California Apparel News

Hot Topic’s Betsy McLaughlin is a busy woman these days.

The chief executive of the mall-based retail chain is running on all eight cylinders as she scouts for a new president for the Hot Topic division to replace the last one, who lasted one month; searches for a new chief merchandising officer to replace the one who left the company in July to work for Wet Seal; and turns around down-in-the-dumps same-store sales that have been stuck in a ditch for almost four years.

With all this bad news piling up, McLaughlin, who is temporarily taking on the duties of president and chief merchandise officer for an 80-hour work week, is trying to convince financial analysts that things are looking up for the California-based company, which sells edgy fashion and alternative music–related goods to teens dissatisfied with vanilla-flavored styles.

For years, Hot Topic was a retail darling. “They went through a period where they were doing everything right. Their peak was in 2000 when sales per square foot were $670, which by any measure is strong,” said Adrienne Tennant, a retail analyst in Arlington, Va., with Friedman, Billings, Ramsey & Co. Inc., who tracks the publicly traded company.

Last year, sales at Hot Topic stores were lukewarm. Total revenue in 2007 was $728 million, compared with $751.6 million in 2006. Hot Topic store sales have been averaging $468 a square foot, while sales at its Torrid outlets, an off-shoot store for large-size women ages 15 to 29, have been around $347 a square foot.

But analysts such as Tennant believe that Hot Topic has hit bottom and has nowhere else to go but up in a year where retail has proved to be extra challenging. “In the next 12 months, the company, we believe, can return to sustainable store comps [same-store sales],” Tennant said.

However, others aren’t convinced. Analysts at Buckingham Research in New York are wary of the company’s performance because they haven’t seen that much turnaround or reinvention of its core concept. “We understand why Hot Topic management did not want to abandon its core customer, but we also maintain that the alternative-fashion customer has more places to shop these days,” analysts said in a recent report. “We also believe there are fewer alternative customers as the market has moved more mainstream.”

This was seen in the company’s second-quarter results for fiscal 2008, which were released Aug. 20. Same-store sales were down 0.9 percent, resulting in a net loss of $400,000 on $166.8 million in net sales. The company predicted same-store sales would be down by single-digit numbers for the rest of the year.

The good old days

Hot Topic, based in City of Industry, Calif., started with a successful retail formula that catered to the kid nobody understood. Its darkly lit stores and heavy-metal merchandise shocked parents but attracted scores of non-conformist teens. Also available were alternative and indie-band CDs and related T-shirts that no one else carried. Things were going well until fashion changed.

Instead, a wave of preppy styles—carried by retailers such as American Eagle Outfitters, Hollister Co. and Abercrombie & Fitch—infiltrated high schools around 2004 as did a flurry of feminine styles such as dresses carried by retail competitors, including Charlotte Russe and Forever 21.

Hot Topic, trying to cope with the mood swing, shifted its merchandise strategy, carrying more trendy items and straying away from heavy-metal fare. “They started to get away from the core underground music and started to be more mainstream,” Tennant said. “And they started to spread their wings into the licensed business that was more mainstream, such as Hello Kitty, Sponge-Bob [SquarePants], Curious George and Care Bears, which started to bring in moms. It lost its authenticity that made it so special.”

Alternative, but not alienating

These days, Hot Topic is attempting to return to its alternative core while not alienating its more trend-oriented customer. T-shirts emblazoned with alternative or indie-band logos are selling well. Hot Topic has more than 180 licensed band T-shirts with artists such as My Chemical Romance, The Ramones and Insane Clown Posse. “I like the band stuff,” said Amber Ornelas, a 20-year-old college student who attends California State University in Fullerton, Calif. “I particularly like the guy T-shirts. I buy the large size.”

Even though she works at Wet Seal, where she receives an employee discount, Ornelas prefers Hot Topic’s skinny denim jeans, which have been retailing for $39 with a recent $10-off promotion.

She also likes the dark ambience, where the stores’ entrances are framed by a large horseshoe-shaped metal-like sculpture, the walls are lined with faux red brick panels and the music is loud. There is an abundance of black clothing and screen-printed apparel with skulls and crossbones and skeletons. Even the bikinis are black with skulls and crossbones.

But other young shoppers don’t like the store. “It’s more scene people,” said Julie Ha, 15, from Garden Grove, Calif., whose fingernails were painted different bright colors. She prefers Forever 21 and Wet Seal, which have more fashion merchandise.

Sabrina Perrin, 18, from Mission Viejo, Calif., and Brianna Young, 18, from Westminster, Calif., come to Hot Topic for the band and movie T-shirts they can’t find elsewhere. They were picking up a T-shirt for a friend from the “Batman” sequel “The Dark Knight,” which was a fast-moving item this quarter in Hot Topic stores.

Creating a sense of uniqueness for the music crowd is part of Hot Topic’s future. Fortunately for the retailer, the first music-inspired trend in four years, the skinny-leg pant, has landed big with teens. The uuml;ber-slim pants can be seen on high school students everywhere, and Hot Topic has a vast supply of them in every single primary color.

“They have been stabilizing their sales. If you look at their overall comps, they are getting closer to flattish,” said Jeffrey Van Sinderen, an analyst with B. Riley & Co. in Los Angeles. “They do a good job with skinny denim, and those are things that are mainstream, but theirs have more flavor.”

Bringing back the music

But skinny pants alone can’t make the company’s bankroll fat.

So McLaughlin and her team are working on profiting from the alternative and indie music scene even more. In April 2007, the company hired John Kirkpatrick as the company’s chief music officer. His job is to stay ahead of the music curve and attract more customers. Since his arrival, every Hot Topic store has installed listening kiosks where customers can sample indie songs and buy the CDs at the emporium.

Around October or November, the retailer will unveil ShockHound, its own Web site where customers can download alternative and indie albums not found on other Internet sites, networking with other teens who are into the same scene.

McLaughlin, who declined to be interviewed for this article, said in a conference call that Hot Topic has signed up three of the four major music labels for the Web site and hopes to have the fourth on board by the time they launch. Right now they are in beta testing.

Hot Topic also will be featured in a new music video game called Rock Band 2, a sequel to Rock Band developed by Harmonix Music Systems.

“It is a much more pop-culture phenomenon than the typical game,” said McLaughlin, who grew up in Costa Mesa, Calif. “The benefit for us is from a branding standpoint to be associated with all these bands playing.”

Hot Topic will be mentioned in the video game and will sponsor bands when they reach a certain degree of success. “We are the only retailer mentioned in the game,” she said. “We are excited about that.”

Key Facts

Hot Topic Inc.

Location: City of Industry, Calif.Beginnings: Founded in 1989 by Orv Madden, now chairman of Metropark, a fashion chain launched in 2004First store: Opened in fall 1989 in the Westminster Mall in Westminster, Calif. That store soon closed and the retailer moved to Montclair, Calif., with more rock-inspired items.Store count: 684 Hot Topic stores and 158 Torrid stores, a chain launched in 2001 for large-size customersStore size: The average Hot Topic store is 1,747 square feet, and the average Torrid store is 2,514 square feet.Revenues: In 2007, net sales totaled $728 million with net income of $16 million compared with 2006 net sales of $751.6 million with net income of $13.6 million. Estimated net sales for 2008 are $725.7 million with net income of $15 million.Top people: Chairman of the board: Bruce Quinnell; chief executive and president of the Hot Topic division: Betsy McLaughlin; chief operating officer: Gerald Cook; president of the Torrid division: Christopher Daniel; chief financial officer: Jim McGinty

Hot Topic’s same-store sales

Source: Hot Topic Inc.