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Hot Topic Inc. (HOTT)

Q2 2009 Earnings Call

August 19, 2009; 04:30 pm ET

Executives

Betsy McLaughlin - Chief Executive Officer

Jim McGinty - Chief Financial Officer

Jerry Cook - Chief Operating Officer

Chris Daniel - President - Torrid

Analysts

Jeff Klinefelter - Piper Jaffray

Janet Kloppenburg - JJK Research

Adrienne Tennant - FBR

Jennifer Black - Jennifer Black & Associates

David Berman - Berman Capital

Kimberly Greenberger - Citigroup

Dana Telsey - Telsey Advisory Group

Holly Guthrie - Boenning & Scattergood

Sharon Zackfia - William Blair

Jeff Van Sinderen - B. Riley

Presentation

Operator

Good afternoon, ladies and gentlemen and welcome to the Hot Topic second quarter 2009 earnings release conference call. At this time all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. This call will be limited to one hour.

Before we begin, I would like to remind you that during the course of the 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 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 periodic reports that Hot Topic files with the Securities and Exchange Commission including the most recent Annual Report on From 10-K and Quarterly Report on Form 10-Q.

All forward-looking statements made on this call speak only as of the time they 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, 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. The telephone number is 888-286-8010 and the passcode is 16121790 for approximately two weeks.

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

Jim McGinty

This is Jim and welcome to the call. While on hold you’ve been listening to Panic Switch from Silversun Pickups. My partners on the call today are Betsy 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 second quarter results and then comment on the balance sheet and cash flow. Following these details, I will turn it over to Betsy, who’ll provide you with additional color on the quarter followed by third quarter guidance.

First, results from the second quarter, all comparisons discussed are to the same period from a year ago unless otherwise noted. Overall, total company net sales during the quarter decreased $9 million due to an $8.7 million sales reduction related to the Hot Topic comparable store sales decline of 7.5%, a $2.7 million sales reduction related to the Torrid comparable stores sales decline of 8.4% or $1.5 million sales reduction from closed stores, a $200,000 sales gain from new and non-comparable Hot Topic stores and $900,000 sales gain from new and non-comparable Torrid stores and a $2.8 million increased in internet sales.

For the quarter, the total company comp decline was the result of 4% decrease in the consolidated average transactions value and a 4% decrease in the average number of transactions in comparable stores. At Hot Topic, apparel was 54% of the total sales in the second quarter versus 59% last year. At Torrid, apparel was 79% of the sales in the second quarter compared to 82% last year.

Gross margin was 31.5% of sales compared to 33.3% last year. The 180 basis point decrease breaks down into the following categories. Merchandise margin declined 80 basis points due to higher mark downs partially offset by higher realized markup. Store occupancy expenses increased 50 basis points due to deleverging store costs over a lower comparable store sales base.

Store depreciation expenses increased 30 basis points due to deleverging from lower comparable store sales. Distribution cost and buying cost increased by 20 basis points due to deleverging of higher depreciation and payroll cost over the lower comparable store sales.

In the second quarter selling, general and administration expenses were 34.9% of net sales compared to 34.0% last year. SG&A expenses in the second quarter of fiscal 2009 include approximately $400,000 in charges associated with store impairment and asset write-off. Impairment in the second quarter a year ago was approximately $200,000. Excluding these charges for both this year and last, SG&A expenses were $1.8 million lower though 80 basis points higher as a result of the deleverage in the lower sales volume.

This breaks down into the following categories. Store payroll dollars decreased compared to last year, but increased 80 basis points due to deleveraging of lower comparable store sales partially offset by lower store performance based bonuses. Other store expenses increased 30 basis points due to deleveraging on lower comparable store sales and higher repairs and maintenance partially offset by a decrease in store supply costs.

Other G&A declined 10 basis points due to decrease and non-store performance based bonuses. In addition lower depreciation in computer and software was offset by an increase in marketing as a percentage of sales. Preopening expenses declined 20 basis points as a result of fewer new, relocated and remodeled stores as well as the pre-launch expenses for ShockHound last year.

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