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Hot Topic, Inc. (HOTT)

F2Q08 Earnings Call

August 20, 2008 4:30 pm ET

Executives

James McGinty – Chief Financial Officer

Elizabeth McLaughlin – Chief Executive Officer & Director

Gerald Cook – President

Christopher F. Daniel – President Torrid

Analysts

Adrienne Tennant – Friedman, Billings, Ramsey & Co.

Stephanie Wissink – Piper Jaffray

Kimberly Greenberger – Citigroup

[David Burman – Burman Capital]

Elizabeth Pierce – Roth Capital Partners, LLC

Jeff Van Sinderen – B. Riley & Company, Inc.

Barbara Wyckoff – Buckingham Research Group

Dana Telsey – Telsey Advisory Group

Crystal Kallik – D. A. Davidson & Co.

Presentation

Operator

Welcome to the Hot Topic second quarter 2008 earnings release conference call. (Operator Instructions)

Before we begin, I would like to remind that during the course of this conference call, the company will be making certain forward-looking statements such as statements relating to financial results, guidance and future financial performance, merchandise assortment, new initiatives and related matters and things related to key personnel and operational issues. These statements as well as related information posted on the Hot Topic investor relations website involve risks and uncertainties that may cause actual results to differ materially than those projected in the forward-looking statements. These risks and uncertainties are discussed from time-to-time by the company and are more fully set forth in the periodic reports that Hot Topics files with the Securities & Exchange Commission including the most recent annual report on Form 10K and quarterly report on Form 10Q. All forward-looking statements made on this call speak only as of the time they are made and Hot Topic undertakes no obligation to update these statements to reflect subsequent events or circumstances.

To more effectively disseminate the information discussed this afternoon, this call is being webcast on the company’s investor relations website at http://investorrelations.hottopic.com and a replay will be available on that site. A replay will also be available at 888-286-8010 pass code 44743739 for approximately two weeks.

Now, I’ll turn the call over to Hot Topic’s Chief Financial Officer Jim McGinty.

James McGinty

My partners on the call today are Betsy McLaughlin, Gerry Cook and Chris Daniel. For competitive reasons we will not be discussing any specific forward-looking product information during this call. I will begin by discussing the second quarter results and the comment on the balance sheet and cash flows. Following these details, I will turn it over to Betsy who will provide you with additional color on the quarter followed by third and fourth quarter guidance.


First, the results for the second quarter. All comparisons discussed are to the same period a year ago unless otherwise noted. Overall, total company net sales during the quarter increased by $5.1 million due to a $5.1 million sales gain from new and non-comparable Torrid stores, a $1.9 million sales gain from new and non-comparable Hot Topic stores, a $1.6 million increase in Internet sales, a $700,000 sales reduction related to the Hot Topic comparable store sales decline of 0.6%, a $600,000 sales reduction related to the Torrid comparable sales decline of 2.1% and a $2.2 million sales reduction from closed stores. For the quarter the total company comp decline was the result of a 3% decrease in the consolidated average transaction value partially offset by a 2% increase in the average number of transactions in comparable stores.

At Hot Topic, apparel was 55% of the total sales in the second quarter versus 57% last year. At Torrid, apparel was 82% of the sales in the second quarter, similar to last year. Gross margin was 33.3% of sales compared to 31.5% last year. The 180 basis point increase breaks down in to the following categories: merchandise margins improved 80 basis points due to higher realized markup primarily the result of more favorable merchandise mix; store depreciation expenses declined 60 basis points due to fewer store remodels prior to their lease expiration; distribution costs improved by 40 basis points due to productivity improvements, lower depreciation expense and lower receipts; store occupancy expenses declined 10 basis points due to negotiated reduced rents partially offset by higher common area expenses; buying costs increased by 10 basis points due to higher payroll expenses.

In the second quarter, selling, general and administrative expenses were 34.0% of net sales compared to 33.6% last year. SG&A expenses in the second quarter of fiscal 2008 include approximately $200,000 in charges associated with store impairment and asset write off. Impairment in the second quarter a year ago was approximately $300,000. Excluding these charges for both this year and last, SG&A expense were 50 basis points higher this year. This breaks down in to the following categories: other G&A expenses including stock option expense increased by 90 basis points due to increased payroll expenses, legal expenditures, performance based bonuses and expenditures related to restricted stock award; marketing expenses increased 20 basis points primarily due to online marketing efforts and increased frequency of Torrid direct mailing, partially offset by declines in store signage. Store payroll increased 10 basis points due to higher bonus and medical benefit expenses. Store payroll costs were up 2% in an average store. Administrative depreciation and amortization declined 10 basis points due to a decrease in depreciation expense for computer hardware and software. And lastly, other store expenses declined 60 basis points, the savings related to the reduced telecommunication costs, lower repairs and maintenance, partially offset by an increase in store supplies. One last note on expenses, of the 50 basis points increase that I just reviewed, 30 basis points is directly attributable to ShockHound.

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