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EX-21 - EXHIBIT 21 - FINISH LINE INC /IN/finl10k2016exhibit21.htm
EX-31.1 - EXHIBIT 31.1 - FINISH LINE INC /IN/finl10k2016exhibit311.htm
EX-31.2 - EXHIBIT 31.2 - FINISH LINE INC /IN/finl10k2016exhibit312.htm
EX-10.18 - EXHIBIT 10.18 - FINISH LINE INC /IN/finl10k2016exhibit1018.htm
EX-10.19 - EXHIBIT 10.19 - FINISH LINE INC /IN/finl10k2016exhibit1019.htm
EX-32 - EXHIBIT 32 - FINISH LINE INC /IN/finl10k2016exhibit32.htm
EX-23 - EXHIBIT 23 - FINISH LINE INC /IN/finl10k2016exhibit23.htm

 
 
 
 
 
UNITED STATES
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 February 27, 2016
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark 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 Class A Common Stock held by non-affiliates of the registrant, which was based on the closing price on the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $1,194,049,455. The registrant does not have any outstanding non-voting common equity.
The number of shares of the registrant’s Class A Common Stock outstanding as of April 2, 2016 was 42,225,237.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement (to be filed within 120 days after February 27, 2016) for the Annual Meeting of Shareholders to be held on July 14, 2016 (hereinafter referred to as the “2016 Proxy Statement”) have been incorporated by reference into Part III of this report.
 
 
 
 
 



PART I
Item 1. Business
General
Throughout this Annual Report on Form 10-K, the 52 weeks ended February 27, 2016, the 52 weeks ended February 28, 2015, and the 52 weeks ended March 1, 2014 are referred to as fiscal 2016, fiscal 2015, and fiscal 2014, respectively.
The Finish Line, Inc., together with its subsidiaries (collectively, the “Company”), is one of the largest specialty retailers in the United States, and operates two retail divisions, the Finish Line and JackRabbit (previously referred to by the Company as Running Specialty Group) brands. The Company’s goal is to offer the most relevant products from the best brands in an engaging and exciting shopping environment with knowledgeable staff trained to deliver outstanding customer service.
Throughout this Annual Report on Form 10-K, the term “brick and mortar stores” is used to describe Finish Line stores and the term “digital” is used to describe Finish Line’s e-commerce site, www.finishline.com, and mobile commerce site, m.finishline.com. The brick and mortar stores and digital are collectively referred to as “Finish Line” throughout this Annual Report on Form 10-K.
Finish Line Brand. Finish Line is a premium retailer of athletic shoes, apparel, and accessories. As of April 2, 2016, the Company operated 589 Finish Line stores, which averaged 5,552 square feet, in 44 U.S. states and Puerto Rico. In addition, Finish Line operates an e-commerce site, www.finishline.com, as well as mobile commerce via m.finishline.com. Finish Line carries a large selection of men’s, women’s, and kids’ athletic shoes (“footwear”), as well as an assortment of apparel and accessories (“softgoods”). Brand names offered by Finish Line include Nike, Brand Jordan, adidas, Under Armour, Puma, and many others. Footwear accounted for 89% of Finish Line’s net sales during fiscal 2016.
Under the Finish Line brand, the Company is the exclusive retailer of athletic shoes, both in-store and online, for Macy’s Retail Holdings, Inc., Macy’s Puerto Rico, Inc., and Macys.com, Inc. (collectively, “Macy’s”). The Company is responsible for the athletic footwear assortment, inventory, fulfillment, and pricing at all of Macy’s locations and online at www.macys.com. The Company operates branded and unbranded shops in-store at Macy’s. Branded shops include Finish Line signage within those shops and are staffed by Finish Line employees, while unbranded shops do not include Finish Line signage and are generally serviced by Macy’s employees. There are no differences in the merchandise that is sold, the classification of revenue recorded at retail, or the Company’s operation of the athletic footwear inventory and business between branded and unbranded shops and www.macys.com. As of April 2, 2016, the Company operated Finish Line-branded shops in 392 Macy’s department stores, which averaged 1,216 square feet, in 37 U.S. states, the District of Columbia, and Puerto Rico. Throughout this Annual Report on Form 10-K, the term “shops within department stores” is used to describe the Company’s business operations at Macy’s in-store branded and unbranded shops, as well as online at www.macys.com. Shops within department stores carry men’s, women’s, and kids’ athletic shoes, as well as an assortment of accessories. Brand names offered by shops within department stores include Nike, Skechers, Converse, Puma, New Balance, adidas, and many others.
JackRabbit Brand. JackRabbit is an active lifestyle retailer of precision-fitted running shoes, apparel, and accessories. As of April 2, 2016, the Company operated 72 JackRabbit stores, which averaged 3,649 square feet, in 17 U.S. states and the District of Columbia. In addition, JackRabbit operates the e-commerce sites www.jackrabbit.com and www.boulderrunningcompany.com. JackRabbit carries men’s and women’s performance running shoes, as well as an assortment of performance apparel and accessories. Brand names offered by JackRabbit include Brooks, Asics, Nike, Saucony, New Balance, and many others. Footwear accounted for 70% of JackRabbit’s net sales during fiscal 2016.
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 shoe, apparel, and accessory retailer and active lifestyle 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.

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Finish Line seeks to achieve this objective in stores by providing convenient mall-based locations that feature a compelling store design with knowledgeable, trained, and courteous customer service professionals as well as a vast selection of fashion-forward and innovative products. In addition, the Company has extended the Finish Line brand to shops within department stores, a majority of which feature Finish Line branding and the same trained and courteous customer service professionals to extend the Finish Line brand to the Macy’s customer.
JackRabbit stores carry a deep assortment of performance running shoes, apparel, and accessories. JackRabbit stores have trained experts to advise everyone from beginning to advanced runners and provide free gait analysis to ensure the proper shoe fit. The stores are tightly connected to their communities, hosting regular neighborhood group runs and sponsoring local races, which typically begin and end near the store.
Through e-commerce and mobile commerce, the Company seeks to provide an easy shopping experience, robust product selection, and outstanding service.
Product Diversity; Target Customer Appeal. The Company stocks its stores/shops with a combination of the leading and newest brand name merchandise, including in-line offerings and unique products offered exclusively by the Company. The focus is on the Company’s stores/shops maintaining their status as a leader in premium athletic shoes, apparel, and accessories for men, women, and kids. Product diversity, in combination with the Company’s store/shop formats and commitment to customer service, is intended to attract a core customer (typically age 18-29 for Finish Line, age 30-35 for shops within department stores with a greater focus on females, and technical, performance, and beginning runners for JackRabbit) as well as other key demographics. The Company is focused on offering premium product, which includes the best brands, on-trend styles, and most relevant selection.
Merchandise
The following table sets forth net sales along with the percentage of net sales for the Company attributable to the categories of footwear and softgoods during the fiscal years indicated. These amounts and percentages fluctuate substantially during the different consumer buying seasons. To take advantage of this seasonality, the Company’s stores/shops have been designed to allow for a shift in emphasis in the merchandise mix between footwear and softgoods items throughout the year.
 
Category
 
2016
 
2015
 
2014
 
 
(in thousands)
Footwear
 
$
1,681,629

 
89
%
 
$
1,596,443

 
88
%
 
$
1,466,039

 
88
%
Softgoods
 
207,259

 
11
%
 
224,143

 
12
%
 
204,371

 
12
%
Total net sales
 
$
1,888,888

 
100
%
 
$
1,820,586

 
100
%
 
$
1,670,410

 
100
%
All merchandising decisions, including merchandise mix, pricing, promotions, and markdowns, are made at the Company’s Customer Central corporate headquarters (“Customer Central”) for Finish Line and shops within department stores and at JackRabbit’s corporate office (“JackRabbit corporate”) for JackRabbit. The merchandising management at Customer Central and JackRabbit corporate, along with store/shop sales managers and district sales managers, review the merchandise mix to adapt to trends in the marketplace.
Technology
The Company continues to update its digital sites to enhance their quality and functionality. The Company has committed capital and other resources specifically for its growing digital channel, which includes design and content upgrades, mobile and tablet applications, expanded presence on social media, and platform enhancements. Finishline.com, jackrabbit.com, boulderrunningcompany.com, and related mobile sites are collectively the Company’s most visited store/shop with approximately 496,000 visitors per day.
To support the Company’s omnichannel commitment as a customer-centric organization, the Company also continuously evaluates and implements improvements to technological platforms, which affect stores/shops, merchandising, planning, allocation, warehouse management, order management, and customer relationship management. These improvements allow the Company to more effectively engage the customer, remain flexible and scalable to support growth, provide integrated service, and have information for real-time decision making.

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In fiscal 2015, Finish Line launched a new mobile app and made enhancements to its mobile web experience - all of which continue to be critical to winning with the customer. In fiscal 2016, the Company replaced its existing warehouse and order management system, which will allow the Company to deliver its products more quickly to its stores/shops and customers, further enhancing the customer experience in store and online. Additionally, during fiscal 2016, the Company made enhancements to its customer data and analytics systems, which will help improve customer engagement by allowing the Company to develop customized communications based on individual preferences. In fiscal 2017, the Company is planning to spend on technology to upgrade its digital platforms, which will increase the website’s stability and functionality, invest in enhancements to increase the Company’s mobile first strategy, and enhance the Company’s information security.
The Company is focused on creating an omnichannel customer experience which delivers a consistent, seamless brand experience for customers at all touch points – stores, shops within department stores, web, mobile, social media, phone, email, and direct mail.
Marketing
Finish Line attempts to reach its target audience by using a multifaceted approach to marketing on national, regional, and local levels. Finish Line utilizes its store windows, direct mail, e-mail, viral media, search engine optimization, key word searches, and online ads in its marketing efforts. In addition to the methods noted for Finish Line, JackRabbit also markets through participating in expositions throughout the year at different running events, as well as through local race events. Shops within department stores collaborate with Macy’s on specific marketing approaches, which are generally similar to the marketing approaches utilized by Finish Line.
The Company benefits from 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. The Company’s total net advertising expense was 2.0% and 1.9% of net sales after deducting cooperative reimbursements in fiscal 2016 and 2015, respectively. These percentages fluctuate substantially throughout the year during the different consumer buying seasons. The Company believes that it benefits from the multi-million dollar advertising campaigns of its key suppliers, such as Nike, adidas, and Under Armour.
Finish Line has a customer loyalty program called “Winners Circle.” Customers earn a $20 reward certificate for every $200 they spend at Finish Line within a 12 month period, in addition to receiving special member offers on footwear and softgoods. Finish Line maintains a Winners Circle database with information that it uses to communicate with members regarding key initiatives, product offerings, and promotions. Finish Line continues to emphasize growing the membership base of the Winners Circle program, which increased 4.5% in fiscal 2016 to 10.5 million active members as of year-end, and on improving the marketing effectiveness of the Winners Circle program to strengthen Finish Line’s relationship with its most loyal customers in order to drive sales.
JackRabbit also has a customer loyalty program called “Run Rewards.” Customers earn $20 off for every $200 they spend at JackRabbit, in addition to receiving special member offers on footwear and softgoods. JackRabbit maintains a Run Rewards database with information that it uses to communicate with members regarding key initiatives, product offerings, and promotions. JackRabbit continues to put an emphasis on growing the membership base of the Run Rewards program and on improving the marketing effectiveness of the Run Rewards program to strengthen JackRabbit’s relationship with its most loyal customers in order to drive sales.
Merchandising and Distribution
In addition to merchandise procurement for both footwear and softgoods, the merchandising department for the Company is responsible for determining pricing and working with the planning and allocation department to establish appropriate stock levels and product mix. Additionally, the merchandising department is responsible for communicating with store/shop and digital operations to monitor shifts in customer preferences and market trends.
The planning and allocation department is responsible for merchandise allocation, inventory movements, and the automated replenishment system. The department acts as the central processing intermediary between the merchandising department, the distribution center, and stores/shops and also tracks the effectiveness of each marketing effort to allow the merchandising and marketing departments to determine the relative success of each promotional program. In addition, the department also manages the implementation of price changes, creation of vendor purchase orders, and determination of inventory levels for each store/shop.

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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 75 suppliers and manufacturers of athletic and fashion products, the largest of which (Nike) accounted for approximately 73% of total Company purchases in both fiscal 2016 and 2015. The Company purchased approximately 89% and 87% of its total merchandise in both fiscal 2016 and 2015, respectively, from its five largest suppliers. The Company and its suppliers use EDI technology to streamline purchasing and distribution operations.
Nearly all of the Company’s merchandise is shipped directly from suppliers to the Company’s distribution center in Indianapolis, Indiana, where the Company processes and ships the merchandise by contract and common carriers to its stores/shops or directly to customers. Each day shipments are made to approximately one-third of the Company’s stores/shops. In any three-week period, each store/shop will receive approximately five shipments. A shipment is normally received by the store/shop one to four days from the date that the order is filled depending on the store/shop’s distance from the distribution center.
Store Operations
The Company’s corporate and regional senior management visit the stores/shops regularly to review and receive feedback from the stores/shops related to the implementation of the Company’s customer service model, plans, and policies, to monitor operations, and to review inventories and the presentation of merchandise. Accounting and general financial functions for the stores/shops are conducted at Customer Central. Each store/shop has a sales manager, co-sales managers, or team lead that is responsible for supervision and overall operations, one or more assistant sales managers, and additional full and part-time sales associates.
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, inventory shrink, and other performance goals of the stores/shops for which they are responsible. All store sales managers in California, team leads, assistant store sales managers, and sales associates are paid on an hourly basis.
Competition
The athletic shoe, apparel, and accessory 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. Additionally, the Company’s competition also includes stores and/or e-commerce sites 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 brick and mortar stores and shops within department 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 seeks to differentiate itself from its competition by operating more attractive, well-stocked stores/shops in high retail traffic areas, with competitive prices and knowledgeable and courteous customer service. The Company keeps its prices competitive with athletic specialty and sporting goods stores in each trade area, including competitors that are not necessarily located inside malls. The Company believes it accomplishes this by effectively assorting its stores/shops 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) seasons. During fiscal 2016 and 2015, these seasons collectively accounted for approximately 30% and 31%, respectively, of the Company’s annual sales.
Employees
As of February 27, 2016, the Company employed approximately 14,300 persons, 4,300 of whom were full-time and 10,000 of whom were part-time. Of this total, approximately 1,300 were employed at Customer Central, the Company’s distribution center, JackRabbit corporate, and the Company’s digital team office in Boulder, Colorado, and approximately 70 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 are represented by a union, and employee relations are good.

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Retirement Plan
The Company sponsors a qualified defined contribution profit sharing plan that has a 401(k) feature. The Company matches 100 percent of employee contributions to the 401(k) plan on the first three percent of an employee’s wages and matches an additional 50 percent of employee contributions to the 401(k) plan on the next two percent up to five percent of their wages (maximum of four percent Company match).
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. 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 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.”

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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, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “future,” “forecast,” “outlook,” “foresee,” “predict,” “potential,” “plan,” “project,” “goal,” “will,” “will be,” “continue,” “lead to,” “expand,” “grow,” “confidence,” “could,” “should,” “may,” “might,” or any variations of such words or other words or phrases with similar meanings. Forward-looking statements address or describe, among other things, expectations, growth strategies, including plans to open and close stores/shops, projections of future profitability, results of operations, future allocations of capital, including capital expenditures, financial condition, or other “forward-looking” information and may include statements about net sales, product margin, occupancy costs, selling, general, and administrative expenses, operating margins, liquidity, operations, and/or inventory. All of these forward-looking statements are subject to risks, management assumptions, and uncertainties that could cause actual results to differ materially from those contemplated by the relevant forward-looking statements. The forward-looking statements included herein are made only as of the date of this Annual Report on Form 10-K and the Company undertakes no obligation to publicly update these forward-looking statements to reflect subsequent events or circumstances.
Current, recent past, and future economic and financial conditions have caused and/or in the future may 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, recent past, and future economic conditions that cause a decline in business and consumer spending, including a reduction in the availability of credit, increased unemployment 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, the Company’s customers may reduce their spending and 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, increased taxes, and/or 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 the Company’s business and results. Promotional activities, product liquidation, 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 expected results for future periods. Any of the foregoing factors could have a material adverse effect on the Company’s 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, or 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 and has a revolving credit agreement in place until November 30, 2017 (which had no borrowings under it other than amounts used for stand-by letters of credit as of February 27, 2016), 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. 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 our 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. Furthermore, our 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. Current, recent past, and future financial and economic conditions may also adversely affect landlords and real estate developers of retail space, which may limit the availability of

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attractive leased store locations. Current, recent past, and future conditions may also adversely affect the Company’s pricing and liquidation strategy.
The Company’s business faces a great deal of competitive pressure.
The athletic shoe, apparel, and accessory business is highly competitive. The Company competes for customers, customer service professionals, management and other qualified personnel, locations, merchandise, services, and other important aspects of its business with many other local, regional, and national retailers, as well as many of its own suppliers. Those competitors, some of whom have a greater market presence than the Company, include traditional brick and mortar store-based retailers, Internet and digital businesses, and other forms of retail commerce. A factor in the Company’s success is its ability to differentiate itself from its competitors. Unanticipated changes in the pricing and other practices of those competitors may adversely affect the Company’s performance. The Company cannot guarantee that it will be able to compete successfully against current and/or future companies within its industry and market space.
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 results and stock price. In addition, comparable store sales are subject to significant fluctuation, on a monthly, quarterly, and annual basis, and we anticipate this fluctuation to continue in the future.
The Company’s business is dependent on consumer preferences, fashion trends, and successful management of inventory.
The athletic footwear and softgoods industry is subject to changing fashion trends and consumer 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 trends and changes, particularly given the long lead times for ordering much of the Company’s merchandise from suppliers. For example, merchandise is generally ordered six to nine months prior to delivery to stores/shops. Sufficient inventory levels must be maintained for the Company to operate its business successfully. However, the Company must concurrently guard against accumulating excess or irrelevant inventory. If the Company fails to accurately anticipate either the market for merchandise or customers’ purchasing habits, the Company may be forced to rely on markdowns, promotional sales, or product liquidation to dispose of excess, irrelevant, and/or slow moving inventory, which may adversely affect performance and results.
The Company’s business may be adversely affected by changes in merchandise sourcing.
The Company’s suppliers must comply with applicable laws and required standards of conduct. The ability to find qualified suppliers 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, supplier employment relations, 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 and results.
Changes in relationships with any of the Company’s key suppliers 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, markdown allowances, and the ability to return merchandise to suppliers. The Company purchased approximately 89% of its merchandise in fiscal 2016 from its top five suppliers and expects to continue to obtain a significant percentage of its product from these suppliers in future periods. Approximately 73% of merchandise 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 disruptions in the global transportation network such as a port strike, weather conditions, work stoppages, or other labor unrest 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 distribution strategy, financial condition, or 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.

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The Company’s operations are primarily 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 primarily handled from a single facility in Indianapolis, Indiana. Any significant interruption in the operation of the distribution center due to natural disasters, accidents, system issues or failures, or other unforeseen causes could delay or impair the ability to distribute merchandise to stores/shops and/or fulfill orders originating from any of its e-commerce sites, which could cause sales to decline.
The Company depends upon third-party carriers for shipment of a significant amount of merchandise to both its stores/shops and directly to its consumers. 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 costs are impacted by changes in fuel prices through surcharges, among other factors. 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/shops, supplier returns and third party liquidators, and shipments of product to customers. Increases in fuel prices, surcharges, and other potential factors may increase freight costs.
The Company may need to record significant non-cash impairment charges if its long-lived assets, including goodwill, become impaired.
The Company reviews its property and equipment, including software, and goodwill when events, which include making decisions that strategically change the intended use of such assets, indicate that their carrying value may be impaired. If an impairment trigger is identified, the carrying value is compared to its estimated fair value and provisions for impairment are recorded as appropriate.
Goodwill is reviewed for impairment annually, at a minimum. The fair value of a reporting unit with goodwill is determined based on a combination of a discounted cash flow approach and market-based approach, which is compared to the reporting unit’s carrying value, and provisions for impairment are recorded as appropriate.
Impairment losses are significantly affected by estimates of future operating cash flows and estimates of fair value. Estimates of future operating cash flows are identified from strategic long-term plans, which are based upon experience, knowledge, and expectations; however, these estimates can be affected by such factors as future operating results, future store/shop profitability, and future economic conditions, all of which can be difficult to predict accurately. Any significant deterioration in macroeconomic conditions could affect the fair value of our long-lived assets, including goodwill, and could result in future impairment charges, which would adversely affect our results of operations.
The Company’s business may be adversely affected by the failure to identify and obtain suitable store locations and acceptable lease terms.
To take advantage of customer traffic and shopping preferences, 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 or other 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 store locations, any significant erosion of the relationships with these landlords or their financial condition would negatively affect our ability to obtain and retain locations. Additionally, further landlord consolidation may negatively affect our ability to obtain and retain store locations at acceptable lease terms. The Company’s average remaining store lease term is relatively short. 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 future results may be adversely affected if it is unable to implement its strategic plan and growth initiatives.
The Company’s ability to succeed in its strategic plan and 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, ramp up time, product differentiation, challenges to economies of scale in merchandise sourcing, and/or the ability to attract and retain qualified management and other personnel. There can be no assurance that the Company will be able to develop and successfully implement its strategic plan and growth initiatives to a point where they will become and/or continue to be profitable or generate positive cash flow. If the Company cannot successfully execute its strategic plan and growth initiatives, the Company’s financial condition and results of operations may be adversely impacted.

8


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, field management, senior management, and other key personnel. Many store/shop 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, health care and minimum wage legislation, and changing demographics. If the Company is unable to attract and retain quality sales associates, management, and other key personnel, 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 store 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 and/or under-performing 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.
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 suppliers, or competitors, could cause the market price of the Company’s common stock to fluctuate substantially. Although the U.S. broader stock market has experienced sustained price increases in recent years, significant stock price and volume fluctuations may return depending on national and international macroeconomic factors, changes in monetary policy, or other factors. As we have seen in the recent past, this volatility would likely affect 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.
The Company cannot provide any guaranty of future dividend payments or that it will continue to repurchase stock pursuant to its share repurchase program.
The Company’s Board of Directors determines if it is in the best interest of the Company to pay a dividend to its shareholders and the amount of any dividend, and declares all dividend payments. There is no assurance that the Board of Directors will continue to declare dividends in the future or that the Company’s results of operations and financial condition will allow for a dividend to be declared. The Company’s current share repurchase program, as amended, authorizes the purchase of 5 million shares of the Company’s common stock (of which 2.3 million shares were available as of February 27, 2016) through December 31, 2018. However, the Company is not obligated to make any purchases under the share repurchase program and the program may be discontinued at any time.
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 credit and debit payment cards from customers. 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 and other sensitive information has been stolen or compromised. While the Company has taken significant steps to prevent the occurrence of security breaches in this respect, the Company may, in the future, become subject to claims for purportedly fraudulent transactions arising out of the theft or compromise of credit or debit card or other 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, if computer and mobile telephone equipment is lost or stolen, or if employees fail to comply with the applicable laws and regulations and electronic payment card or personal information is obtained by unauthorized persons or used inappropriately or illegally, 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 credit card, debit card, or personal information has been compromised. The Company is continuously working to install new, and upgrade its existing, information technology systems and provide employee awareness training around phishing, malware, and other cyber risks to ensure that the Company is protected, to the greatest extent possible, against cyber risks and security breaches. However, there is no guarantee that the Company will not be affected by cyber risks or security breaches.

9


A major failure of technology and information systems could adversely affect the Company’s business.
The efficient operation of the Company’s business is dependent on technology and information systems. In particular, the Company relies on information systems to effectively manage sales, distribution, supply chain, and merchandise planning and allocation functions. However, the failure of technology and information systems to perform as designed could disrupt the Company’s business and adversely affect sales and profitability. There is the risk that the Company could experience challenges with its information systems due to system implementation issues, which include the replacement of certain management and merchandising systems now and over the next few years, system outages or failures, viruses, cyber extortion, which could lead to denial of service to customers, hackers, or other causes. For example, in October 2015 after the Company replaced its warehouse and order management system, it began experiencing significant supply chain challenges. The new system was not able to process product flow at the volumes necessary to support its sales plans, which stressed the Company’s ability to place new product in its stores and its distribution center and significantly decreased its ability to fulfill digital sales orders, negatively impacting the Company’s sales and profitability. The Company may incur additional lost sales and remediation costs resulting from the Company’s supply chain issues and/or the replacement of other systems.
Various risks associated with digital sales may adversely affect the Company’s business.
The Company sells merchandise digitally over the Internet through www.finishline.com, www.jackrabbit.com, www.boulderrunningcompany.com, and www.macys.com, as well as through mobile commerce at m.finishline.com. The digital operations are subject to numerous risks, including but not limited to, unanticipated operating problems, reliance on third party computer hardware, software, and service providers, system failures, and the need to invest in additional computer and other 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/shops, rapid technological changes, liability for online content, credit and debit card fraud, and risks related to the failure of the computer systems that operate the various websites and related support systems, such as computer viruses, cyber extortion, which could lead to denial of service to customers, telecommunication failures, break-ins, security breaches, and similar disruptions. There can be no assurance that the digital operations will continue to operate effectively, achieve sales and profitability growth, or remain at their current or any anticipated levels.
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 but not limited to, comprehensive federal health care legislation enacted in 2010, the Fair Labor Standards Act, and 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.
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, specifically the director standards of conduct provision in Section 23-1-35-1, the control share acquisitions provisions in Sections 23-1-42-1 to 23-1-42-11, and 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 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 directors or 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 Company’s shareholders. Such 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 merger or acquisition discussions with the Company. Any of these factors could reduce the price of the Company’s common stock.

10


The Company’s shops within department stores operations are reliant on Macy’s.
The Company’s shops within department stores use selling space within Macy’s. These shops within department stores are dependent on the Macy’s point of sale and other technological platforms, including those related to www.macys.com. In addition, the Macy’s management team, corporate strategy, labor relations, and marketing and advertising campaigns have an effect on the success of the Company’s shops within department stores. The Company has limited influence over these factors, so a strategic shift in any of these factors or a significant disruption in Macy’s business could result in deterioration in the operations of the Company’s shops within department stores.
Additionally, the Company needs to obtain and retain shops within department stores in desirable locations. The Company cannot be certain that desirable locations will continue to be available because of the dependence upon Macy’s in negotiating the shop locations. Any significant erosion of the relationship with Macy’s or its financial condition could negatively affect our ability to obtain and retain shop locations.
The effects of natural disasters, terrorism, acts of war, and public health issues may adversely affect our business.
Natural disasters, including earthquakes, hurricanes, floods, and tornadoes, may affect the operations of our stores/shops and distribution center. In addition, acts of terrorism, acts of war, and military action both in the United States and abroad can have a significant effect on economic conditions and may negatively affect our ability to purchase merchandise from suppliers for sale to our customers. Public health issues, such as the flu, viruses for which there is currently no known cure, or other pandemics, whether occurring in the United States or abroad, could disrupt our operations and result in a significant part of our workforce being unable to operate or maintain our infrastructure or perform other tasks necessary to conduct our business. Additionally, public health issues may disrupt, or have an adverse effect on, our suppliers’ operations, our operations, our customers, or customer demand. Our ability to mitigate the adverse impact of these events depends, in part, upon the effectiveness of our disaster preparedness and response planning as well as business continuity planning. However, we cannot be certain that our plans will be adequate or implemented properly in the event of an actual disaster. We may be required to suspend operations in some or all of our locations, which could have a material adverse effect on our business, financial condition, and results of operations. Any significant declines in public safety or uncertainties regarding future economic prospects that affect customer spending habits could have a material adverse effect on customer purchases of our products.
Health care reform could adversely affect our 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, imposes new and significant taxes on health insurers and health care benefits, and increases the reporting required to comply with the legislation. Due to the breadth and complexity of the health care reform legislation and the considerable number of eligible employees who currently choose not to participate in our plans, it is difficult to predict the overall effect of the statute and related regulations on our business over the coming years. Based on the health care law changes, beginning in 2015 some eligible employees who had historically not chosen to participate in our health care plans found it more advantageous to participate in our plans. Such changes include tax penalties to persons for not obtaining health care coverage and being ineligible for certain health care subsidies if an employee is eligible for health care coverage under an employer’s plan. If a larger number of eligible employees, who currently choose not to participate in our plans, choose to enroll over the next few years, it may significantly increase our health care coverage costs and negatively affect our financial results.
Legislative or regulatory initiatives related to global warming and climate change concerns may negatively affect our business.
There has been an increasing focus and significant debate on global climate change, including increased attention from regulatory agencies and legislative bodies. The increased focus may lead to new initiatives directed at regulating an array of environmental matters. Legislative, regulatory, or other efforts in the United States to address climate change could result in future increases in taxes or in the cost of transportation and utilities, which could decrease our operating profits and could necessitate additional investments in facilities and equipment. We are unable to predict the potential effects that any such future environmental initiatives may have on our business.
Other factors may negatively affect the Company’s business and results.
The foregoing list of risk factors is not exhaustive or exclusive. Other factors and unanticipated events could adversely affect the Company and its business and results. The Company does not undertake any obligation to revise any forward-looking statement to reflect events or circumstances that occur after the date the statement is made.

11


Item 1B. Unresolved Staff Comments
Not applicable.

12


Item 2. Properties
Customer Central and the Company’s 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. The Company also leases 12,501 square feet of corporate office space for the Company’s digital team in Boulder, Colorado and 7,883 square feet of corporate office space for JackRabbit corporate in Denver, Colorado.
Store Locations
As of April 2, 2016, the Company operated 1,053 stores/shops in 47 U.S. states, the District of Columbia, and Puerto Rico. The brick and mortar stores and shops within department stores are primarily located in enclosed shopping malls and the JackRabbit stores are primarily located on street front locations. The following table sets forth information concerning the Company’s stores/shops as of April 2, 2016:
 
State

Finish Line

JackRabbit

Branded shops
within
department stores

State

Finish Line

JackRabbit

Branded shops
within
department stores
Alabama

9




2

Nevada
 
5

 

 
6

Arizona

11




9

New Hampshire
 
4

 

 
2

Arkansas

6






New Jersey
 
13

 
7

 
18

California

42




90

New Mexico
 
3

 

 
2

Colorado

12


5

4

New York
 
24

 
8

 
28

Connecticut

8


2


8

North Carolina
 
14

 
3

 
2

Delaware






1

North Dakota
 
2

 

 

Florida

44





29

Ohio
 
37

 
3

 
13

Georgia

19




11

Oklahoma
 
5

 

 
1

Hawaii
 


 

 
4

 
Oregon
 
1

 

 
7

Idaho

1




1

Pennsylvania
 
29

 

 
14

Illinois

33




13

Rhode Island
 
1

 
1

 
2

Indiana

23


5

6


South Carolina
 
9

 

 


Iowa

7






South Dakota
 
1

 

 

Kansas

5


3

2

Tennessee
 
14

 

 
5

Kentucky

8


1

2

Texas
 
58

 
11

 
27

Louisiana

9




4

Utah
 


 
2

 

Maine

1




1

Virginia
 
24

 
3

 
10

Maryland

17


1


11

Washington
 
9

 


 
19

Massachusetts

13


6


10


West Virginia
 
7

 


 


Michigan

19


8

10


Wisconsin
 
8

 

 
2

Minnesota

9




7

Wyoming
 
1

 

 

Mississippi

7






District of
Columbia
 


 
1

 
1

Missouri

11


2

6

Puerto Rico
 
3

 

 
2

Nebraska

3






 
 
 
 
 
 
 








Totals
 
589

 
72

 
392


13


Finish Line and JackRabbit lease all of their 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 three to five years with one or more renewal options. The leases generally provide for a fixed minimum rental fee plus contingent rent, which is determined as a percentage of gross sales in excess of specified levels. Shops within department stores are operated under a license agreement based on a percentage of sales, which includes a guaranteed minimum license fee in fiscal years 2017 through 2023.
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 establishes a liability related to its legal proceedings and claims when it has determined that it is probable that the Company has incurred a liability and the related amount can be reasonably estimated. If the Company determines that an obligation is reasonably possible, the Company will, if material, disclose the nature of the loss contingency and the estimated range of possible loss, or include a statement that no estimate of loss can be made. The Company believes there are no pending legal proceedings in which the Company is currently involved which will have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.

14


Item 4.5. Executive Officers of the Registrant
Executive officers of the Company are appointed by and serve at the discretion of the Company’s Board of Directors. The following table sets forth certain information regarding the Company’s executive officers as of April 26, 2016.
No executive officer of the Company has a “family relationship” with any director or other executive officer of the Company, as that term is defined for purposes of this disclosure requirement.

Name
 
Age
 
Position
 
Officer Since
Samuel M. Sato(1)
 
52
 
Chief Executive Officer and Director
 
2007
Glenn S. Lyon(2)
 
65
 
Executive Chairman
 
2001
Melissa Greenwell(3)
 
49
 
Executive Vice President, Chief Operating Officer
 
2013
Edward W. Wilhelm(4)
 
57
 
Executive Vice President, Chief Financial Officer
 
2009
AJ Sutera(5)
 
50
 
Executive Vice President, Chief Information and Technology Officer
 
2016
Imran Jooma(6)
 
44
 
Divisional President, Executive Vice President, Omnichannel Strategy
 
2015
Bill Kirkendall(7)
 
62
 
Executive Vice President, President of JackRabbit
 
2014
 _________________________
(1)
Mr. Sato has served as Chief Executive Officer of the Company since February 28, 2016 and as a Director since October 2014. Previously, Mr. Sato was the Company’s President, serving in such capacity since October 2014.
(2)
Mr. Lyon has served as Chairman of the Company since July 2010, and as Executive Chairman since February 28, 2016. Previously, Mr. Lyon was the Company’s Chief Executive Officer, serving in such capacity since December 2008.
(3)
Ms. Greenwell has served as Executive Vice President, Chief Operating Officer of the Company since February 28, 2016. Previously, Ms. Greenwell was the Company’s Executive Vice President, Chief Human Resources Officer, serving in such capacity since June 2013.
(4)
Mr. Wilhelm has served as Executive Vice President, Chief Financial Officer of the Company since joining the Company in March 2009.
(5)
Mr. Sutera joined the Company as Executive Vice President, Chief Information and Technology Officer on March 16, 2016. Prior to joining the Company, Mr. Sutera held several senior leadership roles with Hudson’s Bay Company in support of a seamless omnichannel customer experience and key leadership positions at JetBlue Airways, Liberty Travel/GOGO Worldwide Vacations, and GlobalWorks Group LLC.
(6)
Mr. Jooma has served as Divisional President, Executive Vice President, Omnichannel Strategy of the Company since February 28, 2016. Previously, Mr. Jooma was the Company’s Executive Vice President, Chief Omnichannel Officer, serving in such capacity since February 2015. Prior to joining the Company, Mr. Jooma was Executive Vice President and President of Online, Marketing, Pricing, and Financial Services at Sears Holding Company and previously held key leadership positions at OfficeMax and Circuit City.
(7)
Mr. Kirkendall has served as Executive Vice President, President of JackRabbit since April 2014. Previously, Mr. Kirkendall served as a member of the Company’s Board of Directors since 2001, resigning from the position in April 2014.


15


PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The Company’s common stock is traded on the Nasdaq Global Select Market under the ticker symbol FINL.
The following table sets forth, for the periods indicated, the intra-day high and low sales prices of the Company’s common stock as reported by the Nasdaq Stock Market.
 
 
 
Fiscal 2016
 
Fiscal 2015
Quarter Ended
 
High
 
Low
 
High
 
Low
May
 
$
26.83

 
$
23.06

 
$
30.15

 
$
25.38

August
 
29.05

 
24.39

 
30.53

 
26.16

November
 
26.69

 
15.37

 
31.90

 
24.15

February
 
19.11

 
15.51

 
29.02

 
22.40

As of April 2, 2016, there were approximately 1,618 record holders of the Company’s common stock. The number of common stock record holders excludes the beneficial owners of shares held in “street” name or held through participants in depositories.
On January 5, 2016, the Company’s Board of Directors increased its quarterly cash dividend by 11% to $0.10 per share of the Company’s common stock. The Company declared dividends of $16.5 million and $15.7 million during fiscal 2016 and 2015, respectively. As of February 27, 2016 and February 28, 2015, dividends declared but not paid of $4.3 million and $4.2 million, respectively, were accrued in other liabilities and accrued expenses on the Company’s 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 21, 2011, the Company’s Board of Directors authorized a share repurchase program (the “Share Repurchase Program”) to repurchase shares of the Company’s common stock. On March 26, 2015, the Company’s Board of Directors amended the Share Repurchase Program (the “2015 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2018.
The Company repurchased 3.9 million shares of its common stock at an average price of $20.42 per share for an aggregate amount of $79.9 million in fiscal 2016. As of February 27, 2016, there were 2.3 million shares remaining available to repurchase under the 2015 Amended Program.
As of February 27, 2016, the Company held 17,381,000 shares of its common stock as treasury shares at an average price of $20.10 per share for an aggregate carrying amount of $349.4 million. The Company’s treasury shares may be issued upon the exercise of employee stock options, under the Employee Stock Purchase Plan, in the form of restricted stock, or for other corporate purposes. 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.
Details on the shares repurchased under the 2015 Amended Program during the thirteen weeks ended February 27, 2016 are as follows:
 
Period
 
Total Number of
Shares Purchased
 
Average Price
Paid per Share(1)
 
Total Number of
Shares Purchased
as Part of Publicly
Announced
Plans or Programs
 
Maximum Number of 
Shares that May Yet Be Purchased Under the Program
November 29, 2015 – January 2, 2016
 

 
$

 

 
4,287,836

January 3, 2016 – January 30, 2016
 
1,845,900

 
17.10

 
1,845,900

 
2,441,936

January 31, 2016 – February 27, 2016
 
150,000

 
18.26

 
150,000

 
2,291,936

 
 
1,995,900

 
$
17.18

 
1,995,900

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

16



17


Item 6. Selected Financial Data
 
 
Year Ended
 
 
February 27,
 
February 28,
 
March 1,
 
March 2,
 
March 3,
 
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
(in thousands, except per share and store/shop data)
Statement of Operations Data(1):
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
1,888,888

 
$
1,820,586

 
$
1,670,410

 
$
1,443,365

 
$
1,369,259

Cost of sales (including occupancy costs)(a)
 
1,305,896

 
1,236,783

 
1,122,967

 
958,921

 
889,130

Gross profit
 
582,992

 
583,803

 
547,443

 
484,444

 
480,129

Selling, general, and administrative expenses(a)(b)
 
503,660

 
459,455

 
424,571

 
365,883

 
343,629

Impairment charges and store closing costs
 
48,692

 
3,918

 
2,767

 
6,264

 
2,165

Operating income
 
30,640

 
120,430

 
120,105

 
112,297

 
134,335

Interest (expense) income, net
 
(65
)
 
(15
)
 
37

 
198

 
447

Gain on sale of investment
 

 

 
2,076

 

 

Income before income taxes
 
30,575

 
120,415

 
122,218

 
112,495

 
134,782

Income tax expense(c)
 
8,779

 
40,673

 
47,166

 
43,314

 
49,978

Net income
 
21,796

 
79,742

 
75,052

 
69,181

 
84,804

Net loss attributable to redeemable noncontrolling interest
 
96

 
2,251

 
1,851

 
2,292

 

Net income attributable to The Finish Line, Inc.
 
$
21,892

 
$
81,993

 
$
76,903

 
$
71,473

 
$
84,804

Earnings Per Share Data(1):
 
 
 
 
 
 
 
 
 
 
Basic earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.49

 
$
1.71

 
$
1.57

 
$
1.42

 
$
1.62

Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.48

 
$
1.70

 
$
1.56

 
$
1.40

 
$
1.59

Dividends declared per share
 
$
0.37

 
$
0.33

 
$
0.29

 
$
0.25

 
$
0.21

Share Data:
 
 
 
 
 
 
 
 
 
 
Basic weighted-average shares
 
44,565

 
47,268

 
48,286

 
49,824

 
52,020

Diluted weighted-average shares(2)
 
44,787

 
47,658

 
48,701

 
50,491

 
52,818

Selected Store Operating Data:
 
 
 
 
 
 
 
 
 
 
Number of stores/shops
 
 
 
 
 
 
 
 
 
 
Acquired during year
 
4

 
20

 
15

 
6

 
18

Opened during year
 
10

 
226

 
212

 
34

 
5

Closed during year
 
(62
)
 
(21
)
 
(24
)
 
(21
)
 
(31
)
Open at end of year
 
1,055

 
1,103

 
878

 
675

 
656

Total square feet(3)
 
4,017,333

 
4,138,117

 
3,893,480

 
3,594,806

 
3,498,090

Average square feet per store/shop(3)
 
3,808

 
3,752

 
4,434

 
5,326

 
5,332

Net sales per square foot for brick and mortar comparable stores(4)(5)
 
$
369

 
$
368

 
$
366

 
$
353

 
$
339

Increase in Finish Line comparable store sales(5)(6)
 
1.8
%
 
3.2
%
 
4.2
%
 
5.8
%
 
9.2
%
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
 
Working capital
 
$
300,166

 
$
339,375

 
$
373,293

 
$
357,657

 
$
414,065

Total assets
 
$
817,548

 
$
849,855

 
$
824,945

 
$
706,422

 
$
711,496

Total debt
 
$

 
$

 
$

 
$

 
$

Shareholders’ equity
 
$
527,644

 
$
589,644

 
$
582,184

 
$
524,863

 
$
529,537

____________________ 
(1)
Fiscal 2012 includes 53 weeks versus 52 weeks in all other fiscal years presented.
(2)
Consists of weighted-average common and common equivalent shares outstanding for the fiscal year.
(3)
Computed as of the end of each fiscal year.
(4)
Calculation includes all brick and mortar stores that were open as of the end of each fiscal year and that were open more than one year. Accordingly, stores opened, closed, or expanded during the fiscal year were not included. Temporarily closed stores are excluded during the months that the store was closed. Calculation excludes digital sales. Calculated excluding sales for the 53rd week in fiscal 2012.
(5)
JackRabbit stores and shops within department stores are not included in this calculation.
(6)
Calculation includes all brick and mortar stores that were open as of the end of each fiscal year and that were open more than one year. Accordingly, stores opened, closed, or expanded during the fiscal year were not included. Temporarily closed stores are excluded during the months that the store was closed. Calculation includes digital sales. Calculated excluding sales for the 53rd week in fiscal 2012.

(a)
Fiscal 2014 cost of sales includes $5.8 million in start-up costs related to inventory reserves established for inventory purchased from Macy’s. Fiscal 2014 selling, general, and administrative expenses includes $2.2 million in start-up costs associated with shipping and handling for the initial inventory takeover and assortment of Macy’s athletic footwear.
(b)
Fiscal 2016 includes $3.6 million in employee severance and retirement costs.
(c)
Fiscal 2015 includes a $4.3 million income tax benefit for a worthless stock deduction with respect to the Company’s wholly-owned subsidiary, The Finish Line MA, Inc.


18


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
During fiscal 2016, the key highlights of the Company included record revenues, significant digital sales growth, and the success of growth initiatives, which included the repositioning and expansion of shops within 88 department stores. The Company remained committed to its strategic plan to put capital investments into its people, technology, and stores/shops. Additionally, the Company continued to provide direct returns to its shareholders through dividends and stock repurchases totaling $96.3 million during fiscal 2016. An overview of the detailed results is presented below:
Net sales increased 3.8% to $1,888.9 million in fiscal 2016 compared to $1,820.6 million in fiscal 2015.
Finish Line comparable store sales for fiscal 2016 increased 1.8%.
Finish Line’s digital comparable sales (which are included in Finish Line comparable store sales) increased 14.5%.
Net sales per square foot for brick and mortar comparable stores increased $1 to $369 per square foot.
Shops within department stores net sales increased $40.9 million to $247.3 million.
JackRabbit net sales increased $20.0 million to $89.9 million.
Gross profit was $583.0 million (30.9% of net sales) in fiscal 2016 compared to $583.8 million (32.1% of net sales) in fiscal 2015.
Product margin, as a percentage of net sales, decreased 1.0%, which was primarily due to the Company’s replacement of its warehouse and order management system during the third quarter of fiscal 2016. This led to a temporary inability to place new product in the Company’s stores/shops and distribution center, which caused an increase in the sales mix of clearance and aged product and a decrease in sales of new product with higher price points and margin in the second half of fiscal 2016.
Occupancy costs, as a percentage of net sales, increased 0.2%.
SG&A expenses were $503.7 million (26.7% of net sales) in fiscal 2016 compared to $459.5 million (25.3% of net sales) in fiscal 2015.
In the second half of fiscal 2016, the Company incurred incremental expenses related to the Company’s supply chain issues as a result of the replacement of the Company’s warehouse and order management system.
During fiscal 2016, depreciation expense increased due to the Company’s capital investments to support the new warehouse and order management system. In addition, the Company incurred incremental SG&A expenses to support the growth in stores/shops and digital.
Operating income was $30.6 million (1.6% of net sales) in fiscal 2016 compared to $120.4 million (6.6% of net sales) in fiscal 2015.
The $89.8 million decrease, or 74.6%, was primarily due to the decrease in product margin and increase in selling, general, and administrative expenses as a result of the Company’s replacement of its warehouse and order management system during the third quarter of fiscal 2016, partially offset by a 3.8% increase in consolidated net sales.
The $48.7 million in impairment charges and store closing costs recorded during fiscal 2016 related to the write-off of technology assets related to enterprise-wide systems infrastructure, the long-lived assets of underperforming stores, obsolete store fixtures and corporate assets, and fixtures and equipment related to the 62 stores/shops closed during fiscal 2016. This compared to $3.9 million in impairment charges and store closing costs during fiscal 2015.
Net income attributable to The Finish Line, Inc. was $21.9 million (1.2% of net sales) in fiscal 2016 compared to $82.0 million (4.5% of net sales) in fiscal 2015, a decrease of $60.1 million, or 73.3%.
Diluted earnings per share attributable to The Finish Line, Inc. shareholders decreased 71.8% to $0.48 in fiscal 2016 compared to $1.70 in fiscal 2015.
Cash and cash equivalents were $79.5 million as of February 27, 2016 with no interest bearing debt.
Generated cash from operations of $99.4 million in fiscal 2016.

19


Cash outlay for capital expenditures was $66.1 million, with an additional $5.7 million within accounts payable as of February 27, 2016.
Paid $16.4 million of dividends to shareholders in fiscal 2016.
Repurchased 3.9 million shares of the Company’s common stock totaling $79.9 million during fiscal 2016.
Opened 8 new and closed 54 brick and mortar stores during fiscal 2016, ending the year with 591 brick and mortar stores.
Opened 1 new branded shop within a department store and closed branded shops within 4 department stores during fiscal 2016, ending the year with branded shops in 392 department stores. Additionally, the Company repositioned and expanded shops within 88 department stores.
Acquired 4, opened 1, and closed 4 JackRabbit stores during fiscal 2016, ending the year with 72 JackRabbit stores.
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 (“U.S. GAAP”). The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates these estimates. 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 the preparation of its consolidated financial statements.
Cost of Sales. Cost of sales includes the cost associated with acquiring merchandise from suppliers, occupancy costs, license fees, provision for inventory shortages, and credits and allowances from our merchandise suppliers. Cash consideration received from merchandise suppliers 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 cost of sales at the time of sale.
Because the Company does not include the costs associated with operating its distribution center and freight within cost of sales, the Company’s gross profit may not be comparable to those of other retailers that may include all such costs related to their distribution centers and freight in cost 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. The Company’s valuation of merchandise inventory includes markdown adjustments for merchandise that will be sold below cost and the impact of inventory shrink. Markdowns are based upon historical information and assumptions about future demand and market conditions. Inventory shrink is based on historical information and assumptions about current inventory shrink trends. Supplier rebates are applied as a reduction to the cost of merchandise inventories. It is possible that changes to the markdowns and inventory shrink estimates could be required in future periods due to changes in market conditions.
Valuation of Property and Equipment. The Company reviews its property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount 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 future undiscounted cash flows expected to be generated by the asset. If an asset is considered to be impaired, the impairment recognized is measured by comparing projected discounted cash flows to the asset’s carrying value. 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.
Valuation of Goodwill. As a result of various acquisitions made by JackRabbit, the Company had a goodwill balance of $44.0 million and $34.7 million as of February 27, 2016 and February 28, 2015, respectively, on its consolidated balance sheets.

20


The Company accounts for goodwill in accordance with Accounting Standards Codification 350, Intangibles - Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill not be amortized, but reviewed for impairment if impairment indicators arise and, at a minimum, annually.
The goodwill impairment test is a two-step test. In the first step, the Company compares the fair value of each reporting unit with goodwill to its carrying value. The Company determines the fair value of its reporting units with goodwill using a combination of a discounted cash flow and a market value approach. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that reporting unit, 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 reporting unit exceeds the fair value of the reporting unit, then the Company must perform the second step of the goodwill impairment test in order to determine the implied fair value of the reporting unit’s goodwill and compare it to the carrying value of the reporting unit’s goodwill. The activities in the second step include valuing the tangible and intangible assets and liabilities. If the implied fair value of goodwill is less than the carrying value, an impairment charge is recognized for the difference.
The determination of the discounted cash flows of the reporting unit and assets and liabilities within the reporting unit requires significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the discount rate, terminal growth rate, earnings before depreciation and amortization, and capital expenditure forecasts. The market approach requires judgment and uses one or more methods to compare the reporting unit with similar businesses, business ownership interests, and/or securities that have been sold. The Company has evaluated the merits of each significant assumption, both individually and in the aggregate, used to determine the fair value of the reporting unit, as well as the fair values of the corresponding assets and liabilities within the reporting unit, and concluded they are reasonable and are consistent with prior valuations; however, due to the inherent uncertainty involved in making these estimates, actual results could differ from those estimates.
Our fourth quarter fiscal 2016 annual goodwill impairment analysis did not result in any impairment charges. The fair value of JackRabbit exceeded its carrying value; however, our analysis contemplates growth in both comparable store sales and digital sales based on economic and industry forecasts as well as gross margin improvements and selling, general, and administrative expense leveraging in the future. While management believes these assumptions are reasonable and their use appropriate, actual results may not meet forecasted results. We will continue to monitor operating results within the JackRabbit reporting unit throughout the upcoming year in an effort to determine if events and circumstances warrant interim impairment testing. Otherwise, the reporting unit will again be subject to the required annual impairment test during the fourth quarter of fiscal 2017. Changes in judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future operating cash flows and the discount rate, could decrease the estimated fair value of this reporting unit in the future and could result in an impairment of goodwill.
Operating Leases. The Company leases retail stores under non-cancelable operating leases, which generally have lease terms ranging from three to ten years. Most of these lease arrangements do not provide for renewal periods; however, management expects that in the normal course of business, expiring leases will generally be renewed or, upon making a decision to relocate, replaced by leases at other premises. The Company recognizes rent expense for minimum lease payments on a straight-line basis over the expected lease term, including rent holidays, rent escalation clauses, and/or cancelable option periods where failure to exercise such options would result in an economic penalty. 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.
Certain leases provide for contingent rents and/or license fees, 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.

21


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 assets. 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 changes in tax law, the tax jurisdiction of new stores/shops or business ventures, the level of earnings or losses, the results of tax audits, permanent tax deductions and credits, the level of investment income, and other items.
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 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, new court cases, regulations, or rulings are issued, or when more or new 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.
Recent Accounting Pronouncements. In April 2015, the Financial Accounting Standards Board (“FASB”) issued guidance on accounting for fees paid in cloud computing arrangements, which assists entities in determining whether a cloud computing arrangement contains a software license. The guidance states that if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses, and if a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract and account for related costs in accordance with existing applicable U.S. GAAP. This guidance is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact to the Company’s consolidated financial position, results of operations, or cash flows.
In May 2014, the FASB issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB approved a one year deferral of the effective date, to make it effective for annual or interim reporting periods beginning after December 15, 2017. The guidance allows for either a full retrospective or a modified retrospective transition method. In March 2016, the FASB issued an amendment to the guidance in order to clarify the implementation guidance on principal versus agent considerations. The guidance includes indicators to assist an entity in determining whether it controls a specified good or service before it is transferred to the customer. The effective date of the amendment is the same as that of the original guidance. The Company is currently assessing the new guidance and its potential impact to its consolidated results of operations, financial position, and cash flows.

22


In July 2015, the FASB issued guidance on simplifying the measurement of inventory. The guidance, which applies to inventory that is measured using any method other than the last-in, first-out (“LIFO”) or retail inventory method, requires that entities measure inventory at the lower of cost or net realizable value. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016 and should be applied on a prospective basis. The Company is currently assessing the potential impact of adopting this guidance, but does not, at this time, anticipate a material impact to its consolidated results of operations, financial position, or cash flows.
In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The guidance requires that all deferred tax assets and liabilities, along with any related valuation, be classified as noncurrent on the balance sheet. The change to noncurrent classification could have a significant impact on working capital. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016, and may be applied either prospectively or retrospectively. Early adoption is permitted. The Company adopted this standard for the annual period beginning on March 1, 2015, and applied it retrospectively. As a result of adopting this standard, all deferred tax assets and liabilities have been classified as noncurrent. The balance sheet as of February 28, 2015 was retrospectively adjusted, which resulted in a $6.2 million decrease in the current deferred income tax liability balance and a $6.2 million increase in the long-term deferred income tax liability balance.
In February 2016, the FASB issued guidance on accounting for leases. A primary purpose of the guidance is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Specifically, lessees will be required to recognize the rights and obligations resulting from leases classified as operating leases as assets and liabilities. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact of adopting this guidance and its potential impact to its consolidated results of operations, financial position, and cash flows.
In March 2016, the FASB issued guidance on simplifying several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and accounting for forfeitures. The guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, and early adoption is permitted. The Company is currently assessing the impact of adopting this guidance and its potential impact to its consolidated results of operations, financial position, and cash flows.
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.


23


General
The following discussion and analysis should be read in conjunction with the information included in Item 6, Selected Financial Data and Item 8, Financial Statements and Supplementary Data.
The Company uses a “Retail” calendar. The Company’s fiscal year ends on the Saturday closest to the last day of February and included 52 weeks in fiscal 2016, 2015, and 2014.
The Company is a premium retailer of athletic shoes, apparel, and accessories for men, women, and kids, throughout the United States and Puerto Rico, through multiple operating segments.
Brick and mortar comparable store sales are sales from Finish Line stores open longer than one year, beginning in the thirteenth month of a store’s operation. Expanded stores are excluded from the brick and mortar comparable store sales calculation until the thirteenth month following the re-opening of the store and temporarily closed stores are excluded during the months that the store is closed. Brick and mortar comparable store sales do not include sales from JackRabbit or shops within department stores.
Digital comparable sales are the change in sales year over year for the reporting period derived from finishline.com and m.finishline.com.
Finish Line comparable store sales is the aggregation of brick and mortar comparable store sales and digital comparable sales.
JackRabbit comparable store sales are sales from JackRabbit stores open longer than one year or operated longer than one year after being acquired, including e-commerce sales, beginning in the thirteenth month of a store’s operation or after it was acquired. Expanded stores are excluded from the JackRabbit comparable store sales calculation until the thirteenth month following the re-opening of the store and temporarily closed stores are excluded during the months that the store is closed.
The following tables set forth store/shop and square feet information of the Company for each of the following fiscal years:
 
 
 
Year Ended
Number of stores/shops
 
February 27, 2016
 
February 28, 2015
Finish Line:
 
 
 
 
Beginning of year
 
637

 
645

Opened
 
8

 
10

Closed
 
(54
)
 
(18
)
End of year
 
591

 
637

Branded shops within department stores:
 
 
 
 
Beginning of year
 
395

 
185

Opened
 
1

 
213

Closed
 
(4
)
 
(3
)
End of year
 
392

 
395

JackRabbit:
 
 
 
 
Beginning of year
 
71

 
48

Acquired
 
4

 
20

Opened
 
1

 
3

Closed
 
(4
)
 

End of year
 
72

 
71

Total:
 
 
 
 
Beginning of year
 
1,103

 
878

Acquired
 
4

 
20

Opened
 
10

 
226

Closed
 
(62
)
 
(21
)
End of year
 
1,055

 
1,103

 

24


Square feet information
 
February 27, 2016
 
February 28, 2015
Finish Line:
 
 
 
 
Square feet
 
3,278,039

 
3,471,448

Average store size
 
5,547

 
5,450

Branded shops within department stores:
 
 
 
 
Square feet
 
476,533

 
404,521

Average shop size
 
1,216

 
1,024

JackRabbit:
 
 
 
 
Square feet
 
262,761

 
262,148

Average store size
 
3,649

 
3,692

Total:
 
 
 
 
Square feet
 
4,017,333

 
4,138,117

Results of Operations
The following table sets forth net sales of the Company by major category for each of the following fiscal years (in thousands):
 
 
 
Year Ended
Category
 
February 27, 2016
 
February 28, 2015
 
March 1, 2014
Footwear
 
$
1,681,629

 
89
%
 
$
1,596,443

 
88
%
 
$
1,466,039

 
88
%
Softgoods
 
207,259

 
11
%
 
224,143

 
12
%
 
204,371

 
12
%
Total net sales
 
$
1,888,888

 
100
%
 
$
1,820,586

 
100
%
 
$
1,670,410

 
100
%
The following table and subsequent discussion set forth operating data of the Company as a percentage of net sales for the fiscal years indicated below:
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
March 1, 2014
Income Statement Data:
 
 
 
 
 
 
Net sales
 
100.0
%
 
100.0
%
 
100.0
%
Cost of sales (including occupancy costs)
 
69.1

 
67.9

 
67.2

Gross profit
 
30.9

 
32.1

 
32.8

Selling, general, and administrative expenses
 
26.7

 
25.3

 
25.4

Impairment charges and store closing costs
 
2.6

 
0.2

 
0.2

Operating income
 
1.6

 
6.6

 
7.2

Interest (expense) income, net
 

 

 

Gain on sale of investment
 

 

 
0.1

Income before income taxes
 
1.6

 
6.6

 
7.3

Income tax expense
 
0.4

 
2.2

 
2.8

Net income
 
1.2

 
4.4

 
4.5

Net loss attributable to redeemable noncontrolling interest
 

 
0.1

 
0.1

Net income attributable to The Finish Line, Inc.
 
1.2
%
 
4.5
%
 
4.6
%

25


Fifty-Two Weeks Ended February 27, 2016 Compared to the Fifty-Two Weeks Ended February 28, 2015
Net Sales
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Brick and mortar stores sales
 
$
1,258,405

 
$
1,288,053

Digital sales
 
293,228

 
256,204

Shops within department stores sales
 
247,349

 
206,450

JackRabbit sales
 
89,906

 
69,879

Total net sales
 
$
1,888,888

 
$
1,820,586

 
 
 
 
 
Brick and mortar comparable store sales (decrease) increase
 
(0.8
)%
 
%
Digital comparable sales increase
 
14.5
 %
 
22.6
%
Finish Line comparable store sales increase
 
1.8
 %
 
3.2
%
JackRabbit comparable store sales increase
 
0.9
 %
 
N/A

Net sales increased 3.8% in fiscal 2016 as compared to fiscal 2015. The increase was attributable to a Finish Line comparable store sales increase of 1.8%, an increase in shops within department stores net sales of $40.9 million, primarily due to an increase in the number of branded shops open during fiscal 2016 as compared to fiscal 2015 as well as an increase in sales per shop, and an increase in JackRabbit net sales of $20.0 million, primarily due to increased store count and digital sales, which was partially offset by a net decrease in Finish Line store count as compared to the prior year. The Finish Line comparable store sales increase of 1.8% was due to an increase in store average dollar per transaction and digital traffic, partially offset by a decrease in store and digital conversion, store traffic, and digital average dollar per transaction in fiscal 2016 as compared to fiscal 2015.
The decelerated growth in Finish Line comparable store sales and shops within department stores sales was primarily caused by the replacement of the Company’s warehouse and order management system during the third quarter of fiscal 2016. In October 2015, the Company began experiencing significant supply chain challenges as the new system was not able to process product flow at the volumes necessary to support its planned receipts and allocations, which caused stress to the Company’s ability to place new product in its stores/shops and distribution center and significantly decreased its ability to fulfill digital sales orders. Inbound shipments processed by the Company during the third quarter of fiscal 2016 decreased 25% as compared to the third quarter of fiscal 2015. As a result, average merchandise inventory levels in its stores/shops and distribution center during the third quarter of fiscal 2016 were $41 million, or 14% below average merchandise inventory levels during the third quarter of fiscal 2015. This drove a significant decrease in brick and mortar and digital conversion during the third quarter of fiscal 2016 as compared to the third quarter of fiscal 2015, despite an increase in digital traffic and slight decrease in brick and mortar traffic. In addition, during the third quarter of fiscal 2016, the new system struggled to process digital orders received, which led to cancellation rates that were 50% higher than normal. The decrease in average merchandise inventory levels also drove a decrease in digital and brick and mortar average dollar per transaction during the third quarter of fiscal 2016 compared to the third quarter of fiscal 2015 due to an increase in the sales mix of clearance and aged product and a decrease in new product with higher price points. These complications were similar in the Company’s shops within department stores, which caused a deceleration of the growth experienced in the current year as compared to the prior year. The Company believes the complications caused by the new warehouse and order management system replacement have significantly improved and the system is currently functional; however, the Company is still in the process of enhancing the system’s capabilities in order to realize the benefits provided by the new system.

Consolidated footwear sales increased 5.3% in fiscal 2016 as compared to fiscal 2015, which was primarily driven by percentage increases in the low-single digits in men’s, low teens in women’s, and mid-single digits in kids’ footwear sales. Consolidated softgoods sales were even more significantly impacted than footwear sales by the replacement of the Company’s warehouse and order management system in the third quarter of fiscal 2016. The complications caused softgoods product levels and sales to be significantly below the Company’s plan for the third quarter of fiscal 2016 with the largest declines coming in its fleece product, which was also impacted by unseasonably warm temperatures in many areas of the United States. As a result, softgoods sales decreased 7.5% in fiscal 2016 as compared to fiscal 2015.

26


Cost of Sales (Including Occupancy Costs) and Gross Profit
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Cost of sales (including occupancy costs)
 
$
1,305,896

 
$
1,236,783

Gross profit
 
$
582,992

 
$
583,803

Gross profit as a percentage of net sales
 
30.9
%
 
32.1
%
Gross profit, as a percentage of net sales, decreased 1.2% in fiscal 2016 as compared to fiscal 2015, which was primarily due to a 1.0% decrease in product margin and a 0.2% increase in occupancy costs, as a percentage of net sales. The 1.0% decrease in product margin, as a percentage of net sales, was primarily due to the replacement of the Company’s warehouse and order management system during the third quarter of fiscal 2016. As previously discussed, the inability to place new product in the Company’s stores/shops and distribution center caused an increase in the sales mix of clearance and aged product and a decrease in sales of new product with higher price points and margin, which caused a degradation of product margins for the third quarter of the current year as compared to the prior year. The 0.2% increase in occupancy costs, as a percentage of net sales, was primarily due to deleveraging against the Finish Line comparable store sales increase.
Selling, General, and Administrative Expenses
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Selling, general, and administrative expenses
 
$
503,660

 
$
459,455

Selling, general, and administrative expenses as a percentage of net sales
 
26.7
%
 
25.3
%
Selling, general, and administrative expenses increased $44.2 million in fiscal 2016 as compared to fiscal 2015, which was primarily due to the following: (1) approximately $8.0 million of incremental expenses related to the Company’s supply chain issues as a result of the replacement of the Company’s warehouse and order management system previously discussed, which included additional IT resources to address technical issues and help stabilize the new system; additional freight costs related to rerouting of trucks to the Company’s vendor partners to assist in repacking, diverting product to a third-party location to help process product flow, and higher per unit shipping costs due to shipments to the Company’s stores/shops from its distribution center being well below capacity; and incremental labor costs in the Company’s distribution center related to the manual processing, handling, and shipping of inventory to its stores/shops and to fulfill orders; (2) an increase in depreciation expense of $5.7 million, or 15%, which was primarily due to the replacement of the Company’s warehouse and order management system that went live during the third quarter of fiscal 2016; (3) an increase in web advertising to drive traffic to the Company’s websites; (4) incremental credit costs due to an increase in chargebacks; (5) the Company recording $3.6 million in employee severance and retirement costs in fiscal 2016; and (6) variable costs in fulfillment, Macys.com license fees, and payroll in conjunction with the 3.8% increase in consolidated net sales.
The Company currently expects to incur incremental selling, general, and administrative expenses for increased technical and operational resources to enhance the capabilities of the new warehouse and order management system during the first half of fiscal 2017.
Impairment Charges and Store Closing Costs
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Impairment charges and store closing costs
 
$
48,692

 
$
3,918

Impairment charges and store closing costs as a percentage of net sales
 
2.6
%
 
0.2
%
Number of stores/shops closed
 
62

 
21

The $48.7 million in impairment charges and store closing costs recorded during fiscal 2016 were primarily the result of a $33.3 million write-off of technology assets related to enterprise-wide systems infrastructure, as the Company determined that

27


the systems were no longer going to be used for their originally intended purpose and instead the Company will focus on smaller upgrades and enhancements to its existing core systems going forward, an $11.8 million write-off of long-lived assets of underperforming stores, and a $1.5 million write-off of obsolete store fixtures and corporate assets. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $2.1 million in store closing costs during fiscal 2016, which represents the non-cash write-off of fixtures and equipment upon a store/shop closing.
The $3.9 million in impairment charges and store closing costs recorded during fiscal 2015 were primarily the result of a $2.1 million charge for the write-off of tangible and indefinite-lived intangible assets related to one of the Company’s websites, as the Company determined that the website was no longer going to be used for its originally intended purpose, a $0.5 million write-off of long-lived assets of four underperforming stores, and a $0.3 million write-off of obsolete store fixtures. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $1.0 million in store closing costs during fiscal 2015.
Interest (Expense) Income, Net
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Interest (expense) income, net
 
$
(65
)
 
$
(15
)
Interest (expense) income, net as a percentage of net sales
 
%
 
%
Interest income is earned on the Company’s investments and interest expense is incurred on money borrowed, the unused commitment fee, and letter of credit fees related to the Company’s Amended and Restated Revolving Credit Facility Credit Agreement.
Income Tax Expense
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Income tax expense
 
$
8,779

 
$
40,673

Income tax expense as a percentage of net sales
 
0.4
%
 
2.2
%
Effective income tax rate
 
28.7
%
 
33.8
%
The decrease in the effective tax rate in fiscal 2016 as compared to fiscal 2015 was primarily due to the $89.8 million decrease in pre-tax book income in fiscal 2016 as compared to fiscal 2015. In addition, the recognition of a $4.3 million income tax benefit for a worthless stock deduction with respect to the Company’s wholly-owned subsidiary, The Finish Line MA, Inc., in fiscal 2015 was partially replaced with the recognition of $3.1 million of federal and state research and development tax credits in fiscal 2016. The Company does not expect to generate significant federal and state research and development tax credits in fiscal 2017.
Net Loss Attributable To Redeemable Noncontrolling Interest
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands)
Net loss attributable to redeemable noncontrolling interest
 
$
96

 
$
2,251

Net loss attributable to redeemable noncontrolling interest as a percentage of net sales
 
%
 
0.1
%
The net loss attributable to redeemable noncontrolling interest represents the noncontrolling owner’s portion of the net loss generated by JackRabbit for the fiscal year. The decrease in fiscal 2016 as compared to fiscal 2015 was primarily due to JackRabbit becoming a wholly owned subsidiary of the Company during fiscal 2016.

28


Net Income Attributable To The Finish Line, Inc.
 
 
 
Year Ended
 
 
February 27, 2016
 
February 28, 2015
 
 
(dollars in thousands, except per
share data)
Net income attributable to The Finish Line, Inc.
 
$
21,892

 
$
81,993

Net income attributable to The Finish Line, Inc. as a percentage of net sales
 
1.2
%
 
4.5
%
Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.48

 
$
1.70

Net income attributable to The Finish Line, Inc. decreased $60.1 million in fiscal 2016 as compared to fiscal 2015, which was primarily due to the increase in impairment charges and store closing costs related to the write-off of technology assets and long-lived assets of underperforming and closed stores, the increase in selling, general, and administrative expenses related to the Company’s supply chain issues as a result of the replacement of its warehouse and order management system in the third quarter of fiscal 2016 and additional costs to support the 3.8% increase in consolidated net sales, and the decrease in gross profit, as a percentage of net sales, caused by the Company’s supply chain issues as a result of the replacement of the Company’s warehouse and order management system, partially offset by the increase in net sales and the decrease in income tax expense.
Fifty-Two Weeks Ended February 28, 2015 Compared to the Fifty-Two Weeks Ended March 1, 2014
Net Sales
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Brick and mortar stores sales
 
$
1,288,053

 
$
1,291,863

Digital sales
 
256,204

 
208,984

Shops within department stores sales
 
206,450

 
119,384

JackRabbit sales
 
69,879

 
50,179

Total net sales
 
$
1,820,586

 
$
1,670,410

 
 
 
 
 
Brick and mortar comparable store sales increase
 
%
 
2.5
%
Digital comparable sales increase
 
22.6
%
 
15.1
%
Finish Line comparable store sales increase
 
3.2
%
 
4.2
%
Net sales increased 9.0% in fiscal 2015 as compared to fiscal 2014. The increase was attributable to a Finish Line comparable store sales increase of 3.2%, an increase in shops within department stores net sales of $87.1 million, and an increase in JackRabbit net sales of $19.7 million, which was partially offset by a net decrease in Finish Line store count compared to the prior year. The Finish Line comparable store sales increase of 3.2% was due to an increase in average dollars per transaction, digital conversion, and digital traffic, partially offset by a decrease in store conversion and store traffic.
Footwear sales increased 8.9% in fiscal 2015 as compared to fiscal 2014, which was primarily driven by a 4.7% increase in men’s, a 17.2% increase in women’s, and a 10.0% increase in kids’ footwear sales. Softgoods sales increased 9.7% in fiscal 2015 as compared to fiscal 2014, which was primarily the result of a 9.1% increase in apparel sales due to the Company’s strategy to focus the product assortment on key items to drive apparel sales.

29


Cost of Sales (Including Occupancy Costs) and Gross Profit
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Cost of sales (including occupancy costs)
 
$
1,236,783

 
$
1,122,967

Gross profit
 
$
583,803

 
$
547,443

Gross profit as a percentage of net sales
 
32.1
%
 
32.8
%
The 0.7% decrease in gross profit, as a percentage of net sales, was primarily due to a 0.5% decrease in product margin, net of shrink, as a percentage of net sales, and a 0.2% increase in occupancy costs, as a percentage of net sales. The 0.5% decrease in product margin, net of shrink, as a percentage of net sales, was primarily the result of an increase in markdowns of both basketball and running merchandise at Finish Line during fiscal 2015 as compared to fiscal 2014. The higher markdowns in basketball and running merchandise during fiscal 2015 were primarily due to the Company having to take markdowns during the year in order to sell off certain slow moving inventory and improve its inventory position at year-end. Additionally, JackRabbit had an increase in markdowns during fiscal 2015 to clear certain of its excess and aged inventory and improve its inventory position. These decreases were partially offset by the $5.8 million in start-up costs related to inventory reserves established for inventory purchased from Macy’s in the prior year. The 0.2% increase in occupancy costs, as a percentage of net sales, was primarily due to deleveraging against the flat brick and mortar comparable store sales in fiscal 2015.
Selling, General, and Administrative Expenses
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Selling, general, and administrative expenses
 
$
459,455

 
$
424,571

Selling, general, and administrative expenses as a percentage of net sales
 
25.3
%
 
25.4
%
The $34.9 million increase in selling, general, and administrative expenses was primarily due to the following: (1) the increased cost associated with building teams for the growth in shops within department stores and JackRabbit; (2) variable costs in fulfillment, freight, and payroll in conjunction with the 9.0% increase in consolidated net sales; and (3) capital investments to support the Company’s technology upgrades, digital enhancements, and omnichannel strategy and to support shops within department stores and JackRabbit, which increased depreciation by $2.0 million, or 5.2%, compared to fiscal 2014. These increases were partially offset by $2.2 million in start-up costs associated with shipping and handling for the initial inventory takeover and assortment of Macy’s athletic footwear in the prior year.
 Impairment Charges and Store Closing Costs
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Impairment charges and store closing costs
 
$
3,918

 
$
2,767

Impairment charges and store closing costs as a percentage of net sales
 
0.2
%
 
0.2
%
Number of stores/shops closed
 
21

 
24

The $3.9 million in impairment charges and store closing costs recorded during fiscal 2015 were primarily the result of a $2.1 million charge for the write-off of tangible and indefinite-lived intangible assets related to one of the Company’s websites, as the Company determined that the website was no longer going to be used for its originally intended purpose, a $0.5 million write-off of long-lived assets of four underperforming stores, and a $0.3 million write-off of obsolete store fixtures. The asset impairment charges were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $1.0 million in store closing costs during fiscal 2015, which represents the non-cash write-off of fixtures and equipment upon a store/shop closing.

30


The $2.8 million in impairment charges and store closing costs recorded during fiscal 2014 were primarily the result of a $2.1 million write-off of obsolete store technology assets and fixtures. The asset impairment charges for the obsolete store technology assets and fixtures were calculated as the difference between the carrying amount of the impaired assets and their estimated future discounted cash flows. Additionally, the Company recorded $0.7 million in store closing costs during fiscal 2014.
Interest (Expense) Income, Net
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Interest (expense) income, net
 
$
(15
)
 
$
37

Interest (expense) income, net as a percentage of net sales
 
%
 
%
Interest income is earned on the Company’s investments and interest expense is incurred from the unused commitment fee and letter of credit fees related to the Company’s Amended and Restated Revolving Credit Facility Credit Agreement.
Gain on Sale of Investment

 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Gain on sale of investment
 
$

 
$
2,076

Gain on sale of investment as a percentage of net sales
 
%
 
0.1
%
During fiscal 2014, the Company sold an investment with a carrying value of $1.0 million for $3.1 million, which resulted in a $2.1 million gain.
Income Tax Expense
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Income tax expense
 
$
40,673

 
$
47,166

Income tax expense as a percentage of net sales
 
2.2
%
 
2.8
%
Effective income tax rate
 
33.8
%
 
38.6
%
The decrease in the effective tax rate in fiscal 2015 as compared to fiscal 2014 was primarily due to the Company recognizing a $4.3 million income tax benefit for a worthless stock deduction with respect to the Company’s wholly-owned subsidiary, The Finish Line MA, Inc., and the release of tax reserves related to the closure of an IRS exam covering fiscal 2011 through 2013.
Net Loss Attributable to Redeemable Noncontrolling Interest
  
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands)
Net loss attributable to redeemable noncontrolling interest
 
$
2,251

 
$
1,851

Net loss attributable to redeemable noncontrolling interest as a percentage of net sales
 
0.1
%
 
0.1
%

31


The net loss attributable to redeemable noncontrolling interest represents the noncontrolling owner’s portion of the net loss generated by JackRabbit for the fiscal year. The increase in fiscal 2015 as compared to fiscal 2014 was primarily due to the increase in markdowns at JackRabbit during fiscal 2015 to clear certain of its excess and aged inventory and improve its inventory position.
Net Income Attributable to The Finish Line, Inc.
 
 
 
Year Ended
 
 
February 28, 2015
 
March 1, 2014
 
 
(dollars in thousands, except per
share data)
Net income attributable to The Finish Line, Inc.
 
$
81,993

 
$
76,903

Net income attributable to The Finish Line, Inc. as a percentage of net sales
 
4.5
%
 
4.6
%
Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
1.70

 
$
1.56

The $5.1 million increase in net income attributable to The Finish Line, Inc. was primarily due to the increase in net sales, the decrease in income tax expense, the increase in net loss attributable to redeemable noncontrolling interest (due to higher markdowns in JackRabbit in fiscal 2015), and an $8.0 million ($4.9 million net of taxes) charge for start-up costs related to shops within department stores recorded in fiscal 2014. These increases were partially offset by a decrease in gross profit as a percentage of net sales, the increase in impairment charges and store closing costs, the increase in selling, general, and administrative expenses to support the increase in sales in shops within department stores and JackRabbit in fiscal 2015, and the gain on sale of investment recorded in fiscal 2014.
Liquidity and Capital Resources
The Company’s primary source of working capital is cash on hand and cash flows from operations. The following table sets forth material balance sheet and liquidity measures of the Company (in thousands):
 
 
 
February 27, 2016
 
February 28, 2015
Cash and cash equivalents
 
$
79,495

 
$
149,569

Merchandise inventories, net
 
$
376,506

 
$
343,403

Interest-bearing debt
 
$

 
$

Working capital
 
$
300,166

 
$
339,375

Operating Activities. Net cash provided by operating activities was $99.4 million, $101.8 million, and $119.0 million for fiscal 2016, 2015, and 2014, respectively. Net cash provided by operating activities decreased by $2.4 million in fiscal 2016 as compared to fiscal 2015. This decrease was primarily due to a decrease in net income, partially offset by an increase in non-cash expenses and a net decrease in the cash outflow in working capital balances for fiscal 2016 compared to fiscal 2015.
Net cash provided by operating activities decreased by $17.2 million in fiscal 2015 as compared to fiscal 2014. This decrease was primarily due to a net increase in the cash outflow in working capital balances, partially offset by an increase in net income and non-cash expenses in fiscal 2015 as compared to fiscal 2014.
At February 27, 2016, the Company had cash and cash equivalents of $79.5 million. Cash and cash equivalents consist primarily of cash on hand and highly liquid instruments with a maturity of three months or less at the date of purchase. At February 27, 2016, substantially all of the Company’s cash was invested in deposit accounts at banks.
Merchandise inventories, net increased 9.6% at February 27, 2016 as compared to February 28, 2015. The increase in merchandise inventories, net over the prior year was driven in part by a seasonal build in merchandise inventories associated with an earlier Easter compared to the prior year. Merchandise inventories increased double digits at shops within department stores and JackRabbit and mid-single digits at Finish Line.
Investing Activities. Net cash used in investing activities was $74.4 million, $101.1 million, and $91.2 million for fiscal 2016, 2015, and 2014, respectively. The decrease in cash used in investing activities in fiscal 2016 as compared to fiscal 2015 was primarily due to a $22.0 million decrease in capital expenditures, a $2.6 million decrease in JackRabbit acquisitions, and a $2.2 million decrease in cash paid for investments in fiscal 2016 as compared to fiscal 2015.

32


The increase in cash used in investing activities in fiscal 2015 as compared to fiscal 2014 was primarily due to a $6.4 million increase in capital expenditures, a $3.1 million decrease in proceeds from the sale of an investment, and a $2.2 million increase in cash paid for investments in fiscal 2015 as compared to fiscal 2014, partially offset by a $1.8 million decrease in cash paid for JackRabbit acquisitions in fiscal 2015
Capital expenditures were $66.1 million, $88.1 million, and $81.7 million for fiscal 2016, 2015, and 2014, respectively. Expenditures in fiscal 2016 were primarily for the construction of 8 new brick and mortar stores, 1 new shop within department stores, and 1 new JackRabbit store, excluding acquisitions, the remodeling and repositioning of existing stores, and repositioning and expanding shops within department stores. Further, the Company had capital investments in technology to support the new warehouse and order management system and enhancements to its customer data and analytics systems. In addition to the $66.1 million of cash paid for capital expenditures in fiscal 2016, $5.7 million of capital expenditures for property and equipment was accrued in accounts payable as of February 27, 2016.
The Company intends to invest approximately $55-60 million in capital expenditures during fiscal 2017. Of this amount, approximately $40 million is intended for the construction of approximately 7 new brick and mortar stores and the remodeling or repositioning of 80-90 existing brick and mortar stores. In addition, approximately $5 million is expected to be spent to reposition and expand approximately 50 shops within department stores. The remaining $10-15 million to be invested is related primarily to an upgrade of our digital platform, our mobile first strategy, and information security enhancements. The Company anticipates satisfying all of these capital expenditures through the use of cash-on-hand and operating cash flows.
Financing Activities. Net cash used in financing activities was $95.1 million, $80.2 million, and $25.7 million for fiscal 2016, 2015, and 2014, respectively. The $14.9 million increase in cash used in financing activities in fiscal 2016 as compared to fiscal 2015 was primarily due to an $11.8 million increase in stock repurchases, a $4.6 million decrease in proceeds from the issuance of common stock, a $4.1 million decrease in proceeds from the repayment of a related-party promissory note, a $1.9 million decrease in excess tax benefits from share-based compensation, and a $1.0 million increase in dividends paid to shareholders, offset partially by an $8.0 million decrease in the purchase of redeemable noncontrolling interest and a $0.5 million decrease in cash paid for the settlements of contingent consideration in fiscal 2016.
The $54.5 million increase in cash used in financing activities in fiscal 2015 as compared to fiscal 2014 was primarily due to a $45.4 million increase in stock repurchases, the purchase of redeemable noncontrolling interest of $9.0 million, a $1.7 million increase in dividends paid to shareholders, a $1.1 million decrease in proceeds from the issuance of common stock, a $0.7 million decrease in excess tax benefits from share-based compensation, and payment for the settlement of contingent consideration of $0.6 million, offset partially by $4.1 million of proceeds from the repayment of a related-party promissory note during fiscal 2015.
Credit Facility. On November 30, 2012, the Company entered into an unsecured $100 million Amended and Restated Revolving Credit Facility Credit Agreement (the “Amended Credit Agreement”) with certain Lenders, which expires on November 30, 2017. The Amended Credit Agreement provides that, under certain circumstances, the Company may increase the maximum amount of the credit facility in an aggregate principal amount not to exceed $200 million. The Amended Credit Agreement is used by the Company, among other things, to issue letters of credit, support working capital needs, fund capital expenditures, and for other general corporate purposes.
Approximately $1.6 million in stand-by letters of credit were outstanding as of February 27, 2016 under the Amended Credit Agreement. No advances were outstanding under the Amended Credit Agreement as of February 27, 2016. Accordingly, the total revolving credit availability under the Amended Credit Agreement was $98.4 million as of February 27, 2016.
The Company’s ability to borrow monies in the future under the Amended Credit Agreement is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties. The Amended Credit Agreement contains restrictive covenants that limit, among other things, mergers and acquisitions. In addition, the Company must maintain a maximum leverage ratio (as defined in the Amended Credit Agreement) and minimum consolidated tangible net worth (as defined in the Amended Credit Agreement). The Company was in compliance with all such covenants as of February 27, 2016.
The Amended Credit Agreement pricing grid is adjusted quarterly and is based on the Company’s leverage ratio. The minimum pricing is LIBOR plus 0.90% or Base Rate (as defined in the Amended Credit Agreement) and the maximum pricing is LIBOR plus 1.75% or Base Rate plus 0.75%. The Company is also subject to an unused commitment fee based on the Company’s leverage ratio with minimum pricing of 0.10% and maximum pricing of 0.25%. In addition, the Company is subject to a letter of credit fee based on the Company’s leverage ratio with minimum pricing of 0.40% and maximum pricing of 1.25%.

33


Share Repurchase Program. On July 21, 2011, the Company’s Board of Directors authorized a share repurchase program (the “Share Repurchase Program”) to repurchase shares of the Company’s common stock. On March 26, 2015, the Company’s Board of Directors amended the Share Repurchase Program (the “2015 Amended Program”) and authorized the repurchase of an additional 5,000,000 shares of the Company’s common stock, which authorization shall expire on December 31, 2018.
The Company repurchased 3.9 million shares of its common stock at an average price of $20.42 per share for an aggregate amount of $79.9 million in fiscal 2016. As of February 27, 2016, there were 2.3 million shares remaining available to repurchase under the 2015 Amended Program.
As of February 27, 2016, the Company held 17,381,000 shares of its common stock as treasury shares at an average price of $20.10 per share for an aggregate carrying amount of $349.4 million. The Company’s treasury shares may be issued upon the exercise of employee stock options, under the Employee Stock Purchase Plan, in the form of restricted stock, or for other corporate purposes. The number of shares of common stock reserved to be issued upon the exercise of options, restricted stock, or other awards is limited as defined in the 2002 Stock Incentive Plan of The Finish Line, Inc. and The Finish Line, Inc. 2009 Incentive Plan Amended and Restated as of April 16, 2014. Further purchases of Company common stock will occur from time to time as market conditions warrant and as the Company deems appropriate when judged against other alternative uses of cash.
Dividends. On January 7, 2016, the Company increased its quarterly cash dividend to $0.10 per share from $0.09 per share of the Company’s common stock. The Company declared dividends of $16.5 million and $15.7 million during fiscal 2016 and 2015, respectively. As of February 27, 2016 and February 28, 2015, dividends declared but not paid were $4.3 million and $4.2 million, respectively. Further declarations of dividends remain at the discretion of the Company’s Board of Directors.
Strategic Priority Funding. Management believes that cash on hand of $79.5 million as of February 27, 2016 and anticipated future operating cash flows will be sufficient to deliver on the Company’s four strategic priorities to drive sales and earnings growth, which are:
 
Strengthening engagement with the Finish Line consumer;
Driving the performance and contribution of our Macy’s and JackRabbit businesses;
Establishing the right leadership team; and
Creating an operating model that drives profitable growth and generates shareholder value consistently over the long-term.
Contractual Obligations
The following table summarizes the Company’s long-term contractual obligations as of February 27, 2016 (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(1)
 
$
812,117

 
$
129,451

 
$
228,451

 
$
202,764

 
$
251,451

 
$

Other liabilities(2)(3)
 
8,764

 

 

 

 

 
8,764

Total contractual obligations
 
$
820,881

 
$
129,451

 
$
228,451

 
$
202,764

 
$
251,451

 
$
8,764

_____________ 
(1)
Includes the guaranteed minimum license fee associated with shops within department stores. The Company has entered into an arrangement to sell product in shops within department stores which includes a guaranteed minimum license fee in fiscal years 2017 through 2023. The license fee is compensation for use of the selling space, administrative and operational services, and use of the department store’s name.
(2)
Other liabilities includes future estimated payments associated with unrecognized tax benefits of $3.2 million. The Company expects to make cash outlays in the future related to unrecognized tax benefits. The liability 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.

34


(3)
Other liabilities includes future payments related to our non-qualified deferred compensation plan of $5.5 million. The liability is included in the “Other” category as the timing of these future payments is not known until an employee leaves the Company or otherwise requests an in-service distribution. For further information related to our non-qualified deferred compensation plan, see Note 7, “Retirement Plans,” to the consolidated financial statements included in Item 8, Financial Statements and Supplementary Data.
In addition to the contractual obligations noted in the table above, the Company enters into arrangements with suppliers to purchase merchandise up to 12 months in advance of expected delivery in the ordinary course of business. These open purchase orders do not contain any significant termination payments or other penalties if canceled. Total open purchase orders outstanding at February 27, 2016 were $605.6 million, and have not been included in the table above.
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 February 27, 2016. The Company does not use interest rate derivative instruments to manage exposure to interest rate changes.

35


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). 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 February 27, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework (2013 framework). Based on management’s assessment, it believes that, as of February 27, 2016, 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 February 27, 2016.

36


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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 February 27, 2016 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (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 February 27, 2016, 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 February 27, 2016 and February 28, 2015, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended February 27, 2016 of The Finish Line, Inc. and our report dated April 26, 2016 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
Indianapolis, Indiana
April 26, 2016


37


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 February 27, 2016 and February 28, 2015, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended February 27, 2016. 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 February 27, 2016 and February 28, 2015, and the consolidated results of its operations and its cash flows for each of the three years in the period ended February 27, 2016, 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 February 27, 2016, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated April 26, 2016 expressed an unqualified opinion thereon.
 
/s/ Ernst & Young LLP
Indianapolis, Indiana
April 26, 2016


38


THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 
 
 
February 27,
2016
 
February 28,
2015
ASSETS
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
79,495

 
$
149,569

Accounts receivable, net
 
18,227

 
16,663

Merchandise inventories, net
 
376,506

 
343,403

Income taxes receivable
 
28,877

 
8,963

Other
 
18,248

 
12,059

Total current assets
 
521,353

 
530,657

Property and equipment:
 
 
 
 
Land
 
1,557

 
1,557

Building
 
43,768

 
43,637

Leasehold improvements
 
198,193

 
248,399

Furniture, fixtures, and equipment
 
256,483

 
187,404

Construction in progress
 
9,182

 
102,944

 
 
509,183

 
583,941

Less accumulated depreciation
 
265,790

 
309,581

Total property and equipment, net
 
243,393

 
274,360

Goodwill
 
44,029

 
34,719

Other assets, net
 
8,773

 
10,119

Total assets
 
$
817,548

 
$
849,855

See accompanying notes.

39


THE FINISH LINE, INC.
CONSOLIDATED BALANCE SHEETS - (CONTINUED)
(in thousands, except per share data)
 
 
 
February 27,
2016
 
February 28,
2015
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Accounts payable
 
$
157,651

 
$
133,053

Employee compensation
 
18,839

 
19,093

Accrued property and sales tax
 
10,710

 
10,499

Other liabilities and accrued expenses
 
33,987

 
28,637

Total current liabilities
 
221,187

 
191,282

Commitments and contingencies
 

 

Deferred credits from landlords
 
32,327

 
29,143

Deferred income taxes
 
25,441

 
27,397

Other long-term liabilities
 
10,949

 
12,299

Redeemable noncontrolling interest, net
 

 
90

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

 

Common stock, $.01 par value; 110,000 shares authorized; 60,145 shares issued
 
 
 
 
Shares outstanding - (2016 - 42,377; 2015 - 46,052)
 
601

 
601

Additional paid-in capital
 
237,129

 
227,006

Retained earnings
 
639,296

 
633,910

Treasury stock, shares held - (2016 - 17,381; 2015 - 13,706)
 
(349,382
)
 
(271,873
)
Total shareholders’ equity
 
527,644

 
589,644

Total liabilities and shareholders’ equity
 
$
817,548

 
$
849,855

See accompanying notes.

40


THE FINISH LINE, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
 
 
 
Year Ended
 
 
February 27,
2016
 
February 28,
2015
 
March 1,
2014
Net sales
 
$
1,888,888

 
$
1,820,586

 
$
1,670,410

Cost of sales (including occupancy costs)
 
1,305,896

 
1,236,783

 
1,122,967

Gross profit
 
582,992

 
583,803

 
547,443

Selling, general, and administrative expenses
 
503,660

 
459,455

 
424,571

Impairment charges and store closing costs
 
48,692

 
3,918

 
2,767

Operating income
 
30,640

 
120,430

 
120,105

Interest (expense) income, net
 
(65
)
 
(15
)
 
37

Gain on sale of investment
 

 

 
2,076

Income before income taxes
 
30,575

 
120,415

 
122,218

Income tax expense
 
8,779

 
40,673

 
47,166

Net income
 
21,796

 
79,742

 
75,052

Net loss attributable to redeemable noncontrolling interest
 
96

 
2,251

 
1,851

Net income attributable to The Finish Line, Inc.
 
$
21,892

 
$
81,993

 
$
76,903

 
 
 
 
 
 
 
Basic earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.49

 
$
1.71

 
$
1.57

Diluted earnings per share attributable to The Finish Line, Inc. shareholders
 
$
0.48

 
$
1.70

 
$
1.56

Dividends declared per share
 
$
0.37

 
$
0.33