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Hot Topic (HOTT)

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By elan19
June 20, 2006

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I've been following HOTT for years, with the thought that this very unique and distinctive store concept may not be subject to direct competition but is subject to fashion cycles and the time to buy is when fashion cycles have gone against them. Well, after three years of negative comps, the stock price is starting to look attractive, should net margins ever return to the 6% to 8% range. Is Hot Topic for music rebels in 2006 what Claire's was for preteens in 2001 (The attractiveness of the stock, that is)?

The big question to answer for me is whether it's just a fashion cycle thing, or other things that are more permanent. The company's explanation is that the main culprit is denim popularity. The stores are not large enough to carry a good selection of denim, so they have not tried, and this is hurting them short term as denim has experienced a surge of popularity over the past 2-3 years.

On the other hand, some theorize that Hot Topic's basic concept is flawed. If people who wear the kind of clothes found in Hot Topic do so to feel rebellious and different, what happens as Hot Topic stores are not longer unusual, but are found in most malls? Indeed, when I swing by the local Hot Topic these days, I don't see many rebellious-looking teens shopping the store. I see mainstream-looking folks, and it seems to be a bit of a shift from a few years ago. If this is the case, Hot Topic is more like a generic clothing/accessories retailer (though less adaptable than many due to its small, unique store format) rather than a community cluster like one finds at Claire's.

Then there is Torrid, the second store concept for plus-sized but fashion forward women. It's now a significant source of sales yet the company continues to provide such sparse information that it is hard to figure out its economics. One big hint though: The number of Torrid store openings has abruptly slowed this year. I did once have a long conversation with a plus sized friend and while she had not shopped their personally (none were close to her), she had heard generally favorable things from friends (though nothing spectacular).

So, despite years of following the Hot Topic story, I have never invested and don't feel much conviction about what this company's future is likely to be.

Any thoughts? Would love to hear comments from anyone who has visited Hot Topic or Torrid stores over the past year.


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