California Apparel News

The picture of crowds of screaming teens throwing down money on T-shirts must seem like fantasy to many retailers after the grim 2008 holiday season. But mall-based retailer Hot Topic Inc. got to experience consumer frenzy and growing profits throughout the holiday season, when the City of Industry, Calif.–based business, with a fleet of 683 stores, became one of a handful of retailers to report positive same-store sales during the crucial holiday season.

Hot Topic’s success is a comeback story. After four years of reporting declines in same-store sales, the company enjoyed booming business at the end of 2008.

Hot Topic Chief Executive Betsy McLaughlin said the past few years have been painful. “It’s like coming out of a dark tunnel—it’s good to see some light,” she told a crowd of retail analysts at the 11th annual ICRXchange Conference on Jan. 14 in Dana Point, Calif. The retailer—which specializes in rock- and pop culture–inspired T-shirts, accessories, and music-inspired fashion—is confident the good times will keep rolling.

On Jan. 7, Hot Topic raised its earnings guidance for its fourth-quarter earnings. It increased from 30 cents to 32 cents per diluted share. Previous guidance was in the range of 25 cents to 28 cents. Retail analysts cheered this comeback, but many wonder if the company’s good fortune can last in the tough economy.

Hot Topic’s season of consumer frenzy boiled over on Nov. 10, when more than 2,500 fans of hit film “Twilight” became unruly in front of the Hot Topic store in San Francisco’s Stonestown Galleria retail center. Only 500 people were allotted spaces at the Hot Topic store, all for the chance to purchase “Twilight” merchandise and meet some cast members of the romantic teen vampire movie, which was produced by Summit Entertainment.

But the overflow crowd in San Francisco became unruly and began pushing one another to try to enter the store, which resulted in Hot Topic canceling the event.

The San Francisco crowds didn’t halt the “Twilight” tour, however, which made 10 additional stops in different cities around the United States.

Hot Topic was one of a handful of retailers offering a wide variety of “Twilight” merchandise. Based on a best-selling book series, the teen vampire flick unseated the highly anticipated James Bond movie “Quantum of Silence” from its No. 1 perch at the American box office during its Nov. 21 opening weekend.

“Twilight” earned $70.6 million during that weekend and kicked Hot Topic out of a 4-year-old malaise. After more than 17 quarters of negative same-store sales, Hot Topic posted an increase in same-store sales of 8.3 percent in October compared with the same time in the previous year. The hot streak kept rolling on, with same-store sales increasing 6.5 percent in November and 4.3 percent in December.

Hot Topic was one of a handful of specialty retailers that fared well during the tough holiday season. Los Angeles–based American Apparel reported a same-store sales increase of 37 percent in December compared with the same time in the previous year. The Buckle Inc., a Kearny, Neb.–based specialty chain with 388 stores, posted a 13.5 percent increase in same-store sales in December compared with the same time in the previous year. New York–based Aeacute;ropostale Inc. reported a 12 percent increase in same-store sales in December.

Still, retail analysts worry that forces beyond the bad economy might cut short Hot Topic’s success. “There’s no question ’Twilight’ is drawing more customers to the store,” said Liz Pierce, who works for Roth Capital Partners in Newport Beach, Calif. “Will they stop coming in if their ’Twilight’ viewership declines? It’s hard to say.”

Other retail analysts believe Hot Topic will do well with merchandising other popular licensed properties such as the Guitar Hero video game. Analyst Jeffrey Van Sinderen of financial-services firm B. Riley & Co. said Hot Topic will most likely continue to focus on pop-culture properties to attract people to its stores. “But the strong ones are few and far between,” he said.

McLaughlin said the company plans to keep the good times rolling by turning the occasional Hot Topic customer—who might visit the store once or twice to buy a “Twilight” shirt—into a frequent Hot Topic customer who also buys music and fashion at the store. One idea is to increase the music experience at the Hot Topic stores. To meet that goal, the retailer will not spend any capital on store expansion in 2009. Instead, it will remodel existing stores for a better music experience and further develop its Web sites at www.hottopic.com and www.shockhound.com.

Summit Entertainment plans to release a “Twilight” sequel, called “New Moon,” in late 2009 or early 2010, which could mean another boost for Hot Topic. Still, the retailer seems to be planning conservatively. Indeed, Hot Topic’s sister company, plus-size retail chain Torrid, has not seen the same rally as Hot Topic. In December, the 160-store chain reported a decline of 1.7 percent in same-store sales compared with the same time in the previous year.From music to fashion

Hot Topic is also gambling on rock music attracting people to its stores. More than 18 months ago, the stores expanded music offerings by adding digital music players to in-store music stations—all this at a time when music stores such as the now-defunct Tower Records have closed. In April 2007, it also named music-industry veteran John Kirkpatrick as its first chief music officer. His mission is to build Hot Topic’s music offerings both in its physical stores and online.

In October, Hot Topic unveiled Shockhound, an e-commerce, music and social-networking site. Shockhound sells T-shirts, books and posters. Like the wildly popular music e-commerce site iTunes, Shockhound sells MP3s of songs. Both Shockhound and Hot Topic produce concerts by up-and-coming rock artists.

And while music and pop culture are the cornerstone of Hot Topic, its foundation is fashion. Retail analysts and shoppers said one reason its sales have been increasing is the popularity of its skinny jeans. Elizabeth Castellanos, a 15-year-old student from Hacienda Heights, Calif., said she is a fan of “Twilight,” but she drops by Hot Topic a few times each week to check out their selection of jeans. The teen describes her wardrobe as skateboard-influenced, adding, “I wear skinny jeans and band shirts.”

Market researcher Tom Wallace said Hot Topic’s reliance on pop culture will continue to pay off for the retailer. Teens always mention the store as a place they like to shop in consumer interviews for his Los Angeles–based market-research firm Label Networks. “Their tapping into music was smart,” Wallace said of Hot Topic. “There’s a lot of crossover to music.”