ANF Abercrombie and Fitch Co

We have maintained our long-term 'Neutral' recommendation on Hot Topic Inc. (HOTT) with a target price of $8.00 per share.

Moreover, the company has a Zacks #2 Rank, implying a short-term 'Buy' rating on the stock.

With its core business strategy of focusing on pop culture-related merchandise, Hot Topic has carved a niche for itself amid a highly competitive specialty retailing industry. The company's stores are strategically located in shopping malls and lifestyle centers, which are frequented by the teenagers, the company’s primary target segment.

Furthermore, Hot Topic's quarterly loss of 8 cents per share was in line with the Zacks Consensus Estimate and marked a substantial recovery from the prior-year quarter's loss of 14 cents.

Moreover, the company reported a growth of 2.6% in same-store sales from the prior-year quarter, consequently increasing its total revenue by 0.7%.

Moving ahead, the company has issued its earnings guidance for fiscal 2011 in the range of 17 cents to 23 cents per share on the back of low-single-digit same store sales growth, compared with the loss of a penny in fiscal 2010.

Hot Topic regularly monitors store sales and takes prudent steps to align merchandise mix in accordance with the rapidly changing preferences of its target customers. Furthermore, the company periodically evaluates its stores and remodels or relocates them in accordance with the latest trends and hip-hop happenings.

The company has a healthy debt-free balance sheet, with cash and cash equivalents of $72.6 million at the end of the second quarter of fiscal 2011. This offers Hot Topic the financial flexibility to drive future growth.

However, Hot Topic's business is seasonal in nature and generates high proportion of sales during the fiscal third and fourth quarters, which are characterized by the back-to-school, Halloween and holiday seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver expected operating performance.

Also, Hot Topic sources its merchandise primarily from foreign vendors and manufacturers. Therefore, the company is vulnerable to political, social and economic risks associated with operations in these countries.

Above all, Hot Topic operates in a highly fragmented specialty retail sector and faces intense competition from other teenage-focused retailers, such as Abercrombie & Fitch Company (ANF) and American Eagle Outfitters Inc. (AEO). The company also competes with Wal-Mart Stores Inc. (WMT) and Best Buy Company (BBY). Consequently, this may dent the company's future growth prospects.

 
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HOT TOPIC INC (HOTT): Free Stock Analysis Report
 
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