Shopping mall based specialty retailer, Hot Topic Inc. (HOTT) posted third-quarter 2012 results with earnings per share of 10 cents, surging 42.9% from the comparable prior-period earnings of 7 cents a share. Moreover, the quarterly earnings surpassed the Zacks Consensus Estimate by a penny.
Hot Topic’s net sales for the quarter increased 2.0% year over year to $179.4 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 $183.0 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.
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.
Cost & Margin Performance
Cost of goods sold (COGS), including buying, distribution and occupancy costs, inched down 0.9% to $115.2 million. As a percentage of revenue, adjusted COGS decreased 190 basis points to 64.2%. Consequently, gross profit surged 7.8% to $64.2 million and gross margin expanded 200 basis points to 35.9%.
Also, the company had revealed the reason behind a significant expansion in gross margin when it announced its sales results. Management believes that the company’s Torrid store concepts have exhibited a significant improvement in gross margins along with 10.0% increase in sales of regular price merchandise. Moreover, management was delighted by the success of the company’s namesake apparel and tee businesses, which resulted in better gross margins.
Selling, general & administrative expenses rose 3.6% to $57.4 million compared with $55.4 million in the prior-year quarter. Based on revenues, it expanded 50 basis points to 32.0%. Income from operations in the quarter came in at $6.9 million compared with $4.2 million in the year-ago quarter.
Other Financial Details
At the end of the third quarter of fiscal 2012, Hot Topic had cash, cash equivalents and short-term investments of $58.8 million, up from $41.8 million at the end of the third quarter of fiscal 2011. Shareholders' equity was $184.8 million compared with $178.1 million in the prior-year period.
The company’s total capital expenditures for the nine months ended October 27, 2012 were $30.0 million, primarily related to store construction projects and IT projects. Cash flows from operating activities for the period grew $21.0 million compared to the prior year.
Dividend
Hot Topic has always been committed to create value to its shareholders by returning capital in the form of dividends. To improve shareholders’ wealth, the company’s Board of Directors recently declared a quarterly dividend of 8 cents per share, payable on December 28, 2012 to shareholders of record as of December 14, 2012.
Store Update
During the quarter, Hot Topic opened 18 Torrid stores, shut 3 Torrid stores. Additionally, the company remodeled or relocated nearly 13 Hot Topic stores and 1 Torrid stores. Thus, the company’s net stores at the end of the quarter included 620 Hot Topic stores and 186 Torrid stores. Hot Topic plans to launch 3 new Torrid stores in the fourth quarter of fiscal 2012.
For fiscal 2013, the company strategizes to open about 40 new Torrid stores in strip centers and 15 Hot Topic outlet stores. Additionally, the company plans to relocate around 10-15 Torrid stores from mall locations to strip centers and renovate around 60 Hot Topic stores.
A New Store Concept
Hot Topic announced a new store concept known as ‘Blackheart’, which will feature a varied range of lingerie collections during its sales release. 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. Further, the company plans to launch 5-10 stores in fiscal 2013.
This new store concept will examine the possibility of taking advantage of the company’s existing customer base by offering them an entirely different range of product category. The company believes that the new product launch will not harm its core brand products.
Guidance
Hot Topic provided its earnings guidance for the fourth quarter of fiscal 2012 at the time of reporting its third quarter comparable sales result on October 31, 2012. Hot Topic estimates fourth-quarter 2012 earnings per share between 23 cents and 27 cents compared with 21 cents per share recorded in the year-ago period. The current Zacks Consensus Estimate for the fourth quarter stands at 25 cents per share.
Further, the company guides net sales in the range of $230–$240 million based on comparable-store sales growth in the low to mid-single-digit percentage range. Gross margins are also expected to increase substantially compared with the last year.
Hot Topic’s total planned capital expenditures for fiscal 2012 remains at about $37.0 million, whereas for fiscal 2013, capital expenditure is expected to be about $50.0 million. Out of $50.0 million to be deployed as capital expenditure in fiscal 2013, the company anticipates $35.0 million to be used for stores developments.
Peer Performance
One of Hot Topic’s closest competitors, Abercrombie & Fitch Co. (ANF) recently reported an outstanding financial result for the third quarter of fiscal 2012 with earnings rising over 52% year over year to 87 cents per share, handily beating the Zacks Consensus Estimate of 59 cents per share. The robust quarterly performance was primarily driven by strong top-line growth along with improved margins and lower effective tax rate.
Zacks Rank & Recommendation
Hot Topic currently carries a Zacks #4 Rank implying a short-term Sell rating for the upcoming 1-3 months. However, we maintain our long-term ‘Neutral’ recommendation on the stock.
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