With its ability to tweak merchandise in accordance with the
rapidly changing trends,
Hot Topic Inc.
) once again posted positive sales and comparable store sales
(comps) results in the third quarter ended October 27, 2012.
Moreover, the company also maintained its view for the third and
the fourth quarters.
Hot Topic's third-quarter comps inched up 0.2% compared with a
dip of 0.5% reported in the comparable year-ago period. The
marginal increase in comps in the reported quarter was driven by
a 0.1% rise in comps at the company's namesake stores and a 0.5%
hike in Torrid stores. The hike also resulted from improvements
in fashion attire partially offset by a decline in the
Hot Topic's net sales for the quarter increased 2.0% year over
year to $179.3 million, on account of robust sales in Torrid
concepts stores, partially offset by fall in the company's
namesake stores. However, quarterly sales missed the Zacks
Consensus Estimate of $184.0 million.
On a segmental basis, net sales crept down 1.6% year over year
to $134.9 million at the company's namesake stores, while Torrid
stores registered a 14.9% increase with sales of $44.4 million.
During the third quarter, the company launched 18 new Torrid
Management believes that the company's Torrid store concepts
have marked significant improvement in gross margins along with
10.0% increase in sales of regular price merchandise. Moreover,
management was delighted with the success in the company's
namesake apparel and tee businesses resulting in better gross
Year-to-date Sales Data
During the first nine months of fiscal 2012, the company's
total sales grew 4.2% to $508.7 million driven primarily by
strong sales in both namesake and Torrid concepts. Net sales
improved 2.1% year over year to $373.1 million at the company's
namesake stores, while Torrid stores registered a 10.6% increase
with sales of $135.6 million.
During the nine months period, Hot Topic's comps were up 3.8%
compared with 1.2% reported in the year-ago period. This increase
was driven by 4.2% and 2.4% increases in comps at the company's
namesake stores and Torrid stores, respectively.
Strolling Through Guidance
As a result of better gross margins in both the brands,
management maintained its earnings guidance for the third and
fourth quarter as well. For the third quarter, the company
anticipates earnings to be in the range of 8-10 cents per share
compared with 7 cents earned in the third quarter of 2011. The
current Zacks Consensus Estimate stands at 9 cents per share for
Further, management expects an expansion of about 150-200
basis points in gross margin for the third-quarter.
Moreover, for the fourth quarter, the company again maintained
its earnings guidance range of 23-27 cents per share versus 21
cents recorded in the prior-year quarter. The company's guidance
is based on comps growth in the low to mid-single-digit range.
The current Zacks Consensus Estimate earnings for fourth quarter
stand at 25 cents per share.
Share Repurchase Program
The company's Board of Directors sanctioned an additional
amount to its share repurchase program, up to $25.0 million of
the company's common stock. The timings of the repurchases were
not disclosed in the press release.
A New Store Concept
Hot Topic announced that it will soon introduce a new store
concept known as 'Blackheart', which will feature a varied range
of lingerie collections. Blackheart lingerie, accessories and
beauty products will be available online at
from November 15, 2012, whereas five Blackheart stores will be
launched in Southern California and Texas by mid-November.
This new store concept will examine the possibility of taking
advantage of the company's existing customer base by offering
them all together a different range of product category. The
company believes that the new product launch will not harm its
core brand products.
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. At the
end of the third quarter, the company operated 620 Hot Topic
stores across 50 states and in Puerto Rico as well as in Canada
and 186 Torrid stores. The company's e-commerce business looks
strong and it runs two e-commerce sites - hottopic.com and
Hot Topic 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.
However, 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.
As a result, we have a long-term 'Neutral' recommendation on
the stock. However, Hot Topic, which competes with
Abercrombie & Fitch Co.
), carries a Zacks #4 Rank, implying short-term Sell rating for
the upcoming 1-3 months, mainly due to continued fall in the
comparable-store sales transactions at Hot Topic's namesake
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