Analysts Remain Bullish on Hot Topic

After flying high for several months, Hot Topic, Inc. reported negative comparable store sales for the month of June, the second consecutive month of declining comp-store sales for the mall chain.

The company cited problems installing new computer software at their national distribution center, near Nashville, Tenn., as to blame for the poor performance, according to Betsy McLaughlin, chief executive officer of the City of Industry, Calif.–based chain.

“Early in June, we implemented a new distribution center software package,” she said, in a company statement. “This conversion took longer than planned, and as such, we were slow to process receipts during the second half of the month. We were back on track with our receipt processing volume by the last week in June, but believe that our sales were negatively impacted due to the lack of new receipt flow to our stores.”

Consequently, comparable-store sales decreased 0.4 percent in June. Net sales for June 2004 increased 20 percent to $51.1 million net compared with sales of $42.4 million for the like period in 2003.

Hot Topic’s comparable-store sales have been slowing since February, when the retailer chain experienced a comparable-store sales high of 7.6 percent. In March, the retailer reported comp-store sales of 3.9 percent and in April, it reported 0.7 percent. By May, Hot Topic’s comp-store sales went into the red when the retailer reported -0.5 percent.

The poor performance in May was blamed on a crucial segment of Memorial Day business shifting to June, according to Jim McGinty, Hot Topic’s chief financial officer. If these sales were counted in May, comp-store sales would have stayed in the black.

Liz Pierce, an analyst who follows Hot Topic remains bullish on the company despite the recent comp-store figures. “How can you be worried when 50 percent of your business is music licensing and that’s doing very well,” said Pierce, senior vice president at the Los Angeles office of Sanders Morris Harris, based in Houston, Texas.

One of Hot Topic’s fundamental businesses is rock T-shirts and, they remain the top merchants of this popular niche in malls, however the chain stumbled when consumers went wild over bright, feminine fashions, which is have never been a strength for this retailer.

“Part of the issue has been change in fashion cycles,” Pierce said. “They lost some of the incremental customers in past couple years. To compete with this is to bring in more fashion in tops and denims. But we have to be realistic, for them to do a real feminine, girly fashion point of view would alienate their core customer.”

The store will experiment with brighter women’s clothes this fall and analysts, such as Jeffery Van Sinderen of Santa Monica, Calif.- based B. Riley & Co., expect July sales to increase due to a fresh assortment of clothes for Fall 2004.

Pierce said she also believed the poor performance was part of the normal peaks and valleys of business. “They have a strong balance sheet, they remain very profitable,” Pierce said. “I believe they have a unique position in the music and pop culture niche, there’s no retailer that serves that niche better than they do.” —Andrew Asch