ANF Abercrombie and Fitch Co

Hot Topic Inc. (HOTT) reported first quarter fiscal 2011 earnings of 0 cents a share, in line with the Zacks Consensus Estimate. However, it improved substantially from the prior-year loss of 4 cents a share. Earnings per share in the reported quarter exclude approximately 17 cents of expenses related to the implementation of the previously announced cost reduction plan and strategic business changes. Including the said expenses, loss per share came in at 17 cents a share.

Total revenue declined 0.8% year over year to $161.3 million, marginally beating the Zacks Consensus Estimate of $159.0 million.  However, the company reported a same-store sales increase of 0.2%, reversing the fall of 8.7% in the first quarter of fiscal 2010.

The Hot Topic segment reported same-store sales decline of 1.3% in the quarter. Though in the red, comparables improved considerably from a drop of 12.3% in the prior-year quarter. Sales for the period decreased 3.1% to $116.1 million.

The Torrid concept recorded same-store sales growth of 4.8%, flat with the year-ago quarter. Sales improved 5.5% year over year to reach $45.3 million for the first quarter of fiscal 2011.

Cost & Margin Performance

Cost of goods sold (COGS), including buying, distribution and occupancy costs, decreased 2.5% to $105.5 million. Based on revenues, COGS decreased 110 basis points to 65.4%. Consequently, gross profit went up 2.4% to $55.8 million and gross margin expanded 110 basis points to 34.6%.

Selling, general & administrative expenses increased to $40.0 million and, based on revenues, declined 80 basis points to 34.5%. Operating profit in the quarter came in at $40 million, compared with an operating loss of $2.9 million in the year-ago quarter. Operating margin in the quarter came in at 24.8%.

Financial Details

At the end of the first quarter, Hot Topic had cash and cash equivalents of $73.7 million, up from $68.9 million at the end of the first quarter of fiscal 2010. Shareholders' equity came in at $206.5 million compared with $229.7 million in the prior-year period.

Store Update

During the quarter, the company closed 15 Hot Topic stores, opened 1 Torrid store and closed 3 Torrid stores. The company remodeled 11 Hot Topic stores during the quarter.

The company ended the quarter with 642 Hot Topic stores and 151 Torrid stores, compared with 681 Hot Topic stores and 156 Torrid stores at the end of the first quarter of fiscal 2010.

Guidance

The company estimates second-quarter 2011 loss per share between 9 cents and 11 cents, on the back of flat same store sales growth.

Peer Performance

Hot Topic’s close competitor, Abercrombie & Fitch Co. (ANF), registered earnings of 27 cents a share in the first quarter of fiscal 2011, considerably ahead of the Zacks Consensus Estimate of 11 cents a share and beating substantially the prior-year net loss of 13 cents per share.

Our Take

Hot Topic’s niche market position, strong brand recall, ability to tweak merchandise in line with rapidly changing trends and a debt-free balance sheet augur well for operating performance. However, macroeconomic headwinds, intense competition from other specialty retailers and the seasonal nature of the business severely undermine the company’s future growth prospects. Until we see business trends improving, the Neutral rating is being maintained. The company has a Zacks #3 Rank (Strong Hold) implying no directional pressure on the stock over the near term.

Hot Topic is a shopping mall-based specialty retailer operating the Hot Topic and Torrid store concepts across the U.S. as well as the e-space music discovery concept, ShockHound. The company’s business strategy is based on the foundation of pop culture and its appeal to teen customers, its target audience. Hot Topic operates in a unique market niche by focusing on music and music/pop culture-oriented merchandise, offering products that are typically not available at other retailers.

 
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