Hot Topic Matches EPS, Cuts Loss - Analyst Blog
August 18 2011 - 11:00AM
Zacks
Hot Topic Inc. (HOTT) reported second quarter
fiscal 2011 net loss of 8 cents a share, in line with the Zacks
Consensus Estimate and up substantially from the prior-year loss of
14 cents a share. Earnings per share in the reported quarter
exclude approximately 6 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 14 cents a share.
Total revenue increased 0.7% year over year to $150.9 million,
missing the Zacks Consensus Estimate of $179.0 million.
However, the company reported a same-store sales increase of
2.6%.
For the quarter, the HotTopic segment recorded same-store sales
increase of 1.2%. Despite the marginal increase, comparables
improved considerably from a drop of 6.5% in the prior-year
quarter. Sales for the period dipped 0.7% to $112.2 million.
The Torrid segment recorded same-store sales growth of 7.4%
compared with 6.0% in the year-ago period. Sales improved 5.3% year
over year to reach $38.7 million for the quarter.
Cost & Margin Performance
Cost of goods sold (COGS), including buying, distribution and
occupancy costs, decreased 1.6% to $102.3 million. Based on
revenues, COGS decreased 150 basis points to 67.8%. Consequently,
gross profit went up 5.7% to $58.7 million and gross margin
expanded 150 basis points to 32.2%.
Selling, general & administrative expenses increased to
$58.8 million and, based on revenues, declined 130 basis points to
37.6%. Operating loss in the quarter came in at $10.1 million,
compared with an operating loss of $10.4 million in the year-ago
quarter.
Financial Details
At the end of the second quarter, Hot Topic had cash and cash
equivalents of $72.6 million, up from $61.8 million at the end of
the second quarter of fiscal 2010. Shareholders' equity came in at
$199.8 million compared with $221.8 million in the prior-year
period.
Store Update
During the quarter, the company closed 7 Hot Topic stores and 6
Torrid stores, and opened 1 Hot Topic store. The company remodelled
8 Hot Topic stores during the quarter.
The company ended the quarter with 636 Hot Topic stores and 145
Torrid stores, compared with 679 Hot Topic stores and 155 Torrid
stores at the end of the second quarter of fiscal 2010.
Guidance
The company estimates third-quarter 2011 loss per share between
7 cents and 9 cents, on the back of low-single-digit same store
sales growth.
Peer Performance
Hot Topic’s close competitor, Abercrombie & Fitch
Co. (ANF) registered earnings of 35 cents a share in the
second quarter of fiscal 2011, considerably ahead of the Zacks
Consensus Estimate of 29 cents a share and the prior-year net
income of 24 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 #1 Rank (Strong Buy) implying
upward 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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