We have recently downgraded our recommendation on
Hot Topic Inc.
) to 'Neutral' based on its declining comparable-store sales
transactions. Moreover, the stock is trading at a premium
pertaining to our forward earnings estimates that limit its
We observe that comparable-store sales transactions at Hot
Topic's namesake stores have been falling year over year since
the last four quarters. In the second quarter of fiscal 2012,
number of transactions dropped by 8%, whereas in the first
quarter it dipped 6%. During the fourth and third quarters of
fiscal 2011, it decreased 7% and 8%, respectively.
Further, Hot Topic's business is seasonal in nature and
generates high proportion of sales during fiscal third and fourth
quarters, which are characterized by the back-to-school,
Halloween and holiday seasons. As a result, the company is
exposed to significant risks if the seasons fail to deliver
expected operating performance.
The company faces intense competition from other
teenage-focused retailers in the industry such as
Abercrombie & Fitch Co.
American Eagle Outfitters Inc.
) on the basis of brand recognition, fashion, price, service,
store location, and quality. Consequently, this may hamper Hot
Topic's top and bottom-line performances.
On the reverse side of the story, Hot Topic recently posted
strong second quarter of fiscal 2012, which was in line with the
Zacks Consensus Estimate. The company posted a loss of 2 cents
that fared better than the prior-year loss of 8 cents. Moreover,
net sales grew 4.6% during the quarter.
Looking ahead, Hot Topic is quite bullish for the remaining
period of fiscal 2012. The company now expects earnings in the
range of 8-10 cents per share and 23-27 cents for the third and
fourth quarters, respectively.
Another positive point for Hot Topic is that the company
regularly monitors store sales and takes prudent steps to align
merchandise mix in accordance with the rapidly changing
preferences of its target customers. Furthermore, the company
periodically evaluates its stores and remodels or relocates them
in compliance with the latest trends. Hot Topic intends to open
18 new stores, remodel 16 and close 3 stores, during third
Based on the above analysis, we believe that the investors
should seek for better visibility for Hot Topic's prospective in
the long term, before investing their money on this stock.
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HOT TOPIC INC (HOTT): Free Stock Analysis
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