We recently upgraded our long-term recommendation on the
mall-based specialty retailer
Hot Topic Inc.
) based on the company's robust first-quarter 2012 results. We also
remain encouraged by the company's history of delivering consistent
operating performance, its solid niche market position, strong
brand portfolio, ongoing cost cutting initiatives, ability to tweak
merchandise in line with the rapidly changing trends and debt-free
Hot Topic's first-quarter 2012 earnings of 9 cents per share
came ahead of its prior-year period break-even earnings, beating
its own guidance range of 7 cents - 8 cents per share. The company
registered a year-over-year growth of 6.4% in net sales. The
company's ongoing cost-cutting initiatives further helped to
deliver a robust year-over-year expansion in the company's gross
and operating margins. Looking ahead, the company expects losses in
the range of 4 cents to 6 cents in the second quarter, much lower
than the prior-year period loss of 14 cents.
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. With this strategy,
Hot Topic has successfully carved a niche for itself amid a highly
competitive specialty retailing space. The company competes
head-to-head with other teenage focused specialty retailers like
Abercrombie & Fitch Company
American Eagle Outfitters Inc.
Moreover, as the icing on the cake, Hot Topic's stores are
strategically located in shopping malls and lifestyle centers,
which are frequented by teenagers, the company's primary target
segment. The company also regularly monitors store sales and takes
prudent steps to align merchandise mix in accordance with the
rapidly changing preferences of its target customers. On the other
hand, the company periodically evaluates its stores and remodels or
relocates them in accordance with the latest trends and hip-hop
To conclude, Hot Topic maintains a healthy debt-free balance
sheet, with cash and cash equivalents and short-term investments of
$69.6 million at the end of first-quarter 2012. This offers Hot
Topic the financial flexibility to drive future growth.
However, the company has a Zacks #3 Rank, implying a short-term
'Hold' rating, due to the macroeconomic headwinds, intense
competition and seasonal nature of the business that undermine the
company's future growth prospects.
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