I'm With Stupid -- Shareholders

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Shares of Hot Topic (Nasdaq: HOTT  ) opened $1.20 -- or 17% -- higher this morning, despite posting horrendous March comps and agreeing to eat into its cash reserves to bankroll some ill-advised dividends.

Here's a merchandising brainstorm: Hot Topic should begin selling "I'm With Stupid" t-shirts for shoppers to wear when they're walking alongside the edgy mall retailer's shareholders.

Let's go over these stock-bubbling payouts. Hot Topic is initiating a quarterly dividend of $0.07 a share. It will also be paying out a one-time $1-a-share distribution.

"By initiating a dividend, our Board of Directors has demonstrated its ongoing commitment to enhancing shareholder value for our broad investor base," explains Hot Topic CEO Betsy McLaughlin in the announcement. "The strength of our balance sheet and the substantial free cash flow generated by our business provide us with the financial flexibility to return capital to our shareholders in this manner."

Let's revisit how these one-time payouts occur. There's no free lunch, as the stock typically drops by the amount of the distribution -- a taxable distribution at that -- after the payout. The company is clearly worth less after the money goes out, since its balance sheet is less liquid. Does it make any sense for the stock to pop higher than the payout on the news, especially when it's for more than the value of the one-time dividend that will soon go ex-dividend?

Yes, the quarterly dividend is nice. Based on yesterday's close, Hot Topic now has a yield of nearly 4%. It's a chunky payout for mall-based retailers, where Footlocker (NYSE: FL  ) at 3.9% was the top dog. Yields at other generous apparel specialists -- American Eagle Outfitters (NYSE: AEO  ) at 2.1%, Limited (NYSE: LTD  ) at 2.3%, and Buckle (NYSE: BKE  ) at 2.3% -- aren't even close.

However, the fat distributions are unlikely to woo your income-investing Granny to buy into a company selling Hello Kitty beanies and Tim Burton t-shirts. She's hopefully smart enough to consider the fundamentals behind the company that is cracking open its vault.

Granny will see that Hot Topic is one of the few mall chains to post negative comps for March. Yes, same-store sales fell 7.5% last month, dragged down by a sharp 11.2% slide at its namesake chain. The one saving grace was the 7.5% spike in comps at its plus-sized Torrid chain. That's a welcome surprise given the terrible report out of Lane Bryant parent Charming Shoppes (Nasdaq: CHRS  ) recently, but Hot Topic needs to remedy the shortcomings of its flagship concept first.

Analysts see Hot Topic earning $0.27 a share this fiscal year, flat with last year's showing. There may be some healthy cash flow being generated beyond the bottom line, but it's just stupid for Hot Topic to begin giving away its greenery as if it were staring at a Che Guevara t-shirt for too long. Until it can fix its comps, it should be holding on to that money for the necessary refreshes to get back on track.

Oh, but why bring uninspiring fundamentals, negative comps, and grim growth prospects into this wonderful day for you Hot Topic shareholders? Let me catch up to you. I have this cool t-shirt I want you to see.

Just make sure you're walking on the correct side of the "I'm With Stupid" arrow.

Is Rick wrong? Is Hot Topic a great buy right now? Let him have it in the comment box below.

Longtime Fool contributor Rick Munarriz enjoys the mall -- even the food court. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.

Read/Post Comments (8) | Recommend This Article (13)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 08, 2010, at 4:36 PM, hudsondusters wrote:

    I heard comps were tough due to the twilight crap from last year.

  • Report this Comment On April 08, 2010, at 4:48 PM, TMFBreakerRick wrote:

    Yes, comps rose 7.1% during March of 2009, so it's essentially back to where it was two years ago. BUT, March of 2008 was down 3.5%, after rising 3.4% in in 2007 -- so it's really back to where it was FOUR years ago. In March 2006 comps were down 8.4%, so it is doing worse than where it was FIVE years ago.

    There's a problem here.

  • Report this Comment On April 08, 2010, at 8:02 PM, plange01 wrote:

    ebay already fills with ipads...

  • Report this Comment On April 08, 2010, at 9:23 PM, eekthecat wrote:

    I was just in Hot Topic yesterday, there were plenty of customers.

  • Report this Comment On April 09, 2010, at 12:27 PM, hudsondusters wrote:

    Yeah, it has been in a pretty stagnant place in general last few years. That doesn't mean that free cash flow shouldn't be returned. In fact, that's usually when it should be, when the company can't grow with the cash.

    I have been long aro and bke myself last year or so. Wish ARO would toss me some of that cash. :)

  • Report this Comment On April 10, 2010, at 10:28 PM, eekthecat wrote:

    So when the shares go down ex-dividend, use your dividend to buy more shares. And then it will go up again, in due time, and in the meantime you will be collecting dividends.

  • Report this Comment On April 10, 2010, at 10:41 PM, eekthecat wrote:

    This website seems to have an anti-Hot Topic bias. I don't know how many articles I've read on here that cited the same quote from a CAPS member about Hot Topic "selling dying fashion trends," which basically shows a lack of anyone actually visiting the store, i.e. knowing what they are talking about. The store is called Hot Topic for a reason, they sell current trends. The currently top-rated bear pitch about this company says, "all I know about Hot Topic I learned on South Park," which is telling.

  • Report this Comment On April 15, 2010, at 2:23 AM, eekthecat wrote:
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