Hot Topic's Sales Stumble, but Analyst Forecasts Turnaround

In an unusual move, Hot Topic Inc. reported its monthly sales on July 31—several days early.

The early report was intended to give fair warning of a 7.2 percent decrease in comparative-store sales, said Jim McGinty, chief financial officer of the City of Industry, Calif.–based retailer.

“We knew we couldn’t achieve our earnings guidance by mid-week,” McGinty said. “We knew we had the responsibility to get the news out as early as we possibly could.”

Public companies typically post their monthly sales numbers a few days after the turn of the month. Hot Topic issued a monthly sales report early only one other time in its 17-year history—July 2002, when earnings guidance for the month was not realized.

On July 31, Hot Topic also lowered its guidance for the company’s second fiscal quarter to a loss of 2 to 3 cents per diluted share. The retailer is scheduled to release its secondquarter earnings on Aug. 16.

The report comes at a time when many retail analysts polled by Thomson Financial expected the company to break even. Analyst Liz Pierce even upgraded her stock recommendation to buy from hold on July 27. Pierce wrote in an Aug. 1 research note that she still stands by her optimistic forecast for the company. “We were surprised,” she wrote. “We recognized at the time of the upgrade that [Hot Topic] was still in the early stages of its turnaround.” Pierce works for the Los Angeles office of Harris Morris Sanders.

Although Hot Topic has reported negative comparative-store sales, mostly in the low single digits, since the summer of 2004, Pierce believed that the company made significant changes that were beginning to show results. Adding Maria Comfort as its chief merchandise officer on Aug. 17, 2005, put the company in a right direction, she wrote. “Comfort has brought a new level of discipline, fashion perspective and merchandise experience to the overall operations of the company.”

Pierce also wrote that fashion was trending to Hot Topic’s strengths of Goth, Victorian and punk. Also increasing was the potential for the company’s Torrid stores, which specialize in plus sizes.

Many teens see Hot Topic as the one place to shop and purchase rock T-shirts. “There’s nothing quite like them,” said David Martinez, 17, of Hacienda Heights, Calif. “The only other place where you can get these shirts is at concerts.”

However, the retailer has stumbled in fashion, said Stephanie Ghanem, 20, a fashion student at California State University, Northridge. “I’d never go in there to buy a SpongeBob SquarePants T-shirt now. But I would have killed for it in junior high and the first year of high school.” She said her friends often shop at Urban Outfitters when they are looking for dark, romantic clothes.

Hot Topic blamed much of the comparative-store decrease on poor sales during a retail tax holiday in Florida during July. However, the company’s e-commerce sales increased 25 percent in July, and CFO McGinty forecast that the retailer’s sales of skinny jeans would be a hit during the 2006 back-to-school season. —Andrew Asch