Hot Topic, Inc. (HOTT)
F2Q08 Earnings Call
August 20, 2008 4:30 pm ET
James McGinty – Chief Financial Officer
Elizabeth McLaughlin – Chief Executive Officer & Director
Gerald Cook – President
Christopher F. Daniel – President Torrid
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.
Welcome to the Hot Topic second quarter 2008 earnings release conference call. (Operator Instructions)
Previous Statements by HOTT
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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.
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.