Shopping mall based specialty retailer
Hot Topic Inc.
) posted second-quarter 2012 results that met our expectations.
Loss per share of 2 cents was in line with the Zacks Consensus
Estimate, and compared favorably with the prior-year loss of 8
cents per share.
Despite a strong quarterly performance that helped boost net
sales by 4.6% year over year to $157.8 million, the company's
losses resulted from increased cost of goods sold and poor
operating margins. Quarterly sales were almost in line with the
Zacks Consensus Estimate of $158 million. The year-over-year
improvement in sales was mainly attributed to improved
merchandising, markdown optimization, and other productivity
initiatives at both the namesake and Torrid concepts.
Hot Topic's second-quarter 2012 comparable store sales (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 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.
Cost & Margin Performance
Adjusted cost of goods sold (COGS), including buying,
distribution and occupancy costs, increased 1.7% to $104.0 million.
As a percentage of revenue, adjusted COGS decreased 180 basis
points to 65.9%. However, gross profit surged 10.7% to $53.9
million and gross margin expanded 200 basis points to 34.2%.
Adjusted selling, general & administrative expenses inched
up 0.9% to $55.1 million compared with $54.6 million in the
prior-year quarter. Based on revenues, it declined 130 basis points
to 34.9%. Loss from operations in the quarter came in at $1.2
million compared with an operating loss of $6.0 million in the
Other Financial Details
At the end of the second quarter of fiscal 2012, Hot Topic had
cash, cash equivalents and short-term investments of $63.6 million,
down from $72.6 million at the end of the second quarter of fiscal
2011. Shareholders' equity was $182.7 million compared with $199.8
million in the prior-year period.
The company's total capital expenditures for the six months
ended July 28, 2012 were $19.5 million, primarily related to store
construction projects and IT projects. Cash flows from operating
activities for the period increased $10 million compared to last
year's $22.3 million.
During the quarter, Hot Topic opened 1 Hot Topic store and 10
Torrid stores, closed 5 Hot Topic stores and 3 Torrid stores.
Additionally, the company remodeled or relocated nearly 20 Hot
Topic stores and 4 Torrid stores. Thus, the company's net stores at
the end of the quarter included 620 Hot Topic stores and 171 Torrid
Hot Topic provided its earnings guidance for the third quarter
of fiscal 2012 at the time of reporting its second quarter
comparable sales result on August 15, 2012. Hot Topic estimates
third-quarter 2012 earnings per share between 8 cents and 10 cents
compared with 7 cents per share recorded in the year-ago
Further, the company guides net sales in the range of $181-$185
million based on comparable-store sales growth in the low
single-digit percentage range. The current Zacks Consensus Estimate
for the third quarter stands at 9 cents per share.
Looking ahead, the company plans to open nearly 18 new Torrid
stores in the third quarter of fiscal 2012 and 3 Torrid stores in
the fourth quarter. Additionally, the company's third quarter store
plans include remodeling of 16 Hot Topic stores and 1 Torrid store
as well as relocating 2 Torrid stores to strip center locations
from malls. Moreover, the company is slated to close down about 3
Torrid stores in the third quarter.
Overall, the company expects nearly 20% of its Torrid stores to
be relocated to strip centers by the end of fiscal 2012.
The company's total planned capital expenditures for fiscal 2012
include nearly $25 million slated for store projects and $12
million for new IT systems. Further, the company expects to make
additional capital expenditures in fiscal 2012 for other strategic
and operational purposes. Depreciation and amortization is expected
to be approximately $35 million for the full year of 2012.
One of Hot Topic's closest competitors,
Abercrombie & Fitch Co.
) adjusted earnings of 19 cents per share for the second quarter of
fiscal 2012 beat the Zacks Consensus Estimate of 17 cents. However,
the quarterly earnings dipped substantially from the year-ago
earnings of 35 cents 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
Currently, we are maintaining our long-term 'Outperform'
recommendation on Hot Topic. Moreover, the company has a Zacks #1
Rank implying a short-term 'Strong Buy' rating on the stock.
ABERCROMBIE (ANF): Free Stock Analysis Report
HOT TOPIC INC (HOTT): Free Stock Analysis
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