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By
Trading at $24.94 on February 7, 2001 Valentine's Day lets me celebrate the stock I love most: I'm positively hot for retailer Hot Topic (Nasdaq: HOTT). If you have never set foot in one of its mall stores, do it soon. Better yet, assuming you're over 22, find a 12-to-22-year-old Valentine-pal-for-the-day who isn't embarrassed to be seen with you, and treat yourselves. You'll be glad you did. If you've already caught the company in its frequent appearances on our Foolish 8 stock screen list of fast- growing small companies, what are you waiting for? Head on over! A store for rites of passage Currently, think Limp Bizkit, Metallica, Slip Knot. Imagine rectangular rimless sunglasses, star-studded muscle tees, and altered mind-space cowboy pants. We're talking the pierced raver crowd. Apparel revenue is 54%, from t-shirts, pants, and other club gear. The men's and women's t-shirts are edgy and witty, with each sex getting its digs in. Getting into the spirit, I almost walked out after a recent visit to a Hot Topics with an "Anticrombie" shirt, after lingering misty-eyed by the Jim Morrison classic on the wall (at least youth appreciates some classics). Rounding out the inventory are lingerie, beauty and paper products, and other gifts. Not for the parents You don't need a store nearby, either, because you can shop at its website. Your teens certainly do: Sales are up 250% year over year, with a 200% increase in user sessions, 290% more hits, and an average user session of 28 minutes. Find me a company with an Internet presence that wouldn't kill for those numbers. And oh, the numbers are phenomenal
Remember how important it was that your parents didn't understand the lyrics or appeal of your music? That your clothes reflected your own style (or that of your peer group, now that we can look back honestly)? Hot Topic relies on these two timeless teen identity formation crucibles. The company licenses music-based apparel from performers that appeal to its target 12-22 age group, and sells related club-appropriate clothing and gifts.
All told, there's a certain je ne sais quoi, something that says I don't belong, don't get it. Which is perfect. The target market most definitely does get it, however. During our visit, the place was busy all night, and every store around was empty (even Just Hats didn't attract). This popularity also makes a Hot Topic job the mall gig for teens. Despite the tight labor market, last year saw 97% of positions filled, with 100% at new stores. Hot Topic deploys these sales associates at music events around the country to scout the performers and clothing that the stores then sell.
I'm sure that this all sounds quite flaky to any serious folks who only invest in the buzzwords of the last few years: Technology! Internet! Wireless! Broadband! Or biotech! But take a look here at the 13 straight quarters of startling revenue and EPS increases since Hot Topic's Q3 1996 IPO, beginning with last year's third quarter:
quarterly revenue vs. quarterly EPS vs.
prior year quarter prior year quarter
Q3 2000 +51% +55%
Q2 2000 +58% +142%
Q1 2000 +59% +229%
Q4 1999 +64% +85%
Q3 1999 +67% +142%
Q2 1999 +58% +242%
Q1 1999 +63% +1200%
Q4 1998 +36% +18%
Q3 1998 +53% +57%
Q2 1998 +52% +75%
Q1 1998 +55% $0.01 vs. (0.02)
Q4 1997 +64% +63%
Q3 1997 +59% +44%
Same-store pleasures
This steroid-laden earnings growth provided the cash flow to boost the store count from 194 at back-to-school time in 1999 to 274 in 45 states at year-end 2000. No debt. Not one nickel.
The stores are going gangbusters, too. Let's line the numbers up just for fun, next to a certain gorilla retailer named the Gap (NYSE: GPS):
Total Sales Same store sales
vs. prior year vs. prior year
Month Hot Topic Gap Hot Topic Gap
December 2000 +37% +14% +8% -6%
November 2000 +49% +20% +17% -1%
October 2000 +42% +19% +8% -2%
September 2000 +56% +12% +20% -8%
August 2000 +53% +6% +18% -14%
July 2000 +55% +22% +20% -1%
June 2000 +63% +19% +25% -2%
May 2000 +54% +19% +20% -2%
April 2000 +59% +31% +24% +7%
March 2000 +51% +8% +20% -11%
February 2000 +69% +27% +31% +4%
January 2000 +67% +36% +31% +11%
I don't deny that Gap has the known universe's strongest retail clothing brand, or that the law of large numbers makes it harder for it to grow at high percentage rates, but let's be honest: Which would you ask out for an investing date? I'll snuggle up to the company with 54% gross margins -- in retail! -- and frequently selling at or below its growth rate, thank you very much.
Heating up
Management's not sitting still. Their research is taking them into the fastest-growing and also underserved retail clothing market: plus-size women ages 15-30 who want to wear the same club gear and street fashions their friends do. Look around. You won't find this at Wet Seal (Nasdaq: WTSLA), Abercrombie & Fitch (NYSE: ANF), or American Eagle Outfitters (Nasdaq: AEOS). Lane Bryant's plus-size line appeals to older, professional women. This market is ripe for Hot Topic's picking.
After test marketing plus-size women's clothing successfully in selected Hot Topic mall stores, the company will launch its Torrid store concept in 2001 with six 2000-2500 square foot stores. While poorly planned and executed expansion has killed many a retailer, management's game plan tells me that, as a shareholder, I'm due for a Torrid affair.
That sounds like the best Valentine's Day anyone could ask for.
Tom Jacobs took his partner and niece to Hot Topic and had the time of his life. (Tells you what his life is like.) At press time, he owned shares in Hot Topic. To see his other stock holdings, view his profile. The Motley Fool is investors writing for investors.
Stocks Fools Love represents the opinion of one Fool and should in no way be taken as the opinion of either The Motley Fool, Inc. or the company in question, or as representative of anyone or anything else other than that specific Fool's thoughts.
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