Shopping mall based specialty retailer, Hot Topic Inc.’s (HOTT) third-quarter 2011 earnings of 7 cents per share were in line with the lower end of the company’s previously announced guidance range of 7 cents to 9 cents and soared from the prior-period earnings of 5 cents. Moreover, the quarterly earnings also met the Zacks Consensus Estimate.
Total revenue decreased 4.0% year over year to $175.8 million, missing the Zacks Consensus Estimate of $178.0 million primarily due to a decline of 1.6% in total comparable store sales, resulting from disappointed sales of Halloween-related merchandise.
For the quarter, same-store sales at the Hot Topic segment declined 2.2% compared with a decline of 5.8% in the year-ago quarter. Sales for the period dipped 4.8% to $137.0 million.
The same-store sales at Torrid segment inched up 1.1% compared with a decline of 1.5% in the year-ago period. Sales marginally fell by 0.6% year over year to $38.7 million for the quarter.
Cost & Margin Performance
Cost of goods sold (COGS), including buying, distribution and occupancy costs, decreased 2.0% to $116.2 million. Based on revenues, COGS increased 130 basis points to 66.1%. Consequently, gross profit went down 7.7% to $59.6 million and gross margin contracted 130 basis points to 33.9%.
Selling, general & administrative expenses decreased 13.8% to $55.4 million, and based on revenues, declined 360 basis points to 31.5%. Operating income in the quarter came in at $4.2 million, compared with an operating income of $321,000 in the year-ago quarter. Consequently, operating margin surged 220 basis points to 2.4%.
Other Financial Details
At the end of the third quarter, Hot Topic had cash, cash equivalents and short-term investments of $41.8 million, down from $58.0 million at the end of the third quarter of fiscal 2010. Shareholders' equity came in at $178.1 million compared with $220.1 million in the prior-year period.
Hot Topic has repurchased 3,212,628 shares for a total of $25.0 million (at an average cost of $7.78 per share) in between August 24 and November 2, 2011 and completed the $25.0 million share repurchase program authorized by the board of directors.
Store Update
During the quarter, the company closed 2 Hot Topic stores and opened 1 Torrid store. The company remodeled 10 Hot Topic stores and 1 Torrid store during the quarter. The company ended the quarter with 634 Hot Topic stores and 146 Torrid stores.
Guidance
The company estimates fourth-quarter 2011 earnings per share between 16 cents and 20 cents, on the back of flat to low-single-digit decline in same store sales. Currently, the Zacks Consensus Estimate stood at 17 cents per share which is closer to the lower end of the guidance range.
Peer Performance
Hot Topic’s close competitor, Abercrombie & Fitch Co.’s (ANF) third-quarter 2011 earnings of 57 cents per share was substantially below the Zacks Consensus Estimate of 73 cents. However, quarterly earnings were marginally higher than the prior-period earnings of 56 cents per share.
Our Take
Hot Topic’s niche market position, strong brand recall, ability to tweak merchandise in line with rapidly changing trends and a debt-free balance sheet augur well for operating performance. However, macroeconomic headwinds, intense competition from other specialty retailers and the seasonal nature of the business severely undermine the company’s future growth prospects.
We reiterate our Neutral recommendation on Hot Topic until there is some improvement in business trends. The company has a Zacks #4 Rank (Sell) indicating a downward directional pressure on the stock over the near term.
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