ANF Abercrombie and Fitch Co

On August 17, 2011, specialty retailer Hot Topic Inc. (HOTT) announced financial results for the second quarter of fiscal 2011.

Street analysts had more than a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.

Earnings Review

Hot Topic 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%.

(Read our full coverage on this earnings report: Hot Topic Matches EPS, Cuts Loss)

Agreement of Estimate Revisions

Despite the company’s underperformance in the reported quarter, the analyst community has remained positive with upward estimate revisions for the upcoming quarter as well as fiscal years 2011 and 2012, over the past one week.

In the last one week, 3 out of 5 analysts have moved their estimates in the upward direction for the third quarter of fiscal 2011 while, for fiscal 2011, 5 of 6 analysts have revised their estimates upward with no downward movement. For fiscal 2012, the analysts remained optimistic with 5 out of 6 analysts moving their estimates upward without any downward movement by any analyst.

Magnitude of Estimate Revisions

As a result of positive estimate revisions seen over the past one week, the Zacks Consensus Estimates, for fiscal 2011 and 2012, have gone up by 4 cents and 6 cents to 20 cents and 28 cents a share, respectively. However, for the third quarter of fiscal 2011, the estimate has remained static at 8 cents a share.

Our Recommendation

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 #2 Rank (Buy) implying upward 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 there at other retailers.

The company operates in a highly fragmented specialty retail sector and faces intense competition from larger teenage-focused retailers such as Abercrombie & Fitch Co. (ANF).

About Earnings Estimate Scorecard

Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/

 
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