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Hot Topic, Inc. (HOTT)

Q4 2008 Earnings Call

March 11, 4:30 pm ET

Executives

James McGinty – Chief Financial Officer

Elizabeth McLaughlin – Chief Operating Officer

Christopher Daniel – President, Torrid

Analysts

Adrienne Tennant – FBR Capital Markets

[Steff Linset – Piper Jaffray]

Kimberly Greenberger – Citigroup

Holly Guthrie – Boenning & Scattergood

Jeff Van Sinderen – B. Riley & Company

Jennifer Black – Jennifer Black & Associates

Presentation

Operator

Welcome to the Hot Topic fourth quarter 2008 earnings release conference call. (Operator Instructions) I would like to remind you that during the course of the conference call the company will be making forward-looking statements such as statements relating to financial results, guidance and future financial performance, merchandise assortment, new initiatives and related matters and statements relating to key personnel and operational issues.

These statements as well as related information posted on the Hot Topics Investor Relations website involve risks and uncertainties that may cause actual results to differ materially from 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 period reports that Hot Topic files with the Securities and Exchange Commission including the most recent annual report on From 10-K and quarter report on Form 10-Q.

All forward-looking statements made on this call only are made and Hot Topics undertakes no obligation to update these statements to reflect subsequent events or circumstances. To more effectively disseminate the information discussed this afternoon, the 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 45637162 for approximately two weeks.

Now I will now turn the call over to Hot Topics Chief Financial Officer, Jim McGinty.

James McGinty

Good afternoon. This is Jim and welcome to the call. While on hold you have been listening to Party in your Bedroom by the band Cash Cash. My partners on the call today are Besty McLaughlin, Jerry 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 fourth quarter results and then comment on the balance sheet and cash flow. Following these details, I will turn it over to Betsy who will provide you with additional color on the quarter and the outlook.

First the results of the fourth 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 $17.3 million due to $10.7 million of sales gain related to the Hot Topic comparable store sales increase of 6.5%, a $6.6 million sales increase in internet sales, a $1.8 million sales gain from new and non comparable Torrid stores and $1.6 million sales gain from new and non comparable Hot Topic stores, a $300,000 sales gain from relocated or remodeled stores, and these gains were offset in part by a $900,000 sales reduction related to the Torrid comparable store sales decline of 2.7%, along with a $2.8 million sales reduction from closed stores.

For the quarter, total company consolidated comp increase was the result of a high single digit increase in the average number of transactions in comparable stores partially offset by a low single digit decrease in the consolidated average transaction value.

At Hot Topic, apparel was 56% of the total sales in the fourth quarter versus 59% last year. At Torrid, apparel was 75% of the total sales in the fourth quarter versus 77% last year.

Gross margin was 38.6% of sales compared to 36.4% last year. This is the highest quarterly gross margin achieved by the business since 2003. The 220 basis point increase breaks down into the following categories; merchandise margin improved by 130 basis points driven primarily by the favorable higher realized markup along with lower shrinkage and associated discounts.

Store occupancy expenses declined 50 basis points primarily as a result of the leverage gained on the higher sales space. Store depreciation expenses declined 40 basis points against the leverage on the sales improvement as well as fewer store remodels and relocations.

As a percent of sales, buying and distribution costs were flat to last year. In the fourth quarter, selling, general and administrative expenses were 29.0% of net sales compared to 27.9% last year. SG&A expenses in the fourth quarter of fiscal 2008 include approximately $460,000 in charges associated with store impairment and asset write off. Impairment in the fourth quarter a year ago was approximately $600,000.

Excluding these non recurring charges for both this year and last, SG&A expenses were 120 basis points higher this year. This breaks down into the following categories; other G&A expenses including administrative depreciation and amortization increased 160 basis points due to the accrual of performance based bonus expense.

Marketing expenses increased 30 basis points to last year related to the launch of Shock Hound and in store events. Payroll declined 20 basis points due to leverage on the comparable store sales, partially offset by an increase in store bonus payouts.

And lastly, other store expenses declined 50 basis points due to savings in telecommunication fee, pre opening expenses and physical inventory costs.

Fourth quarter income increased $3.9 million to $22.9 million. Operating margin for the fourth quarter was 9.6% of sales versus 8.5% last year.

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