With its ability to tweak merchandise in accordance with the rapidly changing trends, Hot Topic Inc. (HOTT) once again posted positive sales and comparable store sales (comps) results in the third quarter ended October 27, 2012. Moreover, the company also maintained its view for the third and the fourth quarters.
Hot Topic’s third-quarter comps inched up 0.2% compared with a dip of 0.5% reported in the comparable year-ago period. The marginal increase in comps in the reported quarter was driven by a 0.1% rise in comps at the company’s namesake stores and a 0.5% hike in Torrid stores. The hike also resulted from improvements in fashion attire partially offset by a decline in the accessories category.
Hot Topic’s net sales for the quarter increased 2.0% year over year to $179.3 million, on account of robust sales in Torrid concepts stores, partially offset by fall in the company’s namesake stores. However, quarterly sales missed the Zacks Consensus Estimate of $184.0 million.
On a segmental basis, net sales crept down 1.6% year over year to $134.9 million at the company’s namesake stores, while Torrid stores registered a 14.9% increase with sales of $44.4 million. During the third quarter, the company launched 18 new Torrid stores.
Management believes that the company’s Torrid store concepts have marked significant improvement in gross margins along with 10.0% increase in sales of regular price merchandise. Moreover, management was delighted with the success in the company’s namesake apparel and tee businesses resulting in better gross margins.
Year-to-date Sales Data
During the first nine months of fiscal 2012, the company’s total sales grew 4.2% to $508.7 million driven primarily by strong sales in both namesake and Torrid concepts. Net sales improved 2.1% year over year to $373.1 million at the company’s namesake stores, while Torrid stores registered a 10.6% increase with sales of $135.6 million.
During the nine months period, Hot Topic’s comps were up 3.8% compared with 1.2% reported in the year-ago period. This increase was driven by 4.2% and 2.4% increases in comps at the company’s namesake stores and Torrid stores, respectively.
Strolling Through Guidance
As a result of better gross margins in both the brands, management maintained its earnings guidance for the third and fourth quarter as well. For the third quarter, the company anticipates earnings to be in the range of 8–10 cents per share compared with 7 cents earned in the third quarter of 2011. The current Zacks Consensus Estimate stands at 9 cents per share for the quarter.
Further, management expects an expansion of about 150-200 basis points in gross margin for the third-quarter.
Moreover, for the fourth quarter, the company again maintained its earnings guidance range of 23–27 cents per share versus 21 cents recorded in the prior-year quarter. The company’s guidance is based on comps growth in the low to mid-single-digit range. The current Zacks Consensus Estimate earnings for fourth quarter stand at 25 cents per share.
Share Repurchase Program
The company’s Board of Directors sanctioned an additional amount to its share repurchase program, up to $25.0 million of the company’s common stock. The timings of the repurchases were not disclosed in the press release.
A New Store Concept
Hot Topic announced that it will soon introduce a new store concept known as ‘Blackheart’, which will feature a varied range of lingerie collections. Blackheart lingerie, accessories and beauty products will be available online at www.blackheartlingerie.com from November 15, 2012, whereas five Blackheart stores will be launched in Southern California and Texas by mid-November.
This new store concept will examine the possibility of taking advantage of the company’s existing customer base by offering them all together a different range of product category. The company believes that the new product launch will not harm its core brand products.
Conclusion
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. At the end of the third quarter, the company operated 620 Hot Topic stores across 50 states and in Puerto Rico as well as in Canada and 186 Torrid stores. The company’s e-commerce business looks strong and it runs two e-commerce sites – hottopic.com and torrid.com.
Hot Topic regularly monitors store sales and takes prudent steps to align merchandise mix in accordance with the rapidly changing preferences of its target customers. Furthermore, the company periodically evaluates its stores and remodels or relocates them in compliance with the latest trends.
However, Hot Topic’s business is seasonal in nature and generates high proportion of sales during fiscal third and fourth quarters, which are characterized by the back-to-school, Halloween and holiday seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.
As a result, we have a long-term ‘Neutral’ recommendation on the stock. However, Hot Topic, which competes with Abercrombie & Fitch Co. (ANF), carries a Zacks #4 Rank, implying short-term Sell rating for the upcoming 1-3 months, mainly due to continued fall in the comparable-store sales transactions at Hot Topic’s namesake stores.
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