We have retained our Neutral stance on
Hot Topic Inc.
) as we remain impressed by the company's strong third-quarter
performance and bullish fiscal 2013 outlook. However, the
company's declining comps transactions and rich valuations keep
us on the sidelines.
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Mall-based specialty retailer, Hot Topic, operates its Hot Topic
and Torrid store concepts across the U.S. as well as an e-space
music discovery concept, ShockHound. The company's business
strategy is based on the foundation of the pop culture and its
relevance for the targeted segment of teen customers. Hot Topic
operates in a unique market niche by focusing on music and
music/pop culture-oriented merchandise, offering products
typically unavailable at other retailers through continuous
emphasis on superior customer service.
In November 2012, the company launched a new store concept,
Blackheart, through which it is offering intimate apparels for
women aged between 18 and 30. Blackheart branded lingerie,
accessories and beauty products are now available online at
www.blackheartlingerie.com, whereas 5 Blackheart stores have been
opened in Southern California and Texas.
We believe Hot Topic is advantageously positioned in North
Limited Brands Inc
) La Senza stores, which operates stores only in Canada and is
spread internationally. Therefore, we anticipate that the new
brand will be accretive to the company's top line.
Moreover, it posted a 42.9% increase in earnings per share for
third-quarter fiscal 2012, aided by lower cost of goods sold
(COGS) and improvement in gross margin. The company's earnings
per share of 10 cents also came ahead of the Zacks Consensus
Estimate by a penny. Net sales inched up 2.0% year over year to
Further, Hot Topic reaffirmed its earnings expectation of 23
cents - 27 cents per share for the fourth quarter. Looking ahead,
the company is quite bullish for fiscal 2013 and expects earnings
per share to increase in the range of 30% - 35% from the fiscal
On the flip side, we observe that comps transactions have been
falling year over year since the last 5 quarters. Moreover, the
stock is trading at a premium compared with the industry average
based on our forward earnings estimates that limits its further
upside. Additionally, prevailing sluggish economic growth,
intense competition and seasonal risk of business may undermine
the company's future operational performance.
Other Stocks to Consider
Besides Hot Topic, other stocks that we look up to in the apparel
stores industry are
Abercrombie & Fitch Co
Citi Trends Inc.
). Both these companies carry a Zacks Rank #1 (Strong Buy).