The loss at specialty retailer Hot Topic Inc. (HOTT) deepened in the second quarter of fiscal 2010 with the company posting a loss per share of 14 cents, twice the loss of 7 cents in the year-ago quarter and slumping further below the loss of 4 cents in the first quarter of fiscal 2010. The loss of 14 cents in the quarter was on par with the Zacks Consensus Estimate.
Loss per share in both the reported quarter as well as the corresponding year-ago quarter included approximately 2 cents per share of expense related to the company's online music site, ShockHound.
Total revenues declined 5% year over year to $150 million, meeting the Zacks Consensus Estimate. Sales dropped in both divisions of Hot Topic, at $113.3 million posting a steeper decline of 5.5%, followed by Torrid at $36.7 million, recording a 3.4% year-over-year dip.
Total company comparable store sales dropped 6.4% for the quarter, with Hot Topic and Torrid declining by 6.5% and 6.0%, respectively.
Cost & Margin Performance
Cost of goods sold, including buying, distribution and occupancy costs, dipped 4% to $104 million, and based on revenues, it increased 80 basis points to 69.3%. Consequently, gross profit went down 7% to $46 million and gross margin contracted 80 basis points to 30.7%.
Selling, general & administrative expenses grew 2% year over year to $56.4 million, and based on revenues increased 270 basis points to 37.6%. Operating loss in the quarter was wider at $10.4 million, almost doubling the loss of $5.4 million in the year-ago quarter.
Cash Position
As of July 31, 2010, Hot Topic had cash and cash equivalents of $61.8 million, down from $68.9 million as of May 1, 2010, and $82.1 million as of August 1, 2009.
Store Update
During the quarter, Hot Topic opened one Hot Topic store and one Torrid store, while closures included three Hot Topic stores and two Torrid stores. The company remodeled or relocated six Hot Topic stores during the quarter.
Hot Topic ended the quarter with 679 Hot Topic stores and 155 Torrid stores, compared with 679 Hot Topic stores and 156 Torrid stores at the end of the second quarter of fiscal 2009.
Outlook
The company expects to reverse its losses in the third quarter of fiscal 2010 and deliver earnings per share in the range of 5 cents to 8 cents. The guidance includes 2 cents of expense related to ShockHound. Hot Topic expects comparable store sales to decline in the mid-single-digits.
Performance of Main Competitor
Hot Topic’s close competitor Abercrombie & Fitch Co. (ANF) reported adjusted earnings per share of 24 cents in its second quarter ended July 31, 2010, reversing a loss of 30 cents per share in the year-ago quarter. Sales increased 17% year over year to $745.8 million and comparable store sales increased 5%.
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, lackluster results in the first half of fiscal 2010, macroeconomic headwinds, intense competition from other specialty retailers and seasonal nature of the business severely undermine the company’s future growth prospects. Until we see business trends improving the Neutral rating is being maintained supported by a Zacks #3 Rank (Hold).
Hot Topic is a shopping mall-based specialty retailer operating the Hot Topic and Torrid store concepts across the U.S. as well as the e-space music discovery concept, ShockHound. The company’s business strategy is based on the foundation of pop culture and its relevance to its target segment of teen customers. Hot Topic operates in a unique market niche by focusing on music and music/pop culture-oriented merchandise, offering products which are typically not available at other retailers.
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Total revenues declined 5% year over year to $150 million, meeting the Zacks Consensus Estimate. Sales dropped in both divisions of Hot Topic, at $113.3 million posting a steeper decline of 5.5%, followed by Torrid at $36.7 million, recording a 3.4% year-over-year dip.
Total company comparable store sales dropped 6.4% for the quarter, with Hot Topic and Torrid declining by 6.5% and 6.0%, respectively.
Cost & Margin Performance
Cost of goods sold, including buying, distribution and occupancy costs, dipped 4% to $104 million, and based on revenues, it increased 80 basis points to 69.3%. Consequently, gross profit went down 7% to $46 million and gross margin contracted 80 basis points to 30.7%.
Selling, general & administrative expenses grew 2% year over year to $56.4 million, and based on revenues increased 270 basis points to 37.6%. Operating loss in the quarter was wider at $10.4 million, almost doubling the loss of $5.4 million in the year-ago quarter.
Cash Position
As of July 31, 2010, Hot Topic had cash and cash equivalents of $61.8 million, down from $68.9 million as of May 1, 2010, and $82.1 million as of August 1, 2009.
Store Update
During the quarter, Hot Topic opened one Hot Topic store and one Torrid store, while closures included three Hot Topic stores and two Torrid stores. The company remodeled or relocated six Hot Topic stores during the quarter.
Hot Topic ended the quarter with 679 Hot Topic stores and 155 Torrid stores, compared with 679 Hot Topic stores and 156 Torrid stores at the end of the second quarter of fiscal 2009.
Outlook
The company expects to reverse its losses in the third quarter of fiscal 2010 and deliver earnings per share in the range of 5 cents to 8 cents. The guidance includes 2 cents of expense related to ShockHound. Hot Topic expects comparable store sales to decline in the mid-single-digits.
Performance of Main Competitor
Hot Topic’s close competitor Abercrombie & Fitch Co. (ANF) reported adjusted earnings per share of 24 cents in its second quarter ended July 31, 2010, reversing a loss of 30 cents per share in the year-ago quarter. Sales increased 17% year over year to $745.8 million and comparable store sales increased 5%.
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, lackluster results in the first half of fiscal 2010, macroeconomic headwinds, intense competition from other specialty retailers and seasonal nature of the business severely undermine the company’s future growth prospects. Until we see business trends improving the Neutral rating is being maintained supported by a Zacks #3 Rank (Hold).
Hot Topic is a shopping mall-based specialty retailer operating the Hot Topic and Torrid store concepts across the U.S. as well as the e-space music discovery concept, ShockHound. The company’s business strategy is based on the foundation of pop culture and its relevance to its target segment of teen customers. Hot Topic operates in a unique market niche by focusing on music and music/pop culture-oriented merchandise, offering products which are typically not available at other retailers.
ABERCROMBIE (ANF): Free Stock Analysis Report
HOT TOPIC INC (HOTT): Free Stock Analysis Report
Zacks Investment Research
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