ANF Abercrombie and Fitch Co

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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