Why Finish Line, Inc. Stock Plunged Today

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What happened

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Shares of The Finish Line Inc. (NASDAQ: FINL) were down 19.4% as of 2 p.m. EDT Tuesday, after the footwear retailer announced disappointing preliminary results and a new shareholder-rights plan to stave off a takeover.

For its fiscal second quarter ended Aug. 26, Finish Line's sales declined 3.3% year over year to $469.4 million, driven primarily by a 4.6% decline in comparable sales. On the bottom line, that should translate to earnings per share in the range of $0.08 to $0.12. Analysts, on average, were expecting significantly higher earnings of $0.38 per share on revenue of $477.2 million.

So what

Said Finish Line CEO Sam Sato, in a release announcing preliminary second-quarter results:

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

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In a separate press release, Finish Line also announced that its board has unanimously approved a shareholder-rights plan, also known as a "poison pill." The company says the plan "is intended to reduce the likelihood that any person or group would gain control of Finish Line through open market accumulation or coercive takeover tactics that the Board of Directors determines are not in the best interests of the Company and its shareholders."

Now what

According to a follow-up note from Susquehanna analyst Sam Poser, the poison pill was almost certainly adopted to prevent a takeover of the company by U.K.-based Sports Direct (LSE: SPD), which currently owns a roughly 8% stake in Finish Line and has been exploring ways to expand into the United States.

But it's also hard to blame them, considering Finish Line stock has plummeted 65% over the past year, leaving opportunistic investors to wonder whether now might be a good time to buy. In the meantime, Finish Line now expects full-year comparable sales to decline 3% to 5% (down from previous guidance for low-single-digit growth), which should result in full-year adjusted earnings per share of $0.50 to $0.60 (down from its previous outlook for $1.12 to $1.23).

In the end, given Finish Line's relative underperformance and freshly reduced guidance, it's no surprise to see shares plunging today.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.