Zacks Investment Research downgraded shares of Hot Topic Inc. (HOTT) from OUTPERFORM to NEUTRAL on October 18, 2012, with a target price of $10.00.
We recently downgraded our recommendation on Hot to Neutral based on declining comparable-store sales transactions and rich valuations. We observe that comparable-store sales transactions have been falling year-over-year since the last four quarters. In the second quarter of fiscal 2012, number of transactions dropped 8%, whereas in the first quarter it dipped 6%. During the fourth and third quarters of fiscal 2011, it decreased 7% and 8%, respectively. Moreover, the stock is trading at a premium based on our forward earnings estimates that limits its further upside. However, the company's improved second-quarter bottom-line performance was a key takeaway. The company posted a loss of $0.02 per share that fared better than the year-ago loss of $0.08. Its sustained focus on improving product offerings, merchandising and promotional activities drove sales up 4.6% year over year. Hot Topic now projects earnings between $0.08 and $0.10 per share in the third quarter and in the range of $0.23 to $0.27 in the fourth quarter.
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