Shopping mall based specialty retailer,
Hot Topic Inc.
) reported its fourth-quarter 2011 results with earnings of 21
cents per share. The reported earnings were above the higher end of
the company's previously announced guidance range of 19 cents to 20
cents and soared from the prior-period adjusted earnings of 12
cents. The year-over-year increase in quarterly earnings was
primarily driven by improved margins resulting from the company's
cost reduction initiative. Moreover, the quarterly earnings also
beat the Zacks Consensus Estimate by a penny.
Hot Topic's net sales for the fourth quarter dipped 1.2% year
over year to $210 million, on account of sales decline at both
namesake and Torrid concepts. Quarterly sales, however, fared
better than the Zacks Consensus Estimate of $208 million.
Hot Topic's fiscal fourth-quarter 2011 comparable store sales
(comps) was up 1.3% compared with negative comps of 2.1% reported
in the year-ago period. Comps increase in the quarter was driven by
a 2.2% rise in comps at the company's namesake stores, offset by a
3.2% decline recorded at the Torrid stores.
Cost & Margin Performance
Adjusted cost of goods sold (COGS), including buying,
distribution and occupancy costs, inched down 1.9% to $135.7
million. Based on revenues, adjusted COGS decreased 50 basis points
to 64.6%. Consequently, gross profit went up 0.2% to $74.2 million
and gross margin expanded 50 basis points to 35.4%.
Adjusted selling, general & administrative expenses
decreased 8.7% to $59.4 million, and based on revenues, declined
230 basis points to 28.3%. Adjusted operating income in the quarter
came in at $14.8 million compared with an operating income of $9
million in the year-ago quarter. Consequently, operating margin
surged 290 basis points to 7.1%.
Other Financial Details
At the end of fiscal 2011, Hot Topic had cash, cash equivalents
and short-term investments of $66.1 million, down from $76.6
million at the end of fiscal 2010. Shareholders' equity came in at
$183 million compared with $217.5 million in the prior-year
During fiscal 2011, Hot Topic repurchased 3,212,628 shares for a
total of $25.0 million (at an average cost of $7.78 per share) and
completed the $25.0 million share repurchase program authorized by
its board of directors.
The company raised its quarterly dividend by 14%. Hot Topic will
now pay a dividend of 8 cents per share compared with 7 cents paid
in the year-ago quarter.
Fiscal 2011 summary
Hot Topic's earnings for fiscal 2011 came in at 19 cents per
share compared with a loss of 1 cent in the previous fiscal.
Moreover, earnings were in line with the Zacks Consensus
For fiscal year 2011, the company's comps inched up 0.6%, with a
0.1% comps increase at the namesake stores and a 2.5% rise in
Torrid comps compared with negative comps of 5.3% reported in
fiscal 2010. However, fiscal year sales declined 1.5% from last
year to $697.9 million, but managed to surpass the Zacks Consensus
Estimate of $696 million.
During the quarter, the company closed 6 Hot Topic stores and
opened net 2 Torrid stores. The company ended the fiscal with 628
Hot Topic stores and 148 Torrid stores.
The company estimates first-quarter 2012 earnings per share
between 2 cents and 5 cents, on the back of mid-single-digit
increase in same store sales. Currently, the Zacks Consensus
Estimate stood at $0.00 per share, which is below the lower end of
the guidance range.
One of Hot Topic's closest competitors,
Abercrombie & Fitch Co.
) adjusted earnings of $1.12 per share for the fourth quarter hit
the bull's eye, coming in line with the Zacks Consensus Estimate.
However, quarterly earnings for the quarter were down 18.8% from
the year-ago quarter earnings of $1.38 per share.
We believe 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
We reiterate our Neutral recommendation on Hot Topic until there
is some improvement in business trends. The company has a
Zacks #2 Rank (Buy) indicating an upward directional pressure on
the stock over the near term.
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