Finish Line Adopts ‘Poison Pill’ Amid Falling Sales & Takeover Concerns

Finish Line Adopts ‘Poison Pill’ Amid Falling Sales & Takeover Concerns

Finish Line

Finish Line at The Mall at Millenia in Orlando, Fla.
Finish Line

The Finish Line Inc.’s shares are taking a beating after the firm on Monday pre-announced a negative second-quarter earnings performance, as well as its plans to adopt a shareholder rights plan or “poison pill.”

As of 11:40 a.m. ET, shares remained down more than 20 percent, to $8.32.

The specialty athletic retailer said its Q2 net sales were down 3.3 percent over the prior year, to $469.4 million, driven by a 4.6 percent decline in comps. The company also cautioned that, based on the decline in sales and pressure on gross margin from increased markdowns, it expects to report second quarter earnings per share in the range of 8 cents to 12 cents — a far cry from analysts’ bets for diluted EPS of 38 cents.

The marketplace for athletic footwear became much more promotional as our second quarter progressed, resulting in challenging sales and gross margin trends,” Finish Line CEO Sam Sato said. “Despite these headwinds, we remained disciplined in managing our inventories and expect to end the quarter with inventory levels down approximately 7 to 8 percent compared with a year ago.”

Still, Finish Line expects negative sales and gross margin trends to continue throughout the remainder of the year. As a result, the firm significantly lowered its full-year outlook. The company now expects comparable sales to decrease 3 to 5 percent, versus its previous guidance for an increase in the low single-digit range. Adjusted earnings per share are now expected to be in the range of 50 cents to 60 cents, versus the previous guidance range of $1.12 to $1.23, and compared with adjusted earnings per share of $1.06 in the previous year.

Finish Line, which has recently shouldered rumors of a takeover by U.K. sporting goods megafirm Sports Direct International Plc, also said Monday that it has adopted a shareholder rights plan “to reduce the likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics …”

The board believes that it is in the best interests of Finish Line and our shareholders to adopt a shareholder rights plan given the current market conditions and recent share accumulations,” said Finish Line chairman Glenn Lyon. “The plan is designed to ensure that the company’s board of directors is able to appropriately consider whether proposals, if any, are in the best interests of all our shareholders.”

In April, a U.S. Securities Exchange & Commissions filing revealed that Sports Direct had taken a significant interest in Finish Line — to the tune of 3 million shares — and at least one analyst believed Sports Direct’s purchase portended a takeover of the retailer. (Sports Direct holds an indirect economic interest in the shares through a derivative known as a contract for difference [CFD]. Such an interest does not provide voting power or beneficial ownership of shares.)

It appears to us that Sports Direct is actively making an effort to purchase Finish Line, despite the fact that no mention of an active position was mentioned in the [SEC] filing,” Susquehanna Financial Group LLP analyst Sam Poser wrote at the time. “The purchase of all of Finish Line would provide leverage for Sports Direct’s total operation, as well as provide better vendor terms from the likes of Nike, Adidas, Under Armour and others.”

Since April, Sports Direct has aggressively upped its purchasing of Finish Line shares — both through CFDs as well as outright purchasing beneficial shares. The most recent SEC filing by the firm shows Sports Direct now beneficially owns more than 3 million Finish Line shares and has an indirect economic interest in 8.7 million shares, representing a 29.6 percent economic interest in the shares.

While Finish Line has not publicly discussed Sports Direct’s actions, the firm’s adoption of a “poison pill” follows a similar strategy undertaken last year by then-embattled brand management firm Iconix Brand Group.

In November 2015, Sports Direct began quietly purchasing huge chunks of Iconix shares. By mid-January 2016, it had aggressively snapped up an indirect economic interest in 14.4 percent of Iconix’s shares. The result was industrywide speculation of a takeover. Later that same month, Iconix announced that it had adopted a “poison pill” to foil any improper takeovers.

Sports Direct has moved aggressively over the past few years to snap up new businesses — including Eastern Outfitters, which it purchased out of bankruptcy in April — and add them to its expanding portfolio. At the same time, the self-proclaimed No. 1 sports retailer in the U.K. has also taken investment stakes in several companies, including JD.com and French Connection, without escalating its role to ownership.

Details of Finish Line’s rights plan are contained in a form 8-K filed with the SEC.