Hot Meets, Revenue Down - Analyst Blog
November 17 2011 - 4:45AM
Zacks
Shopping mall based specialty
retailer, Hot Topic Inc.’s (HOTT) third-quarter
2011 earnings of 7 cents per share were in line with the lower end
of the company’s previously announced guidance range of 7 cents to
9 cents and soared from the prior-period earnings of 5 cents.
Moreover, the quarterly earnings also met the Zacks Consensus
Estimate.
Total revenue decreased 4.0% year
over year to $175.8 million, missing the Zacks Consensus Estimate
of $178.0 million primarily due to a decline of 1.6% in total
comparable store sales, resulting from disappointed sales of
Halloween-related merchandise.
For the quarter, same-store sales
at the Hot Topic segment declined 2.2% compared with a decline of
5.8% in the year-ago quarter. Sales for the period dipped 4.8% to
$137.0 million.
The same-store sales at Torrid
segment inched up 1.1% compared with a decline of 1.5% in the
year-ago period. Sales marginally fell by 0.6% year over year to
$38.7 million for the quarter.
Cost & Margin
Performance
Cost of goods sold (COGS),
including buying, distribution and occupancy costs, decreased 2.0%
to $116.2 million. Based on revenues, COGS increased 130 basis
points to 66.1%. Consequently, gross profit went down 7.7% to $59.6
million and gross margin contracted 130 basis points to 33.9%.
Selling, general &
administrative expenses decreased 13.8% to $55.4 million, and based
on revenues, declined 360 basis points to 31.5%. Operating income
in the quarter came in at $4.2 million, compared with an operating
income of $321,000 in the year-ago quarter. Consequently, operating
margin surged 220 basis points to 2.4%.
Other Financial
Details
At the end of the third quarter,
Hot Topic had cash, cash equivalents and short-term investments of
$41.8 million, down from $58.0 million at the end of the third
quarter of fiscal 2010. Shareholders' equity came in at $178.1
million compared with $220.1 million in the prior-year period.
Hot Topic has repurchased 3,212,628
shares for a total of $25.0 million (at an average cost of $7.78
per share) in between August 24 and November 2, 2011 and completed
the $25.0 million share repurchase program authorized by the board
of directors.
Store Update
During the quarter, the company
closed 2 Hot Topic stores and opened 1 Torrid store. The company
remodeled 10 Hot Topic stores and 1 Torrid store during the
quarter. The company ended the quarter with 634 Hot Topic stores
and 146 Torrid stores.
Guidance
The company estimates
fourth-quarter 2011 earnings per share between 16 cents and 20
cents, on the back of flat to low-single-digit decline in same
store sales. Currently, the Zacks Consensus Estimate stood at 17
cents per share which is closer to the lower end of the guidance
range.
Peer
Performance
Hot Topic’s close competitor,
Abercrombie & Fitch Co.’s (ANF) third-quarter
2011 earnings of 57 cents per share was substantially below the
Zacks Consensus Estimate of 73 cents. However, quarterly earnings
were marginally higher than the prior-period earnings of 56 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.
We reiterate our Neutral
recommendation on Hot Topic until there is some improvement in
business trends. The company has a Zacks #4 Rank (Sell)
indicating a downward directional pressure on the stock over the
near term.
ABERCROMBIE (ANF): Free Stock Analysis Report
HOT TOPIC INC (HOTT): Free Stock Analysis Report
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