Requiem for a Lost Retailer

Teen retailer Hot Topic's (Nasdaq: HOTT  ) identity crisis just got even worse.

CEO Betsy McLaughlin just got the boot, replaced by board member Lisa Harper. Now, Hot Topic merchandising chief Amy Kocoureke has left the company, too.

The company's shutting down its music site, Shockhound.com (as if that could compete with the likes of Apple's (Nasdaq: AAPL  ) iTunes and music streaming services like Pandora), and it forecasts a first-quarter loss of $0.01 to $0.04 per share. That's excluding the $0.21 of charges it expects to record related to merchandise writedowns, shuttering ShockHound.com, and paying McLaughlin's severance costs.

A peek at Hot Topic's website makes me think things are truly, truly bad for the retailer. Admittedly, the company no longer looks like a trendy poseur in the alternative world anymore; instead, it looks like a purveyor of cheap, faddish schlock for tweens. (A tiny link for "old-school Hot Topic" still remains on the company's site, for any truly loyal fans.) Whatever some analysts might believe -- I ran across some commentary welcoming a "less intimidating" product line -- the company's latest new direction doesn't represent progress.

Even on a good day for the economy, this retailer's teen demographic is fickle; just ask longtime Abercrombie & Fitch (NYSE: ANF  ) shareholders how it feels when trendy young shoppers take their dollars elsewhere. Although Abercrombie recently staged a minor recovery, it's succeeding only in comparison to years of underperformance. In January, it posted an annual increase in same-store sales, but its annual comps had been negative or extremely anemic since the year that ended in February 2007.

Speaking of comps, the last time Hot Topic experienced a meaningful increase in annual same-store sales was the 7.4% increase it reported in January 2004. Ouch.

Hot Topic's identity problem isn't new. For years, it catered to goth and punk kids, carrying dark merchandise, body jewelry, and alternative-music T-shirts. Thinking any of that was a particularly authentic purpose was a mistake; the company chased trends, jumping on pop culture bandwagons like the Twilight craze. Surf and skate company Volcom (Nasdaq: VLCM  ) has always struck me as a more authentic company, since founder Richard Woolcott was actually part of the board-sports culture.

For a long while, Hot Topic was fun to write about. In past years, I've taken a page from South Park to joke that it got goth-served, quoted Bauhaus lyrics, cited Siouxsie & the Banshees' Eve White/Eve Black in celebration of old-school goth, and made fun of new-school mall-based goth retailers. In general, I've had a grand time busting on a concept that seemed to think it could commoditize subculture, package it in a shopping mall, and succeed.

The topic of Hot Topic isn't amusing anymore; it's simply sad. Investing in teen retailers is always risky, given teenagers' fickle shopping habits, but this particular retailer should be low on anyone's watchlist. Avoid the misguided notion that Hot Topic shares are cheap right now. This retailer's lost, and the potential that it might find value in the long term seems highly unlikely.

Apple is a Motley Fool Stock Advisor recommendation. Volcom is a Motley Fool Hidden Gems pick. The Fool has written puts on Apple. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple, and Volcom. Try any of our Foolish newsletter services free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned; for more on this and other topics, check back at Fool.com, or follow her on Twitter: @AlyceLomax. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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