ANF Abercrombie and Fitch Co

Shopping mall based specialty retailer, Hot Topic Inc. (HOTT) reported its fourth-quarter 2011 results with earnings of 21 cents per share. The reported earnings were above the higher end of the company’s previously announced guidance range of 19 cents to 20 cents and soared from the prior-period adjusted earnings of 12 cents. The year-over-year increase in quarterly earnings was primarily driven by improved margins resulting from the company’s cost reduction initiative. Moreover, the quarterly earnings also beat the Zacks Consensus Estimate by a penny.

Hot Topic’s net sales for the fourth quarter dipped 1.2% year over year to $210 million, on account of sales decline at both namesake and Torrid concepts. Quarterly sales, however, fared better than the Zacks Consensus Estimate of $208 million.

Hot Topic’s fiscal fourth-quarter 2011 comparable store sales (comps) was up 1.3% compared with negative comps of 2.1% reported in the year-ago period. Comps increase in the quarter was driven by a 2.2% rise in comps at the company’s namesake stores, offset by a 3.2% decline recorded at the Torrid stores.

Cost & Margin Performance

Adjusted cost of goods sold (COGS), including buying, distribution and occupancy costs, inched down 1.9% to $135.7 million. Based on revenues, adjusted COGS decreased 50 basis points to 64.6%. Consequently, gross profit went up 0.2% to $74.2 million and gross margin expanded 50 basis points to 35.4%.

Adjusted selling, general & administrative expenses decreased 8.7% to $59.4 million, and based on revenues, declined 230 basis points to 28.3%. Adjusted operating income in the quarter came in at $14.8 million compared with an operating income of $9 million in the year-ago quarter. Consequently, operating margin surged 290 basis points to 7.1%.

Other Financial Details

At the end of fiscal 2011, Hot Topic had cash, cash equivalents and short-term investments of $66.1 million, down from $76.6 million at the end of fiscal 2010. Shareholders' equity came in at $183 million compared with $217.5 million in the prior-year period.

During fiscal 2011, Hot Topic repurchased 3,212,628 shares for a total of $25.0 million (at an average cost of $7.78 per share) and completed the $25.0 million share repurchase program authorized by its board of directors.

The company raised its quarterly dividend by 14%. Hot Topic will now pay a dividend of 8 cents per share compared with 7 cents paid in the year-ago quarter.

Fiscal 2011 summary

Hot Topic’s earnings for fiscal 2011 came in at 19 cents per share compared with a loss of 1 cent in the previous fiscal. Moreover, earnings were in line with the Zacks Consensus Estimate.

For fiscal year 2011, the company’s comps inched up 0.6%, with a 0.1% comps increase at the namesake stores and a 2.5% rise in Torrid comps compared with negative comps of 5.3% reported in fiscal 2010. However, fiscal year sales declined 1.5% from last year to $697.9 million, but managed to surpass the Zacks Consensus Estimate of $696 million.

Store Update

During the quarter, the company closed 6 Hot Topic stores and opened net 2 Torrid stores. The company ended the fiscal with 628 Hot Topic stores and 148 Torrid stores.

Guidance

The company estimates first-quarter 2012 earnings per share between 2 cents and 5 cents, on the back of mid-single-digit increase in same store sales. Currently, the Zacks Consensus Estimate stood at $0.00 per share, which is below the lower end of the guidance range.

Peer Performance

One of Hot Topic’s closest competitors, Abercrombie & Fitch Co.’s (ANF) adjusted earnings of $1.12 per share for the fourth quarter hit the bull’s eye, coming in line with the Zacks Consensus Estimate. However, quarterly earnings for the quarter were down 18.8% from the year-ago quarter earnings of $1.38 per share.

Our Take

We believe 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 #2 Rank (Buy) indicating an upward directional pressure on the stock over the near term.

 
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