With its ability to tweak merchandise in line with the rapidly changing trends, Hot Topic Inc. (HOTT) once again posted solid sales and comparable store sales (comps) results in the second quarter ended July 28, 2012. The company’s second-quarter comps were up 3.9% compared with 3.2% reported in the year-ago period.
The increase in comps in the reported quarter was driven by a 3.9% rise in comps at the company’s namesake stores and a 4% rise in Torrid stores. The hike also resulted from improvements in fashion attire validating the company’s planned direction.
Hot Topic’s net sales for the quarter increased 4.6% year over year to $157.9 million, on account of robust sales in both namesake and Torrid concepts. Moreover, quarterly sales were almost in line with the Zacks Consensus Estimate of $158 million.
On a segmental basis, net sales inched up 1.7% year over year to $114.1 million at the company’s namesake stores, while Torrid stores registered a 13.1% increase with sales of $43.8 million.
Following strong sales results, Hot Topic lowered its loss per share guidance range for the second quarter to 2 cents – 3 cents per share, compared with its prior loss guidance range of 4 cents – 6 cents per share. The current Zacks Consensus Estimate for the second quarter stands at 2 cents, which coincides with the lower end of the company’s revised guidance range.
Additionally, the company initiated its third and fourth-quarter guidance. For the third quarter, the company is projecting earnings per share of 8 cents – 10 cents compared with 7 cents recorded in the year-ago period. The company’s guidance is based on comps growth in the low-single-digit range. The current Zacks Consensus Estimate for third quarter stands at earnings of 10 cents per share.
For the fourth quarter, Hot Topic anticipates to earn in the range of 23 cents – 27 cents per share on the back of low to mid-single-digit growth in comps. This compares 9.5% to 28% higher from the year-ago earnings of 21 cents per share. The company is scheduled to release its second quarter fiscal 2012 results on August 15, 2012.
Year-to-date sales data
During the first six months of fiscal 2012, the company’s total sales grew 5.5% to $329.4 million driven primarily by strong sales in both namesake and Torrid concepts. Net sales improved 4.2% year over year to $237.8 million at the company’s namesake stores, while Torrid stores registered a 9.1% increase with sales of $91.6 million.
During the six months period, Hot Topic’s comps were up 5.8% compared with 2.1% reported in the year-ago period. This increase was driven by 6.8% and 3.2% increases in comps at the company’s namesake stores and Torrid stores, respectively.
Our Recommendation
Hot Topic’s core business strategy focuses on music/pop culture related merchandise, based on the foundation of pop culture and mainly targets customers in the teenage group. With this strategy, Hot Topic has successfully carved a niche for itself amid a highly competitive specialty retailing space. The company competes head-to-head with other teenage focused specialty retailers like Abercrombie & Fitch Company (ANF) and American Eagle Outfitters Inc. (AEO).
Moreover, Hot Topic stores are strategically located in shopping malls and lifestyle centers frequented by teenagers, its primary target segment. The company also regularly monitors store sales and takes prudent steps to align merchandise mix in accordance with the rapidly changing preferences of its target customers. The company periodically evaluates its stores and remodels or relocates them in accordance with the latest trends.
To conclude, Hot Topic maintains a healthy debt-free balance sheet, with cash and cash equivalents and short-term investments of $69.6 million at the end of first-quarter of fiscal 2012. This offers Hot Topic the financial flexibility to drive growth in the future.
Currently, Hot Topic has a Zacks #2 Rank implying a short-term Buy rating. Moreover, we are maintaining a long-term Outperform recommendation over the stock.
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