Shares of The Finish Line Inc. jumped almost 9 percent Wednesday as inventory and cost controls combined with a one-time tax gain to allow the athletic shoe and apparel retailer to swing to an unexpected third-quarter profit.

This story first appeared in the December 24, 2009 issue of WWD. Subscribe Today.

For the three months ended Nov. 28, the Indianapolis-based company registered net income of $6.6 million, or 12 cents a diluted share, compared with a net loss of $8.8 million, or 16 cents a share, in the year-ago quarter.

Excluding a $6.5 million tax benefit related to the termination of its plans to buy Nashville-based footwear company Genesco Inc., Finish Line said it broke even in the third quarter. Analysts polled by Yahoo Finance expected a loss of 9 cents a share.

Net sales shrank 0.2 percent, to $240.1 million from $240.6 million a year earlier, as same-store sales rose 1.7 percent. Analysts expected revenues of $233.7 million.

“While the Federal Reserve noted in early December that the economy has picked up modestly and consumer spending has gained some steam, traffic in our stores remained down in the third quarter, compared to last year,” chief executive officer Glenn Lyon said on the company earnings call. “And while shoppers turned out for events, like Black Friday, they did not show the kind of sustained shopping behavior throughout the quarter that would signal a real change in mood.”

But there were a few bright spots. Lyon said December same-store sales were up 4.9 percent through Dec. 20, led by a strong showing in running footwear. On the operational side, the retailer in the third quarter was able to cut its selling, general and administrative expenses by 6.9 percent to $70.4 million and reduce inventories by 14.4 percent. Quarterly gross margin as a percentage of sales improved to 29.5 percent from 27 percent, due in part to fewer markdowns.

“They are taking markdowns very quickly and they are adding more freshness than they had in the past,” said Sterne, Agee & Leach retail analyst Sam Poser. “They are operating very efficiently right now. They are trying to get the right stores in the right places.”

Having closed its Paiva concept and sold its Man Alive division, the company “has been working to clean out inventory levels and get its merchandising back on track with better Nike allocation and more exclusive product,” Citi analyst Kate McShane wrote in a research note. “Competition is also more intense in the current environment as Finish Line is now also competing against specialty footwear retailers as well as department stores.”

Based on an uncertain consumer outlook, McShane continued, “we think it could be difficult for Finish Line to turn around its core business, which is already challenged by lower mall traffic trends.”

Finish Line said for the year, it will have opened five stores and closed 25 to 30. Next year, the company said it expects to pursue a similar direction. The company operates 681 units in 47 states.

For the 39 weeks ended Nov. 28, net income slid 0.2 percent to $5.1 million, or 9 cents a diluted share, versus $5.1 million, or 10 cents, in 2008. Sales shrank 6.2 percent to $797.9 million, from $850.6 million.

The retailer expects to report fourth-quarter results on March 26.

Shares of Finish Line finished the day at $10.89, up 89 cents, or 8.9 percent.

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