HOTT Hot Topic, Inc. (MM)

Shopping mall-based specialty retailer, Hot Topic Inc. (HOTT) posted fourth-quarter fiscal 2012 results with earnings per share of 29 cents, surging 38.1% from the comparable prior-year period. The year-over-year increase in quarterly earnings was primarily driven by robust top-line performance, improved gross margin and lower effective tax rate. Moreover, the quarterly earnings surpassed the Zacks Consensus Estimate by a couple of cents.

Hot Topic’s net sales for the quarter increased approximately 11.0% year over year to $233.0 million, on the back of benefits from an additional week in the quarter, along with robust sales at its namesake and Torrid concepts stores. Moreover, quarterly sales surpassed the Zacks Consensus Estimate of $223.0 million.

On a segmental basis, net sales escalated 6.8% year over year to $180.5 million at Hot Topic’s namesake stores, while Torrid stores registered a 28.4% increase with sales of $52.5 million. Management believes that branding and vertical product strategies have strengthened the Torrid store concepts’ growth.

Hot Topic’s fourth-quarter comparable-store sales (comps) grew 2.6% compared with a 1.9% increase reported in the comparable year-ago period. The increase in comps was driven by strong performance at both namesake and Torrid divisions. Comps at the company’s namesake stores rose 2.0%, while Torrid stores witnessed a 5.4% hike in comps. The hike also resulted from improvements in fashion attire, partially offset by a decline in the accessories category.

Gross profit for the quarter increased 19.2% year over year to $88.5 million and as a percentage of sales it improved 260 basis points (bps) to 38.0%. The year-over-year expansion in gross margin was primarily driven by improved merchandise margin and lower store occupancy and store depreciation expenses as a percentage of sales.

Selling, general & administrative expenses rose 16.7% to $69.3 million compared with $59.4 million in the prior-year comparable quarter. Based on revenues, it expanded 150 bps to 29.8% primarily due to increased payroll and performance-based compensations partially offset by lower other store expenses.

Income from operations in the quarter came in at $19.1 million compared with $14.8 million in the year-ago quarter. As a percentage of sales, it expanded 110 bps year over year to 8.2% primarily driven by improved gross margin.

Fiscal 2012, in Brief

During fiscal 2012, Hot Topic’s total sales grew 6.3% to $741.8 million owing to strong sales in both namesake and Torrid concepts. Full-year sales were almost in line with the Zacks Consensus Estimate of $742.0 million. Net sales improved 3.6% year over year to $553.7 million at the company’s namesake stores, while Torrid stores registered a 15.1% increase with sales of $188.1 million.

Hot Topic’s adjusted earnings for the fiscal jumped over twofold to 46 cents per share compared with 19 cents reported in fiscal 2011, primarily driven by strong top-line performance and improved margins. Moreover, quarterly earnings were ahead of the Zacks Consensus Estimate of 43 cents per share.

Other Financial Details

At the end of the fiscal year, Hot Topic had cash, cash equivalents and short-term investments of $50.0 million, compared with $66.1 million at the end of fiscal 2011. Shareholders' equity stood at $172.8 million compared with $183.0 million in the previous fiscal year.

Hot Topic’s total capital expenditures for the 12 months ended Feb 2, 2013 were $36.4 million, primarily associated to store construction and IT projects. Cash flows from operating activities for the reported fiscal came in at $53.2 million compared with $45.9 million in fiscal 2011.

Store Update

During the quarter, Hot Topic opened 5 Torrid and 5 Blackheart stores, while it shuttered 2 namesake stores and 1 Torrid store. Additionally, the company remodeled 1 Hot Topic store. Thus, net stores at the end of the fiscal included 618 Hot Topic stores, 190 Torrid stores and 5 Blackheart stores. For fiscal 2013, Hot Topic reaffirmed its strategy of opening about 40 new Torrid stores.

Guidance

Hot Topic retained its previously forecasted fiscal 2013 earnings growth guidance of 30%–35% compared with fiscal 2012 level. The guidance is based on the comps growth in the low-single-digit range.

Recent Development

In the first week of March, Hot Topic and a privately-held investment firm, Sycamore Partners, agreed to collaborate, wherein the latter will acquire the former in an all-cash transaction worth about $600 million. The transaction has been structured as a one-step merger between the parties and Hot Topic is proposed to be the surviving company.

Other Stocks to Consider

Currently, Hot Topic has a Zacks Rank #2 (Buy). Other stocks that are performing well in the apparel retailing space are Cabela’s Inc. (CAB), Big 5 Sporting Goods Corp. (BGFV) and Marinemax Inc. (HZO). All these stocks carry a Zacks Rank #2 (Buy).

 
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