ANF Abercrombie and Fitch Co

Shopping mall-based specialty retailer Hot Topic Inc. (HOTT) reported fairly good earnings results for the fourth quarter and fiscal 2011. The company’s quarterly sales and earnings smoothly surpassed the Zacks Consensus Estimate. Following the earnings beat and encouraging company guidance, the analysts’ sentiment for the company have been more on the positive side.

The current Zacks Consensus Estimate for first-quarter 2012 is 5 cents per share, which is at the higher end of the company’s recently formulated earnings guidance range of 2 cents to 5 cents.

Fourth Quarter Synopsis

Hot Topic Inc. reported 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 inched down 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.

(Read our full coverage on this earnings report: Hot Beats, Margins Up)

Agreement of Estimate Revisions

The five analysts providing first-quarter 2012 estimates unanimously raised their estimates in the last 7 and 30 days, mainly guided by the company’s strong fourth-quarter performance as well as the company’s first-quarter guidance.

Similarly, for fiscal 2012, 5 out of 6 analysts, upped estimates in both 7-day and 30-day period. Unity was also seen in estimate revision for fiscal 2013, where 1 out of 5 analysts moved up their estimates in both 7 and 30 day periods.

Magnitude of Estimate Revisions

Driven by the unanimous estimate revision in the last 7 and 30 day periods, the current Zacks Consensus Estimate for the first quarter of 2012 moved up to 5 cents per share.  The upside was uniform for both periods with estimate rising 5 cents per share from break-even level forecasted earlier.

Though the number of analysts raising estimates for fiscal 2012 in the 7 and 30 day periods was same, estimates for the last 7 days and 30 days were up by 6 cents and 7 cents, respectively. The Zacks Consensus Estimate following estimate revisions reached 34 cents per share. With one analyst raising estimates for fiscal 2013 in both 7 and 30 periods, estimates shot up 19 cents in both periods to 44 cents per share.

Our Recommendation

Hot Topic’s business strategy is based on the foundation of pop culture and its relevance to its target segment of teen customers. The company mainly focuses on selling music and music/pop culture-oriented merchandise, offering products typically unavailable at other retailers through continuous emphasis on superior customer service. With this core business strategy, Hot Topic has carved a niche for itself amid a highly competitive specialty retailing industry.

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.

Currently, we have a long-term Neutral rating on the stock. However, Hot Topic, which competes with Abercrombie & Fitch Co. (ANF) and Wet Seal Inc. (WTSLA), holds a Zacks #2 Rank that translates into a short-term Buy recommendation.

About Earnings Estimate Scorecard

As a PhD from MIT, Len Zacks 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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