis, Indiana. Any significant interruption in the operation of the distribution facility due to natural disasters, accidents, system failures or other unforeseen causes could delay or impair the ability to distribute merchandise to stores and/or fulfill digital orders, which could cause sales to decline.

The Company depends upon third-party carriers for shipment of a significant amount of merchandise. An interruption in service by these third-party carriers for any reason could cause temporary disruptions in business, a loss of sales and profits, and other material adverse effects.

Freight cost is impacted by changes in fuel prices through surcharges. Fuel prices and surcharges affect freight costs both on inbound freight from suppliers to the distribution center as well as outbound freight from the distribution center to stores and shipments of product to customers. Increases in fuel prices and surcharges and other factors may increase freight costs.

 

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The Company may experience fluctuations in results of operations due to seasonality of the business.

The Company’s business is subject to seasonal influences, with a major portion of sales and income historically realized during the second and fourth quarters of the fiscal year, which include the back-to-school and holiday seasons, respectively. This seasonality causes operating results to vary considerably from quarter to quarter and could materially and adversely affect the Company’s stock price.

The Company’s business may be adversely affected by changes in merchandise sourcing.

All of the Company’s vendors must comply with applicable laws and required standards of conduct. The ability to find qualified vendors and access products in a timely and efficient manner can be a challenge, especially with respect to goods sourced outside the United States. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs and other factors relating to foreign trade, and the ability to access suitable merchandise on acceptable terms are beyond the Company’s control and could adversely impact performance.

Changes in labor conditions as well as the Company’s inability to attract and retain the talent required for the business, may negatively affect operating results.

Future performance will depend upon the Company’s ability to attract, retain and motivate qualified employees, including store personnel and field management. Many of those sales associates are in entry level or part-time positions with historically high rates of turnover. The ability to meet the Company’s labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics. If the Company is unable to attract and retain quality sales associates, the ability to meet growth goals or to sustain expected levels of profitability may be compromised. In addition, a large number of the Company’s retail employees are paid the prevailing minimum wage, which if increased would negatively affect profitability and could, if the increase were material, require the Company to adjust its business strategy, which may include the closure of less profitable stores. Although none of the Company’s employees are currently covered under collective bargaining agreements, the Company cannot guarantee that employees will not elect to be represented by labor unions in the future. If some, or all, of the Company’s workforce were to become unionized and collective bargaining agreement terms were significantly different from the Company’s current compensation arrangements or work practices, it could have a material adverse effect on the Company’s business, financial condition and results of operations.

Changes in relationships with any of the Company’s key vendors, may have an adverse impact on future results.

The Company’s business is dependent to a significant degree upon the ability to purchase premium brand-name merchandise at competitive prices, including the receipt of volume discounts, cooperative advertising and markdown allowances from vendors. The Company purchased approximately 84% of its merchandise in fiscal 2012 from its top five vendors and expects to continue to obtain a significant percentage of its product from these vendors in future periods. Approximately 64% was purchased from one vendor (Nike). The inability to obtain merchandise in a timely manner from major suppliers (particularly Nike) as a result of business decisions by suppliers or any disruption in the supply chain could have a material adverse effect on the business, financial condition and results of operations of the Company. Because of the strong dependence on Nike, any adverse development in Nike’s financial condition and results of operations or the inability of Nike to develop and manufacture products that appeal to the Company’s target customers could also have an adverse effect on the business, financial condition and results of operations of the Company.

The Company’s business may be adversely affected by regulatory and litigation developments.

Various aspects of the Company’s operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. Sales and results of operations may be adversely affected by new legal requirements, including comprehensive federal health care legislation enacted in 2010 and

 

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attendant regulations. For example, new legislation or regulations may result in increased costs directly for compliance or indirectly to the extent that such requirements increase prices of goods and services because of increased compliance costs. Additionally, the Company is regularly involved in various litigation matters that arise in the ordinary course of doing business. Litigation or regulatory developments could adversely affect the business operations and financial performance of the Company.

Health care reform could adversely affect the Company’s business.

In 2010, Congress enacted comprehensive health care reform legislation which, among other things, includes guaranteed coverage requirements, eliminates pre-existing condition exclusions and annual and lifetime maximum limits, restricts the extent to which policies can be rescinded, and imposes new and significant taxes on health insurers and health care benefits. Due to the breadth and complexity of the health reform legislation, the current lack of implementing regulations and interpretive guidance, and the phased-in nature of the implementation, it is difficult to predict the overall effect of the legislation and related regulations on the business over the coming years. Possible adverse effects of the health reform legislation include increased costs, exposure to expanded liability and requirements for the Company to revise ways in which it conducts business.

The Company’s business may be adversely affected by the failure to identify suitable store locations and acceptable lease terms.

To take advantage of customer traffic and the shopping preferences of customers, the Company needs to obtain and retain stores in desirable locations such as in regional and neighborhood malls anchored by major department stores. The Company cannot be certain that desirable mall locations will continue to be available. Several large landlords dominate the ownership of prime malls in the United States and because of the dependence upon these landlords for a substantial number of the Company’s locations, any significant erosion of the relationships with these landlords or their financial condition would negatively affect the ability to obtain and retain store locations. Additionally, further landlord consolidation may negatively affect the ability to obtain and retain store locations at acceptable lease terms. The Company’s average lease term remaining for all stores is relatively short (average remaining term of approximately 3 years). Due to the short-term nature, the Company is subject to potential market changes, which could increase occupancy costs and adversely affect profitability.

The Company’s inability to implement its strategic growth initiatives may have an adverse impact on future results.

The Company’s ability to succeed in its strategic growth initiatives could require significant capital investment and management attention, which may result in the diversion of these resources from the core business and other business issues and opportunities. Additionally, any new initiative is subject to certain risks including customer acceptance, competition, product differentiation, challenges to economies of scale in merchandise sourcing and the ability to attract and retain qualified personnel, including management. There can be no assurance that the Company will be able to develop and successfully implement its strategic growth initiatives to a point where they will become profitable, or generate positive cash flow. If the Company cannot successfully execute its strategic growth initiatives, the Company’s financial condition and results of operations may be adversely impacted.

A major failure of information systems could adversely affect the Company’s business.

The efficient operation of the Company’s business is dependent on information systems. In particular, the Company relies on information systems to effectively manage sales, distribution, merchandise planning and allocation functions. The Company possesses offsite recovery capabilities for its information systems. However, the failure of information systems to perform as designed could disrupt the Company’s business and adversely affect sales and profitability.

 

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Because the Company’s stock price may be volatile, it could experience substantial declines.

The market price of the Company’s common stock has historically experienced and may continue to experience volatility. The Company’s quarterly operating results, changes in general conditions in the economy or the financial markets, and other developments affecting the Company, its key vendors or competitors, could cause the market price of the Company’s common stock to fluctuate substantially. In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has affected the market prices of securities issued by many companies; often for reasons unrelated to their operating performance, and may adversely affect the price of the Company’s common stock.

Anti-takeover provisions under the Indiana Business Corporation Law and the Company’s Restated Articles of Incorporation and Bylaws may render more difficult the accomplishment of mergers or the assumption of control by a principal shareholder, making more difficult the removal of management.

Certain provisions of the Indiana Business Corporation Law (the “IBCL”), specifically the constituent interests provision in Section 23-1-35-1 of the IBCL, the control share acquisitions provisions in Sections 23-1-42-1 to 23-1-42-11, the business combination provisions in Sections 23-1-43-1 to 23-1-43-24, and certain provisions of the Company’s Restated Articles of Incorporation and Bylaws, specifically the provisions regarding preferred stock, the provisions requiring a supermajority vote for certain business combinations and for certain amendments to the Restated Articles of Incorporation, the provisions requiring approval of certain transactions by the continuing directors, the provisions for a staggered board and the provisions limiting removal of directors to removal for cause, may have the effect of discouraging an unsolicited attempt by another person or entity to acquire control of the Company. These provisions may make mergers, tender offers, the removal of management, and certain other transactions more difficult or more costly and could discourage or limit shareholder participation in such types of transactions, whether or not such transactions are favored by the majority of the shareholders. The provisions also could limit the price that investors might be willing to pay in the future for shares of the Company’s common stock. Further, the existence of these anti-takeover measures may cause potential bidders to look elsewhere, rather than initiating acquisition discussions with the Company. Any of these factors could reduce the price of the Company’s common stock.

Other factors may negatively affect the Company’s business.

The foregoing list of risk factors is not exclusive. Other factors and unanticipated events could adversely affect the Company. The Company does not undertake to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.

Item 1B—Unresolved Staff Comments

Not Applicable.

Item 2—Properties

The Company’s corporate headquarters and distribution center are located on 54 acres in Indianapolis, Indiana. The facility consists of 142,000 square feet of office space and 647,000 square feet of warehouse space. The facility, which is owned by the Company, was designed and constructed to the Company’s specifications and includes automated conveyor and storage rack systems, a high speed shipping sorter and a tilt-tray sortation system.

 

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Store Locations

At April 13, 2012, the Company operated 656 stores in 47 states and the District of Columbia. The Finish Line stores are primarily located in enclosed shopping malls and the Running Specialty stores are primarily located on street front locations. The following table sets forth information concerning the Company’s stores.

 

State

   Finish Line      Running Specialty     

State

   Finish Line      Running Specialty  

Alabama

     12          Nebraska      6      

Arizona

     11          Nevada      6      

Arkansas

     6          New Hampshire      4      

California

     39          New Jersey      9         5   

Colorado

     15          New Mexico      4      

Connecticut

     8         1       New York      28         4   

Delaware

     1          North Carolina      15      

Florida

     44         1       North Dakota      2      

Georgia

     18          Ohio      38      

Idaho

     2          Oklahoma      6      

Illinois

     32          Oregon      1      

Indiana

     23          Pennsylvania      39      

Iowa

     9          Rhode Island      1      

Kansas

     9          South Carolina      12      

Kentucky

     8          South Dakota      1      

Louisiana

     10          Tennessee      21      

Maine

     1          Texas      59         3   

Maryland

     17         1       Utah      2      

Massachusetts

     15         3       Virginia      24      

Michigan

     24          Washington      9      

Minnesota

     7          West Virginia      7      

Mississippi

     6          Wisconsin      11      

Missouri

     13          Wyoming      1      

Montana

     1          District of Columbia         1   
           

 

 

    

 

 

 
         Totals      637         19   
           

 

 

    

 

 

 

The Company leases all of its stores. Initial lease terms for the Company’s stores are generally 10 years in duration without renewal options, although some of the stores are subject to leases for five years with one or more renewal options. The leases generally provide for a fixed minimum rental plus contingent rent, which is determined as a percentage of gross sales in excess of specified levels.

Item 3—Legal Proceedings

The Company is subject from time to time to certain legal proceedings and claims in the ordinary course of conducting its business. The Company will record a liability related to its legal proceedings and claims when it has determined that it is probable that the Company will be obligated to pay and the related amount can be reasonably estimated, and it will disclose the related facts in the footnotes to its financial statements, if material. 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 or claims 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 flow.

 

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Item 4—Mine Safety Disclosures

Not applicable.

Directors and Executive Officers of the Registrant

 

Name

   Age     

Position

   Officer or
Director Since
 

Glenn S. Lyon

     61      

Chairman and Chief Executive Officer

     2001   

Steven J. Schneider

     56      

President and Chief Operating Officer

     1989   

Samuel M. Sato

     48      

Finish Line brand President and Chief Merchandising Officer

     2007   

Edward W. Wilhelm

     53      

Executive Vice President, Chief Financial Officer

     2009   

Mark S. Landau(1)

     54      

Executive Vice President, Chief Business Development Officer

     2010   

Christopher S. Ladd(2)

     38      

Executive Vice President, Chief Digital Officer

     2011   

George S. Sanders

     54      

Executive Vice President, Real Estate and Store Development

     1994   

Michael L. Marchetti

     61      

Executive Vice President, Store Operations

     1995   

Stephen Goldsmith(5)(6)(7)

     65      

Director

     1999   

Bill Kirkendall(3)(4)(6)(8)

     58      

Director

     2001   

William P. Carmichael(3)(9)

     68      

Director

     2003   

Catherine A. Langham(5)(10)

     54      

Director

     2006   

Dolores A. Kunda(4)(5)(11)

     56      

Director

     2008   

Norman H. Gurwitz(3)(4)(12)

     64      

Director

     2009   

Richard P. Crystal(4)(5)(6)(13)

     67      

Director

     2009   

Torrence Boone(6)(14)

     42      

Director

     2011   

 

(1) Mr. Landau has served as Executive Vice Present, Chief Business Development Officer of the Company since January 2012. Previously he had served as a member of the Board of Directors since 2010. Prior to joining the Company, Mr. Landau was Managing Director and Head of CRE Banking Americas for Deutsche Bank Securities, Inc.
(2) Mr. Ladd has served as Executive Vice President, Chief Digital Officer since November 2011. Previously he had served as Senior Vice President of Global Ecommerce for Lululemon.
(3) Member of the Audit Committee of the Board of Directors of the Company
(4) Member of the Compensation Committee of the Board of Directors of the Company.
(5) Member of the Governance and Nominating Committee of the Board of Directors of the Company.
(6) Member of the Strategy Committee of the Board of Directors of the Company.
(7) Mr. Goldsmith is currently the Director of the Innovations in American Government Program at Harvard’s Kennedy School of Government. He also serves as a Senior Strategic Advisor and Independent Consultant to the international law firm of McKenna Long and Aldridge LLP.
(8) Mr. Kirkendall is a Partner in Golf Resources Group.
(9) Mr. Carmichael currently serves as Chairman of the Board of Trustees of the Columbia Funds Series Trust, Columbia Funds Master Investment Trust, and Columbia Funds Variable Insurance Trust I.
(10) Ms. Langham is the co-founder, President and Chief Executive Officer of the global logistics firm Langham Logistics, Inc.
(11) Ms. Kunda is the founder, President and Chief Executive Officer of Lapiz Integrated Hispanic Marketing.
(12) Mr. Gurwitz is a former advisor to Emmis Communications Corporation.
(13) Mr. Crystal is the former Chairman and Chief Executive Officer of women’s clothing retailer New York & Company.
(14) Mr. Boone is Managing Director of Agency Business Development for Google.

 

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PART II

Item 5—Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s Class A Common Stock is traded on the Nasdaq Global Select Market under the ticker symbol FINL. There is no established public trading market for the Company’s Class B Common Stock. All shares of the Class B Common Stock will be converted into shares of Class A Common Stock as of July 20, 2012, which is the day after the Company’s 2012 Annual Meeting of Shareholders.

The following table sets forth, for the periods indicated, the range of high and low sale prices for the Company’s Class A Common Stock as reported by the Nasdaq Stock Market.

 

     Fiscal 2012      Fiscal 2011  

Quarter Ended

   High      Low      High      Low  

May

   $ 23.27       $ 16.97       $ 18.11       $ 11.37   

August

     23.64         16.42         17.35         11.78   

November

     22.31         17.80         18.47         12.85   

February

     24.48         18.71         19.48         14.96   

As of April 13, 2012, there were approximately 4,282 record holders of Class A Common Stock and 30 record holders of Class B Common Stock. The number of Class A Common Stock record holders excludes the beneficial owners of shares held in “street” name or held through participants in depositories. All shares of Class B Common Stock are held by the founding shareholders, their family members, directors, officers and other key employees.

On January 18, 2012, the Company’s Board of Directors increased its quarterly cash dividend by 20% to $0.06 per share of Class A and Class B Common Stock. The Company declared dividends of $11.0 million and $9.1 million during fiscal 2012 and 2011, respectively. As of March 3, 2012 and February 26, 2011, dividends declared but not paid of $3.1 million and $2.7 million, respectively, were accrued in “Other liabilities and accrued expenses” on the Consolidated Balance Sheets. The Company expects to continue to pay dividends on a quarterly basis and review for increases annually; however, further declarations of dividends remain at the discretion of the Company’s Board of Directors.

On July 17, 2008, the Company’s Board of Directors authorized the 2008 stock repurchase program to repurchase up to 5,000,000 shares of the Company’s Class A Common Stock outstanding through December 31, 2011. Throughout the term of the 2008 stock repurchase program, the Company purchased 4,660,697 shares at an average price of $16.06 per share for an aggregate amount of $74.8 million. The 2008 stock repurchase program was terminated on July 21, 2011 and was superseded by the 2011 stock repurchase program which became effective as of the same date.

Under the 2011 stock repurchase program, the Company’s Board of Directors authorized the repurchase of up to 5,000,000 shares of the Company’s Class A Common Stock outstanding through December 31, 2014. Under the 2011 stock repurchase program the Company purchased 1,199,900 shares at an average price of $19.70 per share for an aggregate amount of $23.6 million in fiscal 2012. Under both the 2008 and 2011 stock repurchase programs, the Company purchased 2,884,603 shares at an average price of $20.93 per share for an aggregate amount of $60.4 million during fiscal 2012. As of March 3, 2012, there are 3,800,100 shares remaining available to repurchase under the 2011 stock repurchase program.

As of March 3, 2012, the Company holds as treasury shares 8,043,936 shares of its Class A Common Stock at an average price of $15.94 per share for an aggregate amount of $128.2 million. The treasury shares may be issued upon the exercise of employee stock options, issuance of shares for the Employee Stock Purchase Plan,

 

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issuance of restricted stock, or for other corporate purposes. 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.

 

Month

  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
 

November 27, 2011 – December 31, 2011

    300,000     $ 19.71       300,000       3,800,100   

January 1, 2012 – February 4, 2012

    —        $ —          —          3,800,100   

February 5, 2012 – March 3, 2012

    —        $ —          —          3,800,100   
 

 

 

   

 

 

   

 

 

   
    300,000     $ 19.71        300,000    
 

 

 

   

 

 

   

 

 

   

 

(1) – The average price paid per share includes any brokerage commissions.

 

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LOGO

 

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Item 6—Selected Financial Data

 

    Year Ended  
    March 3,
2012
    February 26,
2011
    February 27,
2010
    February 28,
2009
    March 1,
2008
 
    (in thousands, except per share and store operating data)  

Statement of Operations Data(6):

         

Net sales

  $ 1,369,259      $ 1,229,002      $ 1,172,415      $ 1,194,657      $ 1,200,863   

Cost of sales (including occupancy costs)

    889,130        815,073        793,556        828,139        843,288   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    480,129        413,929        378,859        366,518        357,575   

Selling, general and administrative expenses

    343,629        302,718        297,323        312,011        318,227   

Store closing costs

    1,191        350        2,707        492        307   

Terminated merger-related (income) cost, net

    —          —          —          (1,969     91,354   

Impairment charges

    974        1,228        6,771        6,118        4,551   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    134,335        109,633        72,058        49,866        (56,864

Interest income, net

    447        508        322        814        1,380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income taxes

    134,782        110,141        72,380        50,680        (55,484

Income tax expense (benefit)(7)

    49,978        41,277        21,547        20,278        (13,613
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

  $ 84,804      $ 68,864      $ 50,833      $ 30,402      $ (41,871
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings Per Share Data(6):

         

Basic income (loss) from continuing operations per share

  $ 1.62      $ 1.28      $ 0.92      $ 0.56      $ (0.89
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted income (loss) from continuing operations per share

  $ 1.59      $ 1.26      $ 0.92      $ 0.55      $ (0.89
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per share

  $ 0.21      $ 0.17      $ 0.13      $ 0.09      $ 0.025   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Share Data:

         

Basic weighted-average shares

    52,020        52,979        54,221        53,846        47,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted-average shares(1)

    52,818        53,775        54,597        54,108        47,196   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Selected Store Operating Data:

         

Number of stores

         

Acquired during year

    18        —          —          —          —     

Opened during year

    5        11        5        9        18   

Closed during year

    (31     (13     (28     (17     (11

Open at end of year

    656        664        666        689        697   

Total square feet(2)

    3,498,090        3,564,277        3,590,780        3,746,413        3,854,733   

Average square feet per store(2)

    5,332        5,368        5,392        5,437        5,530   

Net sales per square foot for comparable stores(4)(5)

  $ 339      $ 317      $ 298      $ 297      $ 300   

Increase (decrease) in comparable store net sales(3)(5)

    9.2     6.3     (0.5 )%      0.3     (4.5 )% 

Balance Sheet Data:

         

Working capital

  $ 414,065      $ 383,264      $ 328,664      $ 279,237      $ 234,747   

Total assets

  $ 711,496      $ 664,845      $ 610,268      $ 598,733      $ 643,047   

Total debt

  $ —        $ —        $ —        $ —        $ —     

Shareholders’ equity

  $ 529,537      $ 490,245      $ 442,150      $ 424,394      $ 420,866   

 

(1) Consists of weighted-average common and common equivalent shares outstanding for the year.
(2) Computed as of the end of each fiscal year.
(3) Calculation includes all stores that are open at the year-end and that have been open more than one year. Accordingly, stores opened and closed during the year are not included. Calculation includes digital sales.
(4)

Calculation includes all stores that are open at the year-end and that have been open more than one year. Accordingly, stores opened and closed during the year are not included. Calculation excludes digital sales. Calculated excluding sales for the 53rd week in fiscal 2012.

(5) Running Specialty stores are not included in this calculation.
(6) Amounts are from continuing operations only. Fiscal 2012 includes 53 weeks versus 52 weeks in all other years presented.
(7) Fiscal 2010 amount includes a $6.5 million one-time tax benefit regarding the tax treatment of the terminated merger and litigation expenses.

 

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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Fiscal 2012 was an outstanding year for the Company, punctuated by several highlights discussed below. The Company has continued to execute its strategic plan, which was put in place three years ago to help the Company focus on and deliver results that meet or exceed its goals and key financial targets. By consistently and aggressively executing this strategic plan, the Company is delivering on its mission to drive long-term shareholder value.

 

   

Net sales increased 11.4% to $1,369.3 million in fiscal 2012 compared to $1,229.0 million in fiscal 2011.

 

   

Comparable store net sales for fiscal 2012 increased 9.2%.

 

   

Digital comparable sales (which are included in comparable store net sales) increased 49.5%.

 

   

Conversion within the stores increased 1.2%.

 

   

Average dollar per transaction increased 3.5%.

 

   

Store traffic increased 1.3%.

 

   

Net sales per square foot for comparable stores increased by $22 to $339.

 

   

Gross profit was $480.1 million (35.1% of net sales) in fiscal 2012 compared to $413.9 million (33.7% of net sales) in fiscal 2011.

 

   

0.2% increase in product margin, net of shrink, as a percentage of net sales.

 

   

Fiscal 2012 product margin percentage was a historical high.

 

   

Occupancy costs lowered by 1.2% as a percentage of net sales.

 

   

Occupancy costs in dollars increased by 0.5% in fiscal 2012.

 

   

SG&A expenses were $343.6 million (25.1% of net sales) in fiscal 2012 compared to $302.7 million (24.6% of net sales) in fiscal 2011.

 

   

0.5% deleverage as a percentage of net sales.

 

   

Investments in information technology and digital capabilities in addition to variable SG&A in association with digital sales which grew as a percentage of total sales to 10.9% from 7.8% in the prior year.

 

   

Operating income was $134.3 million (9.8% of net sales) in fiscal 2012 compared to $109.6 million (9.0% of net sales) in fiscal 2011.

 

   

$24.7 million improvement over fiscal 2011 or 22.5%.

 

   

0.8% improvement as a percentage of net sales.

 

   

Income from continuing operations was $84.8 million (6.2% of net sales) in fiscal 2012 compared to $68.9 million (5.6% of net sales) in fiscal 2011.

 

   

$15.9 million improvement over fiscal 2011 or 23.1%.

 

   

Diluted income from continuing operations per share of $1.59 in fiscal 2012 compared to $1.26 in fiscal 2011.

 

   

Cash and cash equivalents were $307.5 million at March 3, 2012 with no interest bearing debt.

 

   

Generated cash from operations of $94.7 million in fiscal 2012.

 

   

Capital expenditures were $29.1 million in fiscal 2012.

 

   

Paid $10.5 million of dividends to shareholders in fiscal 2012.

 

   

Repurchased 2.9 million shares of common stock totaling $60.4 million during fiscal 2012.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

   

Opened 4 new, and closed 31, Finish Line stores during fiscal 2012, ending the year with 637 Finish Line stores.

 

   

Acquired 18 Running Specialty stores for $8.5 million and opened 1 new store, ending the year with 19 Running Specialty stores.

Fiscal 2013 Outlook

Based on strategic investments in technology, stores and digital capabilities required to execute the Company’s omni-channel strategy, the Company expects to generate earnings per share growth in the mid-single digits in fiscal 2013 with comparable store net sales expected in the mid-single digits as well. As the investments begin to drive returns, the Company expects earnings per share growth to accelerate into the low to mid-teens beginning in fiscal 2014.

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon the Company’s consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, expenses and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates, including those related to the valuation of inventories, the potential impairment of long-lived assets and income taxes. The Company bases the estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Management believes the following critical accounting policies affect the more significant judgments and estimates used in preparation of its consolidated financial statements.

Costs of Sales. Costs of sales include the cost associated with acquiring merchandise from vendors, occupancy costs, provision for inventory shortages, and credits and allowances from our merchandise vendors. Cash consideration received from merchandise vendors after the related merchandise has been sold is recorded as an offset to cost of sales in the period negotiations are finalized. For cash consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of our cost of sales at the time of sale.

Because the Company does not include the costs associated with operating its distribution facility and freight within cost of sales, the Company’s gross profit may not be comparable to those of other retailers that may include all costs related to their distribution facilities in costs of sales and in the calculation of gross profit.

Valuation of Inventories. Merchandise inventories are valued at the lower of cost or market using a weighted-average cost method, which approximates the first-in, first-out method. The Company’s valuation of inventory includes markdown adjustments for merchandise that will be sold below cost and the impact of shrinkage. Markdowns are based upon historical information and assumptions about future demand and market conditions. Shrinkage is based on historical information and assumptions as to current shrink trends. It is possible that changes to the markdowns and shrinkage estimates could be required in future periods due to changes in market conditions.

Impairment of Long-Lived Assets. The Company reviews its long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

of an asset may not be recoverable. The Company considers historical performance and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the estimated non-discounted future cash flows expected to result from the use of the asset. If such assets are considered to be impaired, the impairment recognized is measured by comparing projected individual store discounted cash flows to the asset carrying values. The estimation of fair value is measured by discounting expected future cash flows at the discount rate the Company utilizes to evaluate potential investments. Actual results may differ from these estimates and as a result the estimation of fair values may be adjusted in the future.

Operating Leases. The Company leases retail stores under operating leases. Many lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes rent expense for minimum lease payments on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The Company uses a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the leased space for build out. Contingent rents are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in “Other liabilities and accrued expenses” in the Consolidated Balance Sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable.

Income Taxes. The Company accounts for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. The deferred tax assets may be reduced by a valuation allowance, which is established when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In addition, management is required to evaluate all available evidence including estimating future taxable income by taxing jurisdictions, the future reversal of temporary differences, tax planning strategies, and recent results of operations when making its judgment to determine whether or not to record a valuation allowance for a portion or all of its deferred tax asset. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in our Consolidated Statements of Income in the period that includes the enactment date.

The Company’s income tax returns, like those of most companies, are periodically audited by tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating income tax positions. The first step requires the Company to conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by a tax authority. The second step applies if the Company has concluded that the tax position is more likely than not to be sustained upon examination and requires the Company to measure the largest amount of benefit, determined on a cumulative probability basis, which it is more likely than not to be realized upon ultimate settlement. The Company adjusts its accrual for uncertain tax positions and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. Accruals of uncertain tax positions require management to make estimates and judgments with respect to the ultimate outcome of tax audits. Actual results could vary from these estimates.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Recent Accounting Pronouncements. In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-08, an update to FASB Codification Intangibles—Goodwill and Other. Specifically, this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The provisions for this pronouncement are effective for fiscal years, and interim periods beginning after December 15, 2011, with early adoption permitted. The Company will adopt this update beginning March 4, 2012. The Company does not expect this pronouncement to have a material effect on our consolidated financial statements.

Results of Operations

General. The following discussion and analysis should be read in conjunction with the information set forth under “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere herein.

The Company uses a “Retail” calendar. The Company’s fiscal year ends on the Saturday closest to the last day of February and included 53 weeks in fiscal 2012 and 52 weeks in fiscal 2011 and 2010.

The following table sets forth store and square feet information of the Company by brand for each of the following periods:

 

     Year Ended  

Number of Stores:

   March 3,
2012
    February 26,
2011
 

Finish Line

    

Beginning of year

     664        666   

Opened

     4        11   

Closed

     (31     (13
  

 

 

   

 

 

 

End of year

     637        664   

Running Specialty

    

Beginning of year

     —          —     

Acquired

     18        —     

Opened

     1        —     

Closed

     —          —     
  

 

 

   

 

 

 

End of year

     19        —     

Total

    

Beginning of year

     664        666   

Acquired

     18        —     

Opened

     5        11   

Closed

     (31     (13
  

 

 

   

 

 

 

End of year

     656        664   
  

 

 

   

 

 

 

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

      March 3,
2012
     February 26,
2011
 

Square feet information as of:

     

Finish Line

     

Square feet

     3,440,788         3,564,277   

Average store size

     5,402         5,368   

Running Specialty

     

Square feet

     57,302         —     

Average store size

     3,016         —     

Total

     
  

 

 

    

 

 

 

Square feet

     3,498,090         3,564,277   
  

 

 

    

 

 

 

The following table sets forth net sales of the Company by major category for each of the following years (in thousands):

 

     Year Ended  

Category

   March 3, 2012     February 26, 2011     February 27, 2010  

Footwear

   $ 1,177,114         86   $ 1,056,586         86   $ 1,005,166         86

Softgoods

     192,145         14     172,416         14     167,249         14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,369,259         100   $ 1,229,002         100   $ 1,172,415         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

The following table and subsequent discussion sets forth operating data of the Company as a percentage of net sales for the years indicated below.

 

     Year Ended  
     March 3,
2012
    February 26,
2011
    February 27,
2010
 

Income Statement Data:

      

Net sales

     100.0     100.0     100.0

Cost of sales (including occupancy costs)

     64.9        66.3        67.7   
  

 

 

   

 

 

   

 

 

 

Gross profit

     35.1        33.7        32.3   

Selling, general and administrative expenses

     25.1        24.6        25.4   

Store closing costs

     0.1        —          0.2   

Impairment charges

     0.1        0.1        0.6   
  

 

 

   

 

 

   

 

 

 

Operating income

     9.8        9.0        6.1   

Interest income, net

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     9.8        9.0        6.1   

Income tax expense

     3.6        3.4        1.8   
  

 

 

   

 

 

   

 

 

 

Income from continuing operations

     6.2     5.6     4.3
  

 

 

   

 

 

   

 

 

 

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Fifty-Three Weeks Ended March 3, 2012 Compared to the Fifty-Two Weeks Ended February 26, 2011.

Net Sales

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Net sales

   $ 1,369,259      $ 1,229,002   

Comparable store net sales increase

     9.2 %     6.3 %

Net sales increased 11.4% for fiscal 2012 compared to fiscal 2011. The increase was primarily a result of a comparable store net sales increase of 9.2% during fiscal 2012 as well as an additional 7 days of sales in fiscal 2012 that resulted in additional net sales of $30.5 million. The 9.2% comparable store sales was a result of a 3.5% increase in average dollar per transaction, a 1.2% increase in store conversion, 1.3% increase in store traffic, and a 49.5% increase in digital sales. Comparable store footwear sales for the fifty-three weeks ended March 3, 2012 increased 9.5% while comparable store softgoods sales increased 7.8%.

Cost of Sales (Including Occupancy Costs) and Gross Profit

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Cost of sales (including occupancy costs)

   $ 889,130      $ 815,073   

Gross profit

   $ 480,129      $ 413,929   

Gross profit as a percentage of net sales

     35.1 %     33.7 %

The 1.4% increase in gross profit, as a percentage of net sales, was a result of a 1.2% decrease in occupancy costs as a percentage of net sales and a 0.2% increase in product margin, net of shrink, as a percentage of net sales. The 1.2% decrease in occupancy costs as a percentage of net sales is primarily the result of leveraging the 9.2% comparable store net sales increase and operating 27 net fewer Finish Line stores at March 3, 2012 compared to February 26, 2011, partially offset by the addition of 19 Running Specialty stores. The 0.2% increase in product margin as a percentage of net sales is primarily the result of disciplined inventory management providing the ability to have more premium products on-hand. This created less mark-downs in stores, as well as improved inventory turns, which resulted in improved sell through at full retail on premium product.

Selling, General and Administrative Expenses

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Selling, general and administrative expenses

   $ 343,629      $ 302,718   

Selling, general and administrative expenses as a percentage of net sales

     25.1 %     24.6 %

The $40.9 million increase in selling, general and administrative expenses for the fifty-three weeks ended March 3, 2012 as compared to the fifty-two weeks ended February 26, 2011 was primarily due to the following: (1) strategic spending in marketing initiatives to drive traffic to our digital sites and our stores; (2) variable costs in fulfillment, freight and payroll increased in conjunction with the 49.5% increase in digital sales as well as the increase in store sales; and (3) additional expenses associated with the Running Specialty stores.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Store Closing Costs

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Store closing costs

   $ 1,191      $ 350  

Store closing costs as a percentage of net sales

     0.1     —  

Number of stores closed

     31       13  

Store closing costs represent the non-cash write-off of any fixtures and equipment upon a store closing. The $0.8 million increase in store closing costs is a function of more stores closed during fiscal 2012 compared to fiscal 2011 that had remaining book value.

Impairment Charges

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Impairment charges

   $ 974      $ 1,228   

Impairment charges as a percentage of net sales

     0.1 %     0.1 %

Number of stores impaired

     4       5  

These impairment charges primarily represent the non-cash write-off of long-lived assets on underperforming stores.

Interest Income, Net

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Interest income, net

   $ 447      $ 508   

Interest income, net as a percentage of net sales

     —   %     —  

The slight decrease was due to lower earned interest rates for fiscal 2012 compared to fiscal 2011, partially offset by higher balances invested.

Income Taxes

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands)  

Income tax expense

   $ 49,978      $ 41,277   

Income tax expense as a percentage of net sales

     3.6     3.4 %

Effective income tax rate

     37.1     37.5 %

The decrease in the effective tax rate in fiscal 2012 is the result of the favorable completion of a state income tax audit of approximately $1.0 million for which an uncertain tax position reserve was reversed.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Income from Continuing Operations

 

     Year Ended  
     March 3, 2012     February 26, 2011  
     (dollars in thousands, except per
share data)
 

Income from continuing operations

   $ 84,804      $ 68,864   

Income from continuing operations as a percentage of net sales

     6.2 %     5.6 %

Income from continuing operations per diluted share

   $ 1.59      $ 1.26   

The $15.9 million increase in income from continuing operations for fiscal 2012 compared to fiscal 2011 is attributable to the 11.4% net sales improvement, improved product margins, better leverage on occupancy costs and managing expenses as discussed above.

Fiscal 2011 Compared to Fiscal 2010.

Net Sales

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Net sales

   $ 1,229,002      $ 1,172,415   

Comparable store net sales (decrease) increase

     6.3 %     (0.5 )%

Net sales increased 4.8% for fiscal 2011 compared to fiscal 2010. The increase was primarily a result of a comparable store net sales increase of 6.3% during fiscal 2011 offset partially by a decrease in net sales resulting from a net decrease in store count the past 2 years as the Company has closed more stores than it has opened. Comparable footwear net sales increased 6.5% for fiscal 2011 primarily driven by a 4.9% increase in average selling price and a 1.0% increase in store conversion, offset partially by a decline in store traffic. Comparable softgoods net sales increased by 4.7% for fiscal 2011. The increase was a result of the Company’s efforts over the recent past to improve the apparel business by improving inventory turns and moving into more premium brands.

Cost of Sales (Including Occupancy Costs) and Gross Profit

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Cost of sales (including occupancy costs)

   $ 815,073      $ 793,556   

Gross profit

   $ 413,929      $ 378,859   

Gross profit as a percentage of net sales

     33.7 %     32.3 %

The 1.4% increase in gross profit, as a percentage of net sales, was a result of a 1.1% decrease in occupancy costs as a percentage of net sales and a 0.3% increase in product margin as a percentage of net sales. The 1.1% decrease in occupancy costs as a percentage of net sales is primarily the result of leveraging the 6.3% comparable store net sales increase and continuing to work with our landlords to negotiate mutually acceptable terms. The 0.3% increase in product margin as a percentage of net sales is primarily the result of disciplined inventory management which led to less promotions and improved inventory turns, resulting in improved sell through at full retail on premium product.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Selling, General and Administrative Expenses

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Selling, general and administrative expenses

   $ 302,718      $ 297,323   

Selling, general and administrative expenses as a percentage of net sales

     24.6 %     25.4 %

The $5.4 million, or 1.8%, increase in selling, general and administrative expenses was primarily due to an increase in variable selling costs due to the 4.8% increase in net sales and higher incentive compensation costs, partially offset by a decrease in depreciation, repairs and maintenance, supplies and other areas due to targeted cost reductions and reduced store levels. The decrease in selling, general and administrative expenses as a percentage of net sales was primarily due to expense leveraging with the 6.3% increase in comparable store net sales as well as a continued focus on controlling expenses.

Store Closing Costs

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Store closing costs

   $ 350     $ 2,707  

Store closing costs as a percentage of net sales

     —       0.2 %

Number of stores closed

     13       28  

Store closing costs represent the non-cash write-off of any fixtures and equipment upon a store closing. The $2.3 million decrease in store closing costs is a function of less stores closed during fiscal 2011 compared to fiscal 2010 as well as that the stores closed during fiscal 2011 had little remaining book value.

Impairment Charges

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Impairment charges

   $ 1,228      $ 6,771   

Impairment charges as a percentage of net sales

     0.1 %     0.6 %

Number of stores impaired

     5        21  

These impairment charges represent the non-cash write-off of long-lived assets on underperforming stores. The decrease in impairment charges during fiscal 2011 compared to fiscal 2010 is due to less stores impaired year over year.

Interest Income, Net

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Interest income, net

   $ 508      $ 322   

Interest income, net as a percentage of net sales

     —   %     —  

The increase of $0.2 million was due to higher invested balances and higher earned interest rates for fiscal 2011 compared to fiscal 2010.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Income Taxes

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Income tax expense

   $ 41,277      $ 21,547   

Income tax expense as a percentage of net sales

     3.4     1.8

Effective income tax rate

     37.5     29.8

The change in effective tax rate reflects a one-time tax benefit of $6.5 million in fiscal 2010 related to the Company finalizing a favorable agreement with the Internal Revenue Service regarding the income tax treatment of terminated merger and litigation expenses.

Income from Continuing Operations

 

     Year Ended  
     February 26, 2011     February 27, 2010  
    

(dollars in thousands,

except per share data)

 

Income from continuing operations

   $ 68,864      $ 50,833   

Income from continuing operations as a percentage of net sales

     5.6 %     4.3 %

Income from continuing operations per diluted share

   $ 1.26      $ 0.92   

The $18.0 million increase in income from continuing operations for fiscal 2011 compared to fiscal 2010 is attributable to the 4.8% net sales improvement, maximizing product margins and managing expenses as discussed earlier, offset partially by the one-time tax benefit of $6.5 million recorded in fiscal 2010.

Loss from Discontinued Operations

 

     Year Ended  
     February 26, 2011     February 27, 2010  
     (dollars in thousands)  

Loss from discontinued operations, net of income taxes

   $ (30 )   $ (15,161 )

For fiscal 2010, the loss from discontinued operations includes operating losses of $5.6 million as well as $18.3 million related to the loss on the sale of Man Alive. This $18.3 million loss was made up of a $7.7 million purchase price rebate, $7.4 million inventory write-off, $6.7 million property and equipment write-off, and $2.4 million in other charges, partially offset by the reversal of “Deferred credits from landlords” of $5.9 million. The $23.9 million of loss from discontinued operations was offset partially by an income tax benefit of $8.7 million.

Liquidity and Capital Resources. The Company’s primary source of working capital is cash flow from operations. The following table sets forth material balance sheet and liquidity measures of the Company (dollars in thousands):

 

     March 3,
2012
     February 26,
2011
 

Cash and cash equivalents

   $ 307,494       $ 299,323   

Merchandise inventories, net

   $ 220,405       $ 193,505   

Interest-bearing debt

   $ —         $ —     

Working capital

   $ 414,065       $ 383,264   

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Operating Activities

Net cash provided by operations was $94.7 million, $108.6 million and $157.5 million for fiscal 2012, 2011 and 2010, respectively. At March 3, 2012, the Company had cash and cash equivalents of $307.5 million, which represents an $8.2 million increase over February 26, 2011. Cash equivalents are invested in short-term money market funds invested primarily in high-quality tax-exempt municipal instruments with daily liquidity. Net cash provided by operating activities decreased by $13.9 million in fiscal 2012 compared to fiscal 2011. This decrease is primarily attributable to working capital changes including an incremental build in inventory of $21.3 million and an incremental reduction in accounts payable of $20.0 million, offset partially by incremental improvement in income taxes payable of $19.6 million and improved operating results for fiscal 2012 compared to fiscal 2011.

Consolidated inventories increased 13.9% at March 3, 2012 compared to February 26, 2011. Finish Line inventories increased 11.9% at March 3, 2012 compared to February 26, 2011. The increase over the prior year is to support the positive comparable store net sales increase.

Investing Activities

Capital expenditures were $29.1 million, $19.1 million and $8.5 million for fiscal 2012, 2011 and 2010, respectively. Expenditures in fiscal 2012 were primarily for the construction of 4 new Finish Line stores and 1 Running Specialty store, the remodeling of 17 existing Finish Line stores, Finish Line digital enhancements, building the Running Specialty website, and various corporate technology upgrades.

The Company intends to accelerate the pace of investments, which will significantly increase capital expenditures for the upcoming fiscal year to approximately $80-$90 million. Of this amount, approximately $14-$17 million is intended for the construction of approximately 25-30 new Finish Line stores, and approximately $28-$30 million is intended for the remodeling or expanding of 35-40 existing Finish Line stores with a newly-developed store prototype design and additional brand shops such as our Nike Track Club, Brand Jordan, as well as other key brand partnerships for “store-within-store” models.

The remaining $38-$43 million is related to projected capital expenditures of approximately $13-$15 million intended for store technology, which includes items like new POS software, tablets and handhelds for our stores, approximately $18-$20 million intended for IT infrastructure investments to support new supply chain and merchandise systems, and approximately $7-$8 million intended for technology to support growth in our digital business.

The Company estimates its cash requirement to open a new Finish Line prototype store (averaging 5,000 square feet) to be approximately $0.9 million. This requirement includes approximately $0.7 million for fixtures, equipment, leasehold improvements and pre-opening expenses and approximately $0.3 million ($0.2 million net of payables) in new store inventory.

Financing Activities

The Company has an unsecured $50.0 million Revolving Credit Facility Agreement (the “Credit Agreement”) with certain lenders, which expires March 1, 2013. The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate maximum amount of the credit facility by up to an additional $50.0 million.

The Credit Agreement is used by the Company to issue letters of credit. It is the Company’s intention to support working capital needs and fund capital expenditures from operating cash flows and cash on hand in the foreseeable future.

 

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Table of Contents

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

Approximately $3.8 million in stand-by letters of credit were outstanding as of March 3, 2012 under the Credit Agreement. No advances were outstanding under the Credit Agreement as of March 3, 2012. Accordingly, the total revolving credit availability under the Credit Agreement was $46.2 million as of March 3, 2012.

The Company’s ability to borrow monies in the future under the Credit Agreement is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties. The Credit Agreement contains restrictive covenants that limit, among other things, mergers and acquisitions. In addition, the Company must maintain a minimum leverage ratio (as defined in the Credit Agreement) and minimum consolidated tangible net worth (as defined in the Credit Agreement). The Company was in compliance with all such covenants as of March 3, 2012.

To maintain availability of funds under the Credit Agreement, the Company will pay a 0.25% per annum commitment fee on the revolving credit commitments under the Credit Agreement.

The interest rates per annum applicable to amounts outstanding under the Credit Agreement at March 3, 2012 are, at the Company’s option, either (a) the Base Rate as defined in the Credit Agreement (the “Base Rate”) plus a margin of 0.50% per annum, or (b) the LIBOR Rate as defined in the Credit Agreement (the “LIBOR Rate”) plus a margin of 1.50% per annum. The margin over the Base Rate and the LIBOR Rate under the Credit Agreement may be adjusted quarterly based on the consolidated leverage ratio of the Company, as calculated pursuant to the Credit Agreement. The maximum margin over the Base Rate under the Credit Agreement will be 1.0% per annum; the maximum margin over the LIBOR Rate under the Credit Agreement will be 2.0% per annum. Interest payments under the Credit Agreement are due on the interest payment dates specified in the Credit Agreement.

The obligations under the Credit Agreement generally are unsecured, except that, upon a Collateralization Event (as defined in the Credit Agreement), the Company will be deemed to have granted a security interest in the Collateral (as defined in the Credit Agreement), subject to certain specified liens. In certain circumstances, such security interest may be released (and may subsequently spring back into effect) depending on whether the Collateralization Event is continuing (or a new Collateralization Event has occurred). No Collateralization Events occurred during fiscal 2012.

On July 17, 2008, the Company’s Board of Directors authorized the 2008 stock repurchase program to repurchase up to 5,000,000 shares of the Company’s Class A common stock outstanding through December 31, 2011. Throughout the term of the 2008 stock repurchase program, the Company purchased 4,660,697 shares at an average price of $16.06 per share for an aggregate amount of $74.8 million. The 2008 stock repurchase program was terminated on July 21, 2011 and was superseded by the 2011 stock repurchase program, which became effective as of the same date.

Under the 2011 stock repurchase program, the Company’s Board of Directors authorized the repurchase of up to 5,000,000 shares of the Company’s Class A common stock outstanding through December 31, 2014. Under the 2011 stock repurchase program the Company purchased 1,199,900 shares at an average price of $19.70 per share for an aggregate amount of $23.6 million in fiscal 2012. Under both the 2008 and 2011 stock repurchase programs, the Company purchased 2,884,603 shares at an average price of $20.93 per share for an aggregate amount of $60.3 million during fiscal 2012. As of March 3, 2012, there were 3,800,100 shares remaining available to repurchase under the 2011 stock repurchase program.

As of March 3, 2012, the Company holds as treasury shares 8,043,936 shares of its Class A Common Stock at an average price of $15.94 per share for an aggregate purchase amount of $128.2 million. The treasury shares may be issued upon the exercise of employee stock options, issuance of shares for the Employee Stock Purchase Plan, issuance of restricted stock, or for other corporate purposes. 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.

 

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Management’s Discussion and Analysis of Financial Condition and Results of Operations (Continued)

 

On January 18, 2012, the Company’s Board of Directors increased its quarterly cash dividend to $0.06 per share of Class A and Class B common stock. The Company declared dividends of $11.0 million and $9.1 million during fiscal 2012 and 2011, respectively. As of March 3, 2012 and February 26, 2011, dividends declared but not paid were $3.1 million and $2.7 million, respectively. Further declarations of dividends remain at the discretion of the Company’s Board of Directors.

Management believes that cash on hand of approximately $307.5 million as of March 3, 2012 and anticipated future operating cash flow will be sufficient to deliver on the Company’s three strategic priorities to drive sales and earnings growth:

 

   

Continue to grow the core Finish Line business through improved store productivity and aggressive digital growth;

 

   

Continue to expand as a multi-divisional retailer, maximizing the growth opportunities in Running Specialty while exploring beyond it as well; and

 

   

Continue to provide direct returns to shareholders through dividends and share repurchases.

Contractual Obligations

The following table summarizes the Company’s long-term contractual obligations as of March 3, 2012 (in thousands):

 

     Total      Payments Due by Fiscal Year  
        Less than
1 Year
     1-3
Years
     3-5
Years
     After 5
Years
     Other  

Contractual Obligations

                 

Operating Lease Obligations

   $ 361,630       $ 77,457       $ 127,604       $ 77,506       $ 79,063       $ —     

Other Liabilities(1)

     12,654         200         —           —           —           12,454   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Contractual Obligations

   $ 374,284       $ 77,657       $ 127,604       $ 77,506       $ 79,063       $ 12,454   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Other Liabilities includes future estimated payments associated with unrecognized tax benefits of $8.9 million. The Company expects to make cash outlays in the future related to our unrecognized tax benefits. The “Less than 1 Year” category includes $0.2 million of these tax items because it is reasonably possible that the payment could change in the next 12 months due to audit settlements or resolution of uncertainties. The remaining $8.7 million is included in the “Other” category as the timing and amount of these payments is not known until the matters are resolved with relevant tax authorities. For further information related to unrecognized tax benefits, see Note 6, “Income Taxes,” to the Consolidated Financial Statements included in Item 8, Financial Statements and Supplementary Data. Additionally, Other Liabilities includes future payments related to our non-qualified deferred compensation plan of $3.8 million as the timing of these future payments is not known until an associate leaves the Company or otherwise requests an in-service distribution.

In the ordinary course of business, the Company enters into arrangements with vendors to purchase merchandise up to 12 months in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled. Total purchase orders outstanding at March 3, 2012 are $410.5 million.

Off Balance Sheet Arrangements

The Company has no off balance sheet arrangements as that term is defined in Item 303(a)(4) of Regulation S-K.

Item 7A—Quantitative and Qualitative Disclosures About Market Risks

The Company is exposed to changes in interest rates primarily from its investments in marketable securities from time to time. The Company did not have any marketable securities as of March 3, 2012. The Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

 

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Item 8—Financial Statements and Supplementary Data

Management’s Report on Internal Control Over Financial Reporting

The management of The Finish Line, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.

Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that: (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of March 3, 2012. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on management’s assessment it believes that, as of March 3, 2012, the Company’s internal control over financial reporting is effective based on those criteria.

The Company’s independent registered public accounting firm, Ernst & Young LLP, has issued an attestation report on the Company’s internal control over financial reporting. Ernst & Young LLP’s report appears on the following page and expresses an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of March 3, 2012.

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON

INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of The Finish Line, Inc.

We have audited The Finish Line, Inc.’s internal control over financial reporting as of March 3, 2012 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The Finish Line, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, The Finish Line, Inc. maintained, in all material respects, effective internal control over financial reporting as of March 3, 2012 based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Finish Line, Inc. as of March 3, 2012 and February 26, 2011, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended March 3, 2012 of The Finish Line, Inc., and our report dated May 1, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Indianapolis, Indiana

May 1, 2012

 

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of The Finish Line, Inc.

We have audited the accompanying consolidated balance sheets of The Finish Line, Inc. as of March 3, 2012 and February 26, 2011, and the related consolidated statements of income, changes in shareholders’ equity and cash flows for each of the three years in the period ended March 3, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Finish Line, Inc. at March 3, 2012 and February 26, 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 3, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), The Finish Line, Inc.’s. internal control over financial reporting as of March 3, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 1, 2012, expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Indianapolis, Indiana

May 1, 2012

 

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THE FINISH LINE, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

     March 3,
2012
    February 26,
2011
 
Assets     

Current Assets

    

Cash and cash equivalents

   $ 307,494      $ 299,323   

Accounts receivable, net

     9,041        10,552   

Merchandise inventories, net

     220,405        193,505   

Other

     15,808        6,304   
  

 

 

   

 

 

 

Total current assets

     552,748        509,684   

Property and Equipment

    

Land

     1,557        1,557   

Building

     41,745        41,653   

Leasehold improvements

     220,532        223,485   

Furniture, fixtures and equipment

     115,798        115,054   

Construction in progress

     6,987        2,820   
  

 

 

   

 

 

 
     386,619        384,569   

Less accumulated depreciation

     259,622        258,059   
  

 

 

   

 

 

 
     126,997        126,510   

Deferred income taxes

     16,888        23,795   

Goodwill

     8,503        —     

Other intangible assets

     550        —     

Other assets, net

     5,810        4,856   
  

 

 

   

 

 

 

Total assets

   $ 711,496      $ 664,845   
  

 

 

   

 

 

 
Liabilities and Shareholders’ Equity     

Current Liabilities

    

Accounts payable

   $ 67,246      $ 72,780   

Employee compensation

     22,403        18,516   

Accrued property and sales tax

     10,312        8,188   

Income taxes payable

     13,348        6,776   

Deferred income taxes

     7,068        3,170   

Other liabilities and accrued expenses

     18,306        16,990   
  

 

 

   

 

 

 

Total current liabilities

     138,683        126,420   

Commitments and contingencies

    

Deferred credits from landlords

     30,080        34,653   

Other long-term liabilities

     13,196        13,527   

Shareholders’ Equity

    

Preferred stock, $.01 par value; 1,000 shares authorized; none issued

     —          —     

Common stock, $.01 par value

    

Class A:

    

Shares authorized—100,000

    

Shares issued—(2012—58,839; 2011—58,001)

    

Shares outstanding—(2012—50,795; 2011—51,037)

     588        580   

Class B:

    

Shares authorized—10,000

    

Shares issued and outstanding—(2012—571; 2011—1,351)

     5        13   

Additional paid-in capital

     211,271        197,036   

Retained earnings

     445,884        372,047   

Treasury stock (2012—8,044; 2011—6,964)

     (128,211     (79,431
  

 

 

   

 

 

 

Total shareholders’ equity

     529,537        490,245   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 711,496      $ 664,845   
  

 

 

   

 

 

 

See accompanying notes

 

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THE FINISH LINE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

 

     Year Ended  
     March 3,
2012
     February 26,
2011
    February 27,
2010
 

Net sales

   $ 1,369,259       $ 1,229,002      $ 1,172,415   

Cost of sales (including occupancy costs)

     889,130         815,073        793,556   
  

 

 

    

 

 

   

 

 

 

Gross profit

     480,129         413,929        378,859   

Selling, general and administrative expenses

     343,629         302,718        297,323   

Store closing costs

     1,191         350        2,707   

Impairment charges

     974         1,228        6,771   
  

 

 

    

 

 

   

 

 

 

Operating income

     134,335         109,633        72,058   

Interest income, net

     447         508        322   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations before income taxes

     134,782         110,141        72,380   

Income tax expense

     49,978         41,277        21,547   
  

 

 

    

 

 

   

 

 

 

Income from continuing operations

     84,804         68,864        50,833   

Loss from discontinued operations, net of income tax benefit

     —           (30     (15,161
  

 

 

    

 

 

   

 

 

 

Net income

   $ 84,804       $ 68,834      $ 35,672   
  

 

 

    

 

 

   

 

 

 

Income (loss) per basic share:

       

Income from continuing operations

   $ 1.62       $ 1.28      $ 0.92   

Loss from discontinued operations

     —           —          (0.27
  

 

 

    

 

 

   

 

 

 

Net income

   $ 1.62       $ 1.28      $ 0.65   
  

 

 

    

 

 

   

 

 

 

Income (loss) per diluted share:

       

Income from continuing operations

   $ 1.59       $ 1.26      $ 0.92   

Loss from discontinued operations

     —           —          (0.28
  

 

 

    

 

 

   

 

 

 

Net income

   $ 1.59       $ 1.26      $ 0.64   
  

 

 

    

 

 

   

 

 

 

Dividends declared per share

   $ 0.21       $ 0.17      $ 0.13   
  

 

 

    

 

 

   

 

 

 

 

See accompanying notes

 

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THE FINISH LINE, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Year Ended  
     March 3,
2012
    February 26,
2011
    February 27,
2010
 

Operating activities

      

Net income

   $ 84,804      $ 68,834      $ 35,672   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Loss on sale of discontinued operations

     —          —          18,284   

Impairment charges

     974        1,228        6,771   

Depreciation and amortization

     27,027        26,959        29,977   

Deferred income taxes

     10,805        2,362        7,090   

Loss on disposal of property and equipment

     1,528        303        3,075   

Share-based compensation

     5,187        4,209        3,508   

Excess tax benefits from share-based compensation

     (5,951     (1,297     (433

Changes in operating assets and liabilities

      

Accounts receivable

     1,511        (6,785     1,187   

Merchandise inventories

     (23,880     (2,611     42,074   

Other assets

     (8,645     8,416        1,371   

Accounts payable

     (7,512     12,479        (4,055

Employee compensation

     3,887        2,258        3,535   

Income taxes payable

     8,971        (10,651     16,452   

Other liabilities and accrued expenses

     2,950        8,223        (993

Deferred credits from landlords

     (6,916     (5,353     (6,057
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     94,740        108,574        157,458   

Investing activities

      

Additions to property and equipment

     (29,131     (19,088     (8,454

Acquisition, net of cash acquired

     (8,495     —          —     

Payments for intangible assets

     (550     —          —     

Proceeds from disposals of property and equipment

     40        127        103   

Payments for sale of discontinued operations

     —          (667     (10,195

Proceeds from sale of marketable securities

     —          —          14,913   
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (38,136     (19,628     (3,633

Financing activities

      

Dividends paid to shareholders

     (10,512     (8,598     (6,610

Proceeds from issuance of common stock

     16,496        5,338        1,834   

Excess tax benefits from share-based compensation

     5,951        1,297        433   

Purchase of treasury stock

     (60,368     (22,168     (15,936
  

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

     (48,433     (24,131     (20,279
  

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     8,171        64,815        133,546   

Cash and cash equivalents at beginning of year

     299,323        234,508        100,962   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

   $ 307,494      $ 299,323      $ 234,508   
  

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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THE FINISH LINE, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands)

 

    Number of Shares     Amount     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Totals  
    Class A     Class B     Treasury     Class A     Class B          

Balance at February 28, 2009

    50,025        4,013        5,271      $ 553      $ 40      $ 186,655      $ 283,757      $ (46,611   $ 424,394   

Net income

                35,672          35,672   

Cash dividends declared ($0.13 per share)

                (7,124       (7,124

Non-qualified Class A Common Stock options exercised and related tax benefits

    327          (327         246          1,449        1,695   

Share-based compensation

              3,508            3,508   

Restricted shares vested, net of repurchase for taxes

    110          (110         (887       455        (432

Shares issued under employee stock purchase plan

    53          (53         142          231        373   

Class B Common Stock conversion to Class A Common Stock

    1,960        (1,960       19        (19           —     

Treasury Stock purchased

    (1,390       1,390                (15,936     (15,936
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 27, 2010

    51,085        2,053        6,171        572        21        189,664        312,305        (60,412     442,150   

Net income

                68,834          68,834   

Cash dividends declared ($0.17 per share)

                (9,092       (9,092

Non-qualified Class A Common Stock options exercised and related tax benefits

    542          (542         4,011          2,250        6,261   

Share-based compensation

              4,209            4,209   

Restricted shares vested, net of repurchase for taxes

    223        43        (223         (1,091       783        (308

Shares issued under employee stock purchase plan

    28          (28         243          116        359   

Class B Common Stock conversion to Class A Common Stock

    745        (745       8        (8           —     

Treasury Stock purchased

    (1,586       1,586                (22,168     (22,168
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at February 26, 2011

    51,037        1,351        6,964        580        13        197,036        372,047        (79,431     490,245   

Net income

                84,804          84,804   

Cash dividends declared ($0.21 per share)

                (10,967       (10,967

Non-qualified Class A Common Stock options exercised and related tax benefits

    1,490          (1,490         10,428          11,237        21,665   

Share-based compensation

              5,187            5,187   

Restricted shares vested, net of repurchase for taxes

    288        58        (288         (1,508       17        (1,491

Shares issued under employee stock purchase plan

    27          (27         128          334        462   

Class B Common Stock conversion to Class A Common Stock

    838        (838       8        (8           —     

Treasury Stock purchased

    (2,885       2,885                (60,368     (60,368
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 3, 2012

    50,795        571        8,044      $ 588      $ 5      $ 211,271      $ 445,884      $ (128,211   $ 529,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Significant Accounting Policies

Basis of Presentation. The consolidated financial statements include the accounts of The Finish Line, Inc. and its subsidiaries (collectively, the “Company”). All intercompany transactions and balances have been eliminated. Throughout these notes to the consolidated financial statements, fiscal years ended March 3, 2012, February 26, 2011 and February 27, 2010 are referred to as 2012, 2011 and 2010, respectively.

The Company uses a “Retail” calendar. The Company’s fiscal year ends on the Saturday closest to the last day of February and included 53 weeks in 2012, and 52 weeks in 2011 and 2010.

Nature of Operations. The Finish Line, Inc. is one of the nation’s largest mall-based specialty retailers in the United States, and operates two retail divisions under the Finish Line brand name (“Finish Line”) and Running Specialty Group (“Running Specialty”).

In 2012, the Company purchased approximately 84% of its merchandise from its five largest suppliers. The largest supplier, Nike, accounted for approximately 64%, 61% and 65% of merchandise purchases in 2012, 2011 and 2010, respectively.

Use of Estimates. Preparation of the financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Segment Information. The Company is a premium retailer of athletic shoes, apparel and accessories for men, women and kids, throughout the United States, through three operating segments, “brick and mortar” stores, digital (which includes internet, mobile and tablet), and Running Specialty. Given the similar economic characteristics of both “brick and mortar” stores and digital, which include a similar nature of products sold, type of customer, and method of distribution, and Running Specialty being immaterial, 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 years (in thousands):

 

Category

   2012     2011     2010  

Footwear

   $ 1,177,114         86   $ 1,056,586         86   $ 1,005,166         86

Softgoods

     192,145         14     172,416         14     167,249         14
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 1,369,259         100   $ 1,229,002         100   $ 1,172,415         100
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Cash and Cash Equivalents. Cash and cash equivalents consist primarily of cash on hand and all highly liquid instruments purchased with a maturity of three months or less at the date of purchase. At March 3, 2012, substantially all of the Company’s cash was invested in deposit accounts at banks. The majority of payments due from banks for credit card transactions process within 24 to 48 hours and are accordingly classified as cash and cash equivalents.

Merchandise Inventories. Merchandise inventories are valued at the lower of cost or market using a weighted-average cost method, which approximates the first-in, first-out method. Merchandise inventories are recorded net of markdowns and shrinkage. Vendor rebates are applied as a reduction to the cost of merchandise inventories.

Property and Equipment. Property and equipment are stated at cost and depreciated on a straight-line basis over the estimated useful lives of the assets: 30 years for buildings and three to 10 years for furniture, fixtures and equipment. Improvements to leased premises are amortized on a straight-line basis over the shorter of the estimated useful life of the asset, generally 10 years, or the remaining lease term. Significant additions and

 

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Table of Contents

THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

improvements that extend the useful life of an asset are capitalized. Maintenance and repairs are charged to current operations as incurred. Depreciation expense charged to continuing operations for 2012, 2011 and 2010 was $27,091,000, $26,940,000 and $29,398,000, respectively.

Impairment of Long-Lived Assets. In accordance with Accounting Standards Codification “ASC” 360, the Company reviews long-lived assets for impairment related to all stores open for at least two years with negative contribution and cash flows as well as stores opened less then two years whenever other events or changes in circumstances indicate the store’s assets may not be recoverable. Recoverability of assets to be held and used is determined by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment recognized is measured by comparing projected individual store discounted cash flows to the asset carrying values.

Goodwill and Other Intangible Assets. The Company accounts for goodwill and other intangible assets in accordance with ASC 350 “Goodwill and Other Intangible Assets” (“ASC 350”). ASC 350 requires that goodwill and intangible assets with indefinite lives not be amortized, but reviewed for impairment if impairment indicators arise and, at a minimum, annually. Intangible assets that are deemed to have finite lives are amortized over their estimated useful lives.

The goodwill impairment test is a two-step impairment test. In the first step, the Company compares the fair value of each operating segment with goodwill to its carrying value. The Company determines the fair value of its operating segments with goodwill using a combination of a discounted cash flow and a market value approach. If the fair value of the operating segment exceeds the carrying value of the net assets assigned to that operating segment, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the net assets assigned to the operating segment exceeds the fair value of the operating segment, then the Company must perform the second step in order to determine the implied fair value of the operating segment’s goodwill and compare it to the carrying value of the operating segment’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities of the impaired operating segment based on their fair value and determining the fair value of the impaired operating segment’s goodwill based upon the residual of the summed identified tangible and intangible assets and liabilities.

Intangible assets that have been determined to have indefinite lives relate to a domain name and is also not subject to amortization and is reviewed at least annually for potential impairment, as described above. The fair value of the Company’s indefinite lived intangible assets are estimated and compared to their carrying value. The Company recognizes an impairment charge when the estimated fair value of the intangible asset is less than the carrying value.

Deferred Credits From Landlords. Deferred credits from landlords consist of step rent and allowances from landlords related to the Company’s retail stores. Step rent represents the difference between actual operating lease payments due and straight-line rent expense, which is recorded by the Company over the term of the lease, including the build-out period. This amount is generally recorded as a deferred credit in the early years of the lease, when cash payments are generally lower than the straight-line rent expense, and reduced in the later years of the lease, when payments begin to exceed the straight-line expense. Landlord allowances are generally comprised of amounts promised to the Company by landlords in the form of cash or rent abatements. These allowances are part of the negotiated terms of the lease. In situations where cash is to be received, the Company records a receivable for the full amount of the allowance when certain performance criteria articulated in the lease are met and a liability is concurrently established. This deferred credit from landlords is amortized into income (through lower rent expense) over the term (including the pre-opening build-out period) of the applicable lease and the receivable is reduced as amounts are received from the landlord.

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Revenue Recognition. Revenues are recognized at the time the customer receives the merchandise, which for Digital revenues reflects an estimate of shipments that have not been received by the customer based on shipping terms and estimated delivery times. Sales include merchandise, net of returns and exclude all taxes. Revenue from layaway sales is recognized when the customer receives the merchandise.

The Company sells gift cards with no expiration dates to customers and does not charge administrative fees on unused gift cards. The Company recognizes revenue from gift cards when they are redeemed by the customer. In addition, the Company recognizes revenue on unredeemed gift cards when the likelihood of the gift card being redeemed is remote and there is no legal obligation to remit the value of unredeemed gift cards to the relevant jurisdictions. The Company determined the gift card breakage rate based on historical redemption patterns. During the 4th quarter of 2012, 2011 and 2010 the Company recorded $346,000, $434,000 and $2,622,000 respectively, of revenue related to gift card breakage. The Company’s initial year of recognizing gift card breakage was 2010 and represented multiple years of unredeemed gift cards. Gift card breakage is included in Net Sales in the Company’s Consolidated Statements of Income, however is not included in the comparable store net sales.

Costs of Sales. Costs of sales include the cost associated with acquiring merchandise from vendors, occupancy costs, provision for inventory shortages, and credits and allowances from merchandise vendors. Cash consideration received from merchandise vendors after the related merchandise has been sold is recorded as an offset to cost of sales. For cash consideration received on merchandise still in inventory, the allowance is recorded as a reduction to the cost of on-hand inventory and recorded as a reduction of our cost of sales at the time of sale.

Because the Company does not include the costs associated with operating the distribution facility and freight within cost of sales, the Company’s gross profit may not be comparable to those of other retailers that may include all costs related to their distribution facilities in costs of sales and in the calculation of gross profit.

Selling, General and Administrative Expenses. Selling, general and administrative expenses include store payroll and related payroll benefits, store operating expenses, advertising, cooperative advertising allowances, shipping expense associated with shipping product to customers, costs associated with operating our distribution facility and freight, including moving merchandise from our distribution center to stores, share-based compensation and other corporate related expenses.

Advertising. The Company expenses the cost of advertising as incurred, net of reimbursements for cooperative advertising. The reimbursements for cooperative advertising are agreed upon with vendors and are recorded in the same period as the associated expenses are incurred. Advertising expense charged to continuing operations was as follows (in thousands):

 

     2012     2011     2010  

Advertising expense

   $ 35,827      $ 25,099      $ 21,129   

Cooperative advertising credits

     (7,839     (5,530     (4,393
  

 

 

   

 

 

   

 

 

 

Net advertising expense

   $ 27,988      $ 19,569      $ 16,736   
  

 

 

   

 

 

   

 

 

 

Store Pre-opening Costs. Store pre-opening costs and other non-capitalized expenditures, including payroll, training costs and straight-line rent expense, are expensed as incurred.

Store Closing Costs. Store closing costs represent the non-cash write-off of any fixtures and equipment upon a store closing. In the event a store is closed before its lease has expired, any estimated post-closing lease

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

obligations, less sublease rental income, is provided for when the leased space is no longer in use. The Company closed 31, 13 and 28 stores in 2012, 2011 and 2010, respectively.

Income Taxes. The Company accounts for income taxes under the asset and liability method. Under this method, the amount of taxes currently payable or refundable are accrued and deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets are also recognized for realizable loss and tax credit carryforwards. The deferred tax assets may be reduced by a valuation allowance, which is established when it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. In addition, management is required to evaluate all available evidence including estimating future taxable income by taxing jurisdictions, the future reversal of temporary differences, tax planning strategies, and recent results of operations when making its judgment to determine whether or not to record a valuation allowance for a portion or all of its deferred tax asset. Deferred tax assets and liabilities are measured using enacted income tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in income tax rates is recognized in the Company’s Consolidated Statements of Income in the period that includes the enactment date.

The Company calculates an annual effective income tax rate based on annual income, permanent differences between book and tax income and statutory income tax rates. The Company adjusts the annual effective income tax rate as additional information on outcomes or events becomes available. The Company’s effective income tax rate is affected by items including changes in tax law, the tax jurisdiction of new stores or business ventures, the level of earnings or losses, the results of tax audits and the level of investment income.

The Company’s income tax returns, like those of most companies, are periodically audited by tax authorities. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. At any one time, multiple tax years are subject to audit by the various tax authorities. The Company accounts for uncertainty in income taxes using a two-step approach for evaluating income tax positions. The first step requires the Company to conclude that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by a tax authority. The second step applies if the Company has concluded that the tax position is more likely than not to be sustained upon examination and requires the Company to measure the largest amount of benefit, determined on a cumulative probability basis, which it is more likely than not to be realized upon ultimate settlement. The Company adjusts its accrual for uncertain tax positions and income tax provision in the period in which matters are effectively settled with tax authorities at amounts different from its established accrual, the statute of limitations expires for the relevant taxing authority to examine the tax position or when more information becomes available. The Company includes its accrual for uncertain tax positions, including accrued penalties and interest, in “Other long-term liabilities” on the Consolidated Balance Sheets unless the liability is expected to be paid within one year. Changes to the accrual for uncertain tax positions, including accrued penalties and interest, are included in “Income tax expense” in the Consolidated Statements of Income.

Earnings Per Share. Basic earnings per share is calculated by dividing net income associated with common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method discussed in 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 shareholders. During periods of net income, participating securities are allocated a proportional share of net income determined by dividing total weighted average

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

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. All per share amounts, unless otherwise noted, are presented on a diluted basis.

Financial Instruments. Financial instruments consist of cash and cash equivalents, accounts receivable and accounts payable. The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximate fair value because of the short maturity of these instruments.

As of March 3, 2012 and February 26, 2011, the Company had not invested in, nor did it have, any derivative financial instruments.

Share-Based Compensation. The Company accounts for share-based compensation by the measuring and recognizing of compensation expense for all share-based awards made to employees and directors based on estimated fair values on the grant date. The Company is required to estimate the fair value of share-based awards on the date of grant and recognize as expense the value of the portion of the award that is ultimately expected to vest over the requisite service period.

Share-based compensation expense recognized in the Consolidated Statements of Income is based on awards ultimately expected to vest, and accordingly has been reduced for estimated forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company applies an estimated forfeiture rate based on historical data to determine the amount of compensation expense.

Compensation expense for stock options is recognized, net of forfeitures, over the requisite service period on a straight-line basis, using a single option approach (each option is valued as one grant, irrespective of the number of vesting tranches). Restricted stock expense is recognized, net of forfeitures, on a straight-line basis over the requisite service period.

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 reporting entity to develop its own assumptions.

The Company has cash equivalents in short-term money market funds invested primarily in high-quality tax-exempt municipal instruments. The primary objective of our short-term investment activity is to preserve our capital for the purpose of funding operations and we do not enter into short-term investments for trading or speculative purposes. The fair values are based on unadjusted quoted market prices for the funds in active markets with sufficient volume and frequency (Level 1). Also included in Level 1 assets are mutual fund investments under the non-qualified deferred compensation plan. The Company estimates the fair value of these investments on a recurring basis using market prices that are readily available.

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

Recent Accounting Pronouncements. In September 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-08, an update to FASB Codification Intangibles—Goodwill and Other. Specifically, this update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The provisions for this pronouncement are effective for fiscal years, and interim periods beginning after December 15, 2011, with early adoption permitted. The Company will adopt this update beginning March 4, 2012. The Company does not expect this pronouncement to have a material effect on its consolidated financial statements.

Other recently issued accounting pronouncements did not, or are not believed by management to, have a material effect on the Company’s present or future consolidated financial statements.

 

2. Acquisition

On August 31, 2011, the Company acquired substantially all the assets and assumed certain liabilities of the Running Company for a purchase price of $8.5 million which was funded through the Company’s existing cash. As of the acquisition date, the Running Company operated 18 specialty running shops in Connecticut, District of Columbia, Florida, Maryland, Massachusetts, New Jersey, New York and Texas.

The Company has allocated the purchase price based upon the tangible and intangible assets acquired, net of liabilities, which is tentative. The Company’s results of operations included those of the Running Company beginning with the date of acquisition. Pro forma effects of the acquisition have not been presented, as their effects were not significant to the consolidated results of the Company. The allocation of the purchase price is detailed below (in thousands):

 

     Allocation of
Purchase Price
 

Goodwill

   $ 8,503   

Tangible assets, net of liabilities

     1,675   

Net unfavorable lease obligation

     (1,678 )
  

 

 

 

Total purchase price

   $ 8,500   
  

 

 

 

The Company determined the estimated fair values based on discounted cash flow analyses and estimates made by management. Goodwill from the acquisition is deductible for tax purposes.

 

3. Discontinued Operations

On June 21, 2009, The Finish Line, Inc. and its wholly-owned subsidiary The Finish Line Man Alive, Inc. (“Man Alive”) entered into a definitive asset purchase agreement (the “Purchase Agreement”) with an unaffiliated buyer, Man Alive Acquisitions, LLC (“the Buyer”), under which the Buyer assumed certain assets and liabilities of Man Alive. The transaction closed on July 3, 2009 with an effective date of July 4, 2009.

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The results of operations of Man Alive have been classified in discontinued operations for all periods presented. The financial results of the Man Alive operations, which are included in discontinued operations in the accompanying Consolidated Statements of Income, were as follows (in thousands):

 

     2012      2011     2010  

Net sales

   $       —         $       —        $ 10,925   
  

 

 

    

 

 

   

 

 

 

Loss from discontinued operations

   $ —         $ (55   $ (23,911

Income tax benefit

     —           22        8,672   
  

 

 

    

 

 

   

 

 

 

Loss from discontinued operations, net of income tax benefit

   $ —         $ (33   $ (15,239
  

 

 

    

 

 

   

 

 

 

For 2010, the loss from discontinued operations of Man Alive included operating losses of $5,627,000 as well as $18,284,000 related to the loss on sale of Man Alive. The $18,284,000 was made up of a $7,705,000 purchase price rebate, $7,359,000 inventory write-off, $6,726,000 property and equipment write-off and $2,370,000 in other charges, partially offset by the reversal of “Deferred credits from landlords” of $5,876,000. The $18,284,000 loss was comprised of $10,195,000 of cash payments and $8,089,000 of non-cash net charges.

 

4. Debt Agreement

On February 18, 2010, the Company entered into an unsecured $50,000,000 Revolving Credit Facility Agreement (the “Credit Agreement”) with certain lenders, which expires on March 1, 2013. The Credit Agreement also provides that, under certain circumstances, the Company may increase the aggregate maximum amount of the credit facility by up to an additional $50,000,000.

The Credit Agreement is used by the Company to issue letters of credit and could be used, among other things, to support working capital needs, fund capital expenditures and other general corporate purposes. Approximately $3,808,000 in stand-by letters of credit were outstanding as of March 3, 2012 under the Credit Agreement. No advances were outstanding under the Credit Agreement as of March 3, 2012. Accordingly, the total revolving credit availability under the Credit Agreement was $46,192,000 as of March 3, 2012.

The Company’s ability to borrow monies in the future under the Credit Agreement is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties. The Credit Agreement contains restrictive covenants that limit, among other things, mergers and acquisitions. In addition, the Company must maintain a minimum leverage ratio (as defined in the Credit Agreement) and minimum consolidated tangible net worth (as defined in the Credit Agreement). The Company was in compliance with all such covenants as of March 3, 2012.

To maintain availability of funds under the Credit Agreement, the Company will pay a 0.25% per annum commitment fee on the revolving credit commitments under the Credit Agreement.

The interest rates per annum applicable to amounts outstanding under the Credit Agreement at March 3, 2012 are, at the Company’s option, either (a) the Base Rate as defined in the Credit Agreement (the “Base Rate”) plus a margin of 0.50% per annum, or (b) the LIBOR Rate as defined in the Credit Agreement (the “LIBOR Rate”) plus a margin of 1.50% per annum. The margin over the Base Rate and the LIBOR Rate under the Credit Agreement may be adjusted quarterly based on the consolidated leverage ratio of the Company, as calculated pursuant to the Credit Agreement. The maximum margin over the Base Rate under the Credit Agreement will be 1.00% per annum; the maximum margin over the LIBOR Rate under the Credit Agreement will be 2.00% per annum. Interest payments under the Credit Agreement are due on the interest payment dates specified in the Credit Agreement.

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The obligations under the Credit Agreement generally are unsecured, except that, upon a Collateralization Event (as defined in the Credit Agreement), the Company will be deemed to have granted a security interest in the Collateral (as defined in the Credit Agreement), subject to certain specified liens. In certain circumstances, such security interest may be released (and may subsequently spring back into effect) depending on whether the Collateralization Event is continuing (or a new Collateralization Event has occurred). No Collateralization Events occurred during 2012.

 

5. Leases

The Company leases retail stores under non-cancelable operating leases, which generally have lease terms ranging from five to ten years. Most of these lease arrangements do not provide for renewal periods. Many leases provide for contingent rents, which are determined as a percentage of gross sales in excess of specified levels. The Company records a contingent rent liability in “Other liabilities and accrued expenses” on the Consolidated Balance Sheets and the corresponding rent expense when specified levels have been achieved or when management determines that achieving the specified levels during the fiscal year is probable. In addition to rent payments, these leases generally require additional payments covering real estate taxes, insurance, maintenance and other costs. These additional payments are excluded from the table below. The components of rent expense from continuing operations incurred under these leases are as follows (in thousands):

 

     2012     2011     2010  

Base rent, net of landlord deferred credits

   $ 82,177      $ 80,951      $ 82,136   

Step rent

     (1,883     (1,192     (1,105

Contingent rent

     4,870        2,849        1,555   
  

 

 

   

 

 

   

 

 

 

Rent expense

   $ 85,164      $ 82,608      $ 82,586   
  

 

 

   

 

 

   

 

 

 

A schedule of future base rent payments by fiscal year with initial or remaining non-cancelable terms of one year or more is as follows (in thousands):

 

2013

   $ 77,457   

2014

     69,666   

2015

     57,938   

2016

     45,009   

2017

     32,497   

Thereafter

     79,063   
  

 

 

 
   $ 361,630   
  

 

 

 

This schedule of future base rent payments includes lease commitments for seven new stores and eight remodeled stores that were not open as of March 3, 2012.

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

6. Income Taxes

The components of income taxes from continuing operations are as follows (in thousands):

 

     2012      2011      2010  

Currently payable:

        

Federal

   $ 36,211       $ 35,047       $ 19,440   

State

     2,962         3,746         2,680   
  

 

 

    

 

 

    

 

 

 
     39,173         38,793         22,120   

Deferred:

        

Federal

     9,357         2,294         (1,281

State

     1,448         190         708   
  

 

 

    

 

 

    

 

 

 
     10,805         2,484         (573
  

 

 

    

 

 

    

 

 

 

Total income tax expense from continuing operations

   $ 49,978       $ 41,277       $ 21,547   
  

 

 

    

 

 

    

 

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows (in thousands):

 

     2012     2011  

Deferred tax assets:

    

Deferred credits from landlords

   $ 11,314      $ 13,488   

Share-based compensation

     3,950        4,979   

Compensation accrual

     3,745        3,820   

Deferred Compensation

     1,486        1,035   

Other

     4,112        5,494   
  

 

 

   

 

 

 

Total deferred tax assets

     24,607        28,816   

Deferred tax liabilities:

    

Inventories

     (9,245     (6,540

Property and equipment

     (4,990     (954

Other

     (552     (697
  

 

 

   

 

 

 

Total deferred tax liabilities

     (14,787     (8,191
  

 

 

   

 

 

 

Net deferred tax asset

   $ 9,820      $ 20,625   
  

 

 

   

 

 

 

The effective income tax rate related to continuing operations varies from the statutory federal income tax rate for 2012, 2011 and 2010 due to the following:

 

     2012     2011     2010  

Tax at statutory federal income tax rate

     35.0     35.0     35.0

State income taxes, net of federal benefit

     3.0        2.7        1.9   

Tax contingencies

     (0.9     (0.3     0.7   

Tax-exempt interest

     —          —          (0.1

Valuation allowance

     —          —          (8.1

Other

     —          0.1        0.4   
  

 

 

   

 

 

   

 

 

 
     37.1     37.5     29.8

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

In 2010, the Company finalized a favorable agreement with the Internal Revenue Service regarding the income tax treatment of the terminated merger and litigation expenses which allowed the Company to treat all of the terminated merger and litigation expenses as an ordinary deduction instead of a portion as an ordinary deduction and another portion as a capital loss. The Company determined that its previously classified capital loss carryforward would be recovered through operating income and the valuation allowance of $6,546,000 attributable to the capital loss was no longer necessary and was reversed in 2010.

As of March 3, 2012, the Company had approximately $10,134,000 of net operating loss carryforwards for state tax purposes of which $3,189,000 of net operating loss carryforwards related to excess stock-based compensation deductions and when realized, will be credited to shareholders’ equity. If not used, these carryforwards will expire between 2013 and 2032.

Payments (refunds) of income taxes for 2012, 2011 and 2010, equaled $28,693,000, $42,428,000 and ($10,993,000), respectively.

The Company is subject to U.S. federal income tax as well as income tax by multiple state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters through fiscal 2006 and all state and local income tax matters through fiscal 2001. The Company may resolve some or all of the issues related to tax matters and make payments to settle agreed upon liabilities.

Uncertain Tax Positions

As of March 3, 2012 and February 26, 2011, the Company had $8,854,000 and $10,395,000 of unrecognized tax benefits respectively, $3,248,000 and $4,398,000 respectively, of which, if recognized, would affect the effective income tax rate. Of the total unrecognized tax benefits as of March 3, 2012, it is reasonably possible that the total unrecognized tax benefits could decrease by up to $600,000 during the next twelve months due to audit settlements, expiration of statute of limitations or other resolution of uncertainties. Due to the uncertain and complex application of tax regulations, it is possible that the ultimate resolution of audits may result in liabilities that could be different from this estimate. In such case, the Company will record additional tax expense or tax benefit in the tax provision or reclassify amounts on the Consolidated Balance Sheets in the period in which such the matter is effectively settled with the tax authority.

The Company recognizes interest and penalty expense, as well as reversal of expense, related to unrecognized tax benefits as components of income tax expense. In 2012, 2011 and 2010, $(559,000), $76,000 and $398,000, respectively, of interest and penalties were included in “Income tax expense” on the Consolidated Statements of Income. The Company has accrued $2,306,000 and $2,865,000 for the payment of interest and penalties as of March 3, 2012 and February 26, 2011, respectively.

 

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THE FINISH LINE, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes the activity related to its unrecognized tax benefits for U.S. federal and state tax jurisdictions and excludes accrued interest and penalties (in thousands):

 

     2012     2011     2010  

Unrecognized Tax Benefits at Beginning of Year

   $ 7,530      $ 9,255      $ 11,843   

Increases in Tax Positions for Prior Years

     193        26        3,163   

Decreases in Tax Positions for Prior Years

     (1,057     (1,166     (4,106

Increases in Unrecognized Tax Benefits as a Result of Current Year Activity

     50        106        489   

Decreases to Unrecognized Tax Benefits Relating to Settlements with Taxing Authorities

     (5     (113     (1,452

Decreases to Unrecognized Tax Benefits as a Result of a Lapse of the Applicable Statute of Limitations

     (163     (578     (682
  

 

 

   

 

 

   

 

 

 

Unrecognized Tax Benefits at End of Year

   $ 6,548      $ 7,530      $ 9,255   
  

 

 

   

 

 

   

 

 

 

 

7. Retirement Plan

The Company sponsors a defined contribution profit sharing plan, which covers substantially all employees who have completed one year of service and met other eligibility criteria. Contributions to this plan are discretionary and are allocated to employees as a percentage of each covered employee’s wages. The plan also has a 401(k) feature whereby the Company matches employee contributions to the plan. Effective January 1, 2012, the Company amended its matching contribution from 50 percent of employee contributions to the plan up to six percent of an employee’s wages (maximum of three percent) to 100 percent of employee contributions to the plan on the first three percent of an employee’s wages and then 50 percent of employee contributions to the plan over three percent up to five percent of their wages (maximum of four percent). Also effective January 1, 2012, employee contributions and Company matching contributions vest immediately. The Company’s total expense charged to continuing operations for the plan in 2012, 2011 and 2010 amounted to $1,329,000, $844,000 and $2,250,000, respectively.

The Company has a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under the qualified defined contribution plan. Amounts contributed and deferred under the deferred compensation plans are credited or charged with the performance of investment options offered under the plans and elected by the participants. In the event of bankruptcy, the assets of these plans are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company’s plans was $3,828,000 and $2,661,000 at March 3, 2012 and February 26, 2011, respectively, and is included in “Other long-term liabilities”. Total expense from continuing operations recorded under this plan was $24,000, $164,000 and $84,000 for 2012, 2011 and 2010, respectively.

 

8. Stock Plans

General

In July 2009, the Company’s shareholders approved and adopted The Finish Line, Inc. 2009 Incentive Plan (the “2009 Incentive Plan”), previously approved by the Company’s Board of Directors. The Company’s Board of Directors have reserved 6,500,000 shares of Class A and Class B Common Stock for issuance upon exercise of options or other awards under the option plan. The number of shares reserved for issuance of all awards other than options and stock appreciation rights, is limited to 2,500,000. Upon approval of the 2009 Incentive Plan, the 2002 Stock Incentive Plan of The Finish Line, Inc. (the “2002 Incentive Plan”) is limited in future grants to awards from shares returned to the 2002 Incentive Plan by forfeiture after July 23, 2009.

 

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Total share-based compensation expense charged to continuing operations in 2012, 2011 and 2010 was $5,187,000, $4,209,000 and $3,508,000, respectively.

Stock Option Activity

Stock options have been granted to directors, officers and other key employees. Generally, options outstanding under the 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. The estimated weighted-average fair value of the individual options granted during 2012, 2011 and 2010 was $8.98, $6.00 and $2.49, respectively on the date of the grant. The fair values for all years were determined using a Black-Scholes option-pricing model with the following weighted average assumptions:

 

     2012     2011     2010  

Dividend yield

     1.12     1.02     2.18

Volatility

     57.8     57.6     54.5

Risk-free interest rate

     1.98     2.18     1.69

Expected life

     4.8 years        4.6 years        4.5 years   

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 dividend yield assumption is based on the Company’s history and expectation of dividend payouts. 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.

A reconciliation of the Company’s stock option activity and related information is as follows:

 

     Number of
Shares
    Weighted
Average
Exercise Price
Per Share
     Weighted
Average
Remaining
Contractual Life
(Years)
     Aggregate
Intrinsic
Value
 

Outstanding at February 26, 2011

     3,396,673      $ 10.41         

Granted

     491,766        19.58         

Exercised

     (1,490,177     10.76          $ 14,698,000   

Forfeited

     (57,613     14.86         
  

 

 

   

 

 

       

Outstanding at March 3, 2012

     2,340,649      $ 12.00         6.4       $ 27,189,000   
  

 

 

   

 

 

       

Exercisable at March 3, 2012

     870,692      $ 12.13         3.9       $ 9,854,000   

As of March 3, 2012, there was $4,762,000 of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested options. That cost is expected to be recognized over a weighted average period of 1.8 years.

Intrinsic value for stock options is the difference between the current market value of the Company’s stock and the option strike price. The total intrinsic value of options exercised during 2012, 2011 and 2010 was $14,698,000, $4,155,000 and $1,585,000, respectively.

 

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The following table summarizes information concerning outstanding and exercisable options at March 3, 2012:

 

Range of

Exercise Prices

   Number
Outstanding
     Weighted-Average
Remaining
Contractual Life
     Weighted-Average
Exercise Price
     Number
Exercisable
     Weighted-Average
Exercise Price
 

$ 1-$ 5

     223,500         6.0       $ 4.51         95,500       $ 4.51   

$ 5-$10

     753,286         6.2         6.27         215,493         6.14   

$10-$15

     530,401         6.8         13.19         196,264         13.25   

$15-$25

     833,462         6.4         18.45         363,435         17.07   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     2,340,649         6.4       $ 12.00         870,692       $ 12.13   

The Company recorded compensation expense related to stock options within continuing operations of $2,112,000, $1,772,000 and $1,268,000 in 2012, 2011 and 2010, respectively.

Restricted Stock Activity

The Company has granted shares of the Company’s stock to non-employee Directors, officers and other key employees that are subject to restrictions. The restricted stock granted to employees under the 2002 and 2009 Incentive Plans either vest upon the achievement of specified levels of net income growth over a three-year period or were granted such that they cliff-vest after a three-year period. For performance-based awards, should the net income 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 grant date. The Company recorded compensation expense related to restricted stock within continuing operations of $2,986,000, $2,372,000 and $2,174,000 in 2012, 2011 and 2010, respectively.

A reconciliation of the Company’s restricted stock activity and related information is as follows:

 

     Number of
Shares
    Weighted Average
Grant Date
Fair Value
 

Unvested at February 26, 2011

     747,241      $ 7.95   

Granted

     273,556        19.92   

Vested

     (429,955     5.84   

Forfeited

     (30,682     17.11   
  

 

 

   

 

 

 

Unvested at March 3, 2012

     560,160      $ 14.90   
  

 

 

   

 

 

 

As of March 3, 2012, there was $4,131,000 of total unrecognized compensation cost, net of estimated forfeitures, related to nonvested restricted stock. That cost is expected to be recognized over a weighted average period of 1.9 years. The total fair value of awards for which restrictions lapsed (vested) during 2012 was $2,511,000.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan (“ESPP”). Under the ESPP, participating employees are able to contribute up to 10 percent of their annual compensation to acquire shares of common stock at 85 percent of the market price on a specified date each offering period. As of March 3, 2012, 2,400,000 shares of common stock were authorized for purchase under the ESPP, of which, 27,000, 28,000 and 53,000 shares were

 

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purchased during 2012, 2011 and 2010, respectively. The Company recognizes compensation expense based on the 15 percent discount at purchase. The Company recorded compensation expense related to the ESPP within continuing operations of $89,000, $65,000 and $66,000 in 2012, 2011 and 2010, respectively.

 

9. Earnings Per Share

Basic earnings from continuing operations per share is calculated by dividing income from continuing operations associated with common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per share assumes the issuance of additional shares of common stock by the Company upon exercise of all outstanding stock options and contingently issuable securities if the effect is dilutive, in accordance with the treasury stock method or two class method (whichever is more dilutive) discussed in 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 shareholders. During periods of net income, participating securities are allocated a proportional share of net income 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):

 

     2012      2011      2010  

Income from continuing operations

   $ 84,804       $ 68,864       $ 50,833   

Income from continuing operations attributable to participating securities

     691         981         739   
  

 

 

    

 

 

    

 

 

 

Income from continuing operations available to common shareholders

   $ 84,113       $ 67,883       $ 50,094   
  

 

 

    

 

 

    

 

 

 

Basic earnings from continuing operations per share:

        

Weighted-average number of common shares outstanding

     52,020         52,979         54,221   

Basic earnings from continuing operations per share

   $ 1.62       $ 1.28       $ 0.92   

Diluted earnings from continuing operations per share:

        

Weighted-average number of common shares outstanding

     52,020         52,979         54,221   

Dilutive effect of potential common shares(a)

     798         796         376   
  

 

 

    

 

 

    

 

 

 

Diluted weighted-average number of common shares outstanding

     52,818         53,775         54,597   
  

 

 

    

 

 

    

 

 

 

Diluted earnings from continuing operations per share

   $ 1.59       $ 1.26       $ 0.92   

 

(a) The computation of diluted earnings from continuing operations per share excludes options to purchase approximately 0.4 million, 1.2 million and 1.8 million shares of common stock in 2012, 2011 and 2010, respectively, because the impact of such options would have been antidilutive.

 

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10. Common Stock

At March 3, 2012, shares of the Company’s stock outstanding consisted of Class A and Class B Common Stock. Class A and Class B Common Stock have identical rights with respect to dividends and liquidation preference. However, Class A and Class B Common Stock differ with respect to voting rights, convertibility and transferability.

Holders of Class A Common Stock are entitled to one vote for each share held of record, and holders of Class B Common Stock are entitled to ten votes for each share held of record. The Class A Common Stock and the Class B Common Stock vote together as a single class on all matters submitted to a vote of shareholders (including the election of directors), except that, in the case of a proposed amendment to the Company’s Articles of Incorporation that would alter the powers, preferences or special rights of either Class A Common Stock or the Class B Common Stock, the class of Common Stock to be altered shall vote on the amendment as a separate class. Shares of Class A and Class B Common Stock do not have cumulative voting rights.

While shares of Class A Common Stock are not convertible into any other series or class of the Company’s securities, each share of Class B Common Stock is freely convertible into one share of Class A Common Stock at the option of the Class B Shareholders.

Shares of Class B Common Stock may not be transferred to third parties (except for transfer to certain family members of the holders and in other limited circumstances). All of the shares of Class B Common Stock are held by the founding shareholders, their family members, directors, officers and other key employees.

At the 2009 Annual Meeting of Shareholders of the Company held July 23, 2009 (the “Annual Meeting”), the Company’s shareholders voted to amend and restate the Company’s Restated Articles of Incorporation (as amended, the “Restated Articles”) to effect a number of amendments relating to the Company’s dual class stock structure. The main objective of the amendments effected by the Restated Articles is the transition to a more customary corporate governance structure for the Company.

The Restated Articles provide for the conversion of all outstanding high voting Class B Common Shares into Class A Common Shares as of the day after the Company’s annual shareholders’ meeting to be held in 2012 (which is currently scheduled for July 19, 2012), and eliminate the prior provision in the Company’s restated articles of incorporation which automatically converted all Class B Common Shares into Class A Common Shares on a one-to-one basis only once they constituted less than 5% of the total common shares outstanding as of a record date for an annual meeting.

The Restated Articles also contain an amendment limiting the aggregate voting power of the Company’s Class B Common Shares. Under this provision, if at any time the holders of all Class B Common Shares hold greater than 41% of the total voting power of the Company’s shares as of the record date for any shareholders’ meeting, then the number of votes per share of each holder of Class B Common Shares will automatically be reduced (on a proportionate basis) so that the holders of Class B Common Shares hold in the aggregate no more than 41% of the Company’s total voting power. The Restated Articles further provide for the automatic conversion of Class B Common Shares issued to Company employees or directors into Class A Common Shares upon each such person’s death or termination of employment or service.

On July 17, 2008, the Company’s Board of Directors authorized the 2008 stock repurchase program to repurchase up to 5,000,000 shares of the Company’s Class A common stock outstanding through December 31, 2011. Throughout the term of the 2008 stock repurchase program, the Company purchased 4,660,697 shares at an average price of $16.06 per share for an aggregate amount of $74,833,000. The 2008 stock repurchase program was terminated on July 21, 2011 and superseded by the 2011 stock repurchase program, which became effective as of the same date.

 

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Under the 2011 stock repurchase program, the Company’s Board of Directors authorized the repurchase of up to 5,000,000 shares of the Company’s Class A common stock outstanding through December 31, 2014. Under the 2011 stock repurchase program the Company purchased 1,199,900 shares at an average price of $19.70 per share for an aggregate amount of $23,638,000 in 2012. Under both the 2008 and 2011 stock repurchase programs, the Company purchased 2,884,603 shares at an average price of $20.93 per share for an aggregate amount of $60,368,000 during 2012. As of March 3, 2012, there are 3,800,100 shares remaining available to repurchase under the 2011 stock repurchase program. As of March 3, 2012, the Company holds as treasury shares 8,043,936 shares of its Class A Common Stock at an average price of $15.94 per share for an aggregate purchase amount of $128,211,000. The treasury shares may be issued upon the exercise of employee stock options, issuance of shares for the Employee Stock Purchase Plan, issuance of restricted stock, or for other corporate purposes. 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 January 18, 2012, the Company’s Board of Directors increased its quarterly cash dividend to $0.06 per share from $0.05 per share of Class A and Class B common stock. The Company declared dividends of $10,967,000, $9,092,000 and $7,124,000 during 2012, 2011 and 2010, respectively. As of March 3, 2012 and February 26, 2011, dividends declared but not paid were $3,108,000 and $2,653,000, respectively. Further declarations of dividends remain at the discretion of the Company’s Board of Directors.

 

11. Impairment Charges

In the fourth quarter of 2012, 2011 and 2010, the Company recorded asset impairment charges from continuing operations of $974,000 for four identified under-performing stores, $1,228,000 for five identified under-performing stores and $6,771,000 for 21 identified under-performing stores, respectively. The asset impairment review encompassed all stores open for at least two years with negative contribution and cash flows as well as stores opened less than two years which had other events or changes in circumstances that indicated the store’s assets may not be recoverable. The asset impairment charge for the underperforming stores was calculated as the difference between the carrying amount of the impaired assets and each impaired store’s estimated future discounted cash flows.

 

12. 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 flow.

 

13. Subsequent Events

The Company announced on March 30, 2012 that GCPI SR LLC (“GCPI”) made a $10,000,000 strategic investment in the Running Specialty business. The Company will remain majority owner with a 51% ownership. This strategic investment pairs the Company with GCPI, an equity investment partnership that has a proven track record of successfully executing specialty retail rollups. As part of the transaction, GCPI issued to the Company a $4,000,000 related-party promissory note which calls for interest payments based in part on a fixed rate and in part on participation in the value of other investments held by GCPI.

 

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14. Quarterly Financial Information (Unaudited)

 

    Quarter Ended  
    May 28, 2011     August 27, 2011     November 26, 2011     March 3, 2012(a)  
    (Dollars in thousands, except per share data)  

Statement of Operations Data:

               

Net sales

  $ 299,474        100.0   $ 331,514        100.0   $ 282,011        100.0   $ 456,260        100.0

Cost of sales (including occupancy costs)

    196,211        65.5        215,180        64.9        191,002        67.7        286,737        62.8   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    103,263        34.5        116,334        35.1        91,009        32.3        169,523        37.2   

Selling, general and administrative expenses

    76,675        25.6        82,076        24.7        83,067        29.5        101,811        22.3   

Store closing costs

    17        —          580        0.2        368        0.1       226        0.1   

Impairment charges

    —          —          —          —          —          —          974        0.2   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    26,571        8.9        33,678        10.2        7,574        2.7       66,512        14.6   

Interest income, net

    142        —          139        —          109        —          57        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    26,713        8.9        33,817        10.2        7,683        2.7       66,569        14.6   

Income tax expense

    10,297        3.4        12,897        3.9        2,135        0.7       24,649        5.4   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 16,416        5.5   $ 20,920        6.3   $ 5,548        2.0   $ 41,920        9.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per basic share(b):

  $ 0.31        $ 0.40        $ 0.11        $ 0.81     
 

 

 

     

 

 

     

 

 

     

 

 

   

Net income per diluted share(b):

  $ 0.30        $ 0.39        $ 0.11        $ 0.80     
 

 

 

     

 

 

     

 

 

     

 

 

   

Dividends declared per share

  $ 0.05        $ 0.05        $ 0.05        $ 0.06     
 

 

 

     

 

 

     

 

 

     

 

 

   

 

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    Quarter Ended  
    May 29, 2010     August 28, 2010     November 27, 2010     February 26, 2011  
    (Dollars in thousands, except per share data)  

Statement of Operations Data:

               

Net sales

  $ 282,398        100.0 %   $ 301,070        100.0 %   $ 260,935        100.0 %   $ 384,599        100.0 %

Cost of sales (including occupancy costs)

    188,428        66.7        201,301        66.9        179,056        68.6        246,288        64.0   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    93,970        33.3        99,769        33.1        81,879        31.4        138,311        36.0   

Selling, general and administrative expenses

    71,779        25.4        72,778        24.2        75,278        28.9        82,883        21.6   

Store closing costs

    —          —          —          —          87        —          263        0.1   

Impairment charges

    —          —          —          —          —          —          1,228        0.3   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    22,191        7.9        26,991        8.9        6,514        2.5        53,937        14.0   

Interest income, net

    64        —          155        0.1        151        0.1        138        —