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How Did It Double?
How hot is Hot Topic? The fact that the edgy retailer has thrived might come as a surprise to anyone walking past the recent shopping mall carnage. Fellow young adult apparel chains like Abercrombie & Fitch (NYSE: ANF), Wet Seal (Nasdaq: WTSLA), and Urban Outfitters (Nasdaq: URBN) have all given up at least half of last year's highs.
Business Description
Hot Topic sells music-licensed and music-influenced apparel, accessories, and gift items through 212 leased mall locations in 42 different states. The target shopper is a 12-to-22-year-old male or female.
Financial Facts
Income Statement
How Could You Have Found This Double?
I'm no fashion expert. The phrase "supermodel runway" means big jets on a landing strip to me. I don't know Crawford from crawfish. Still, I've grown up over the past three decades and change, and I think I've got a pulse on the trends that shaped Hot Topic's resurgence.
Where to From Here?
Like a Three Stooges t-shirt, Hot Topic's got the Moe right now. Earnings nearly doubled last year as the company reported an amazing 22.8% gain in same-store sales. That trend improved this new fiscal year. As a result, analysts bumped up this year's earnings projections from $1.53 to $1.64 a share. Over the holidays the bottom-line consensus was at just $1.38 per share. The numbers have also been propped up to $2.08 per share next year.
Ticker: (Nasdaq: HOTT)
Phone: 626-839-4681
Website: www.hottopic.com
Price (4/1/2000): $35
In general, retail stocks have been racked. Despite a presence online, investors with a cyberslant seem to wonder about the role physical storefronts will play in the new economy. Hot Topic isn't the sole survivor. Gadzooks (Nasdaq: GADZ) has tripled off its early autumn lows.
Then again, maybe that's not so surprising. Unless a nudist movement catches on, consumers will still shop for clothes. While some chains will misread the trend of the moment, those that do nail it are going to have a healthy walk through the suburbia ruins.
With estimate-topping financial results and a stunning 31.2% increase in same-store sales in February, Hot Topic is packing a fully loaded nail gun -- and it's not afraid to use it.
The company's website was launched back in 1997 and features everything from t-shirts to music CDs, along with message boards, polls, and content. The stock split 2-for-1 back in December.
12-month sales: $168.9 million
12-month income: $13.5 million
12-month EPS: $1.38
Profit Margin: 8.0%
Market Cap: $360.5 million
Balance Sheet
Cash: $39.6 million
Total Assets: $89.0 million
Total Liabilities: $21.7 million
Ratios
Price-to-earnings: 25.4
Price-to-sales: 2.1
If Hot Topic was around in the 1970s, it would have made a killing. Popular music had two distinct movements -- rock & roll and disco. They were alienating forces. While disco fans eventually grew into leisure suits and dance dresses, the rock crowd stocked up on rock tour shirts and jerseys. With such diverse streams of pop culture flowing strong, the clothing became the statement. On the celluloid front, Star Wars opened up a merchandising vault and television properties also became popular iron-on t-shirt gear.
Then came the designer jeans. In one fell swoop, the clothing maker became the brand. Disco faded. Pop music cast its net further over the next two decades. Rock and New Wave fit snugly on the radio dial alongside power ballads and urban dance hits. While there were extremes in heavy metal and rap, that only revived the band brand fashion for segments of teenage boys.
The 1990s continued the trend towards comfy, statement-free fashion. The comfortable brown shoe replaced designer sneakers. Solid prints ruled. When a clothing trend emerged to break that up -- like grunge wear that helped bring Urban Outfitters to prominence -- it lacked the merchandising flair of the 1970s.
Now the musical schism has been blown wide open again. The sexist, angst-ridden music of Limp Bizkit or Blink 182 doesn't lead awfully well into the Lilith Fair-fueled female empowerment of Fiona Apple and TLC. The sugar pop of young soloist females and Orlando-based boy bands wedges a third commercial-intensive spike into the mix.
The more things change, the more that Led Zeppelin tour jersey remains the same. So, with musical statements to make, the band brands are back, and the Hot Topic racks are being picked dry over the identity-free prints and patterns sold at the other fashion-savvy mall shops.
Another bonus is that the company's interactive website is unique beyond its effective usage of alternative bells and whistles -- it also turned a profit last year.
Plans call for 60 new stores on top of the 54 locations that were added last year. It's clear the company plans to strike while the iron is Hot Topic. In the near-term, it is hard to resist the freight train of momentum the hip retailer is packing. In the long-term, it is impossible to deny that fellow sluggish retailers can always adapt to the trend -- and worse -- that the trend itself might die. Like disco. Like a Blue Oyster Cult rock tee fearing the reaper.
Related Links:
-- "Hot Topic on Shoppers' Minds," Fool News, 10/5/99
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