I have been in awe of Hot Topic (NASDAQ:HOTT) for about four years now. When I first discovered the company in 2000, I was impressed but skeptical. Could such a trend-driven retailer really connect with its teenage audience again and again? Wouldn't it eventually flub, fall out of favor, and then be lost forever?
Turns out the answer to both of those questions is nope. I underestimated management's ability to keep up with and even anticipate the latest trends in music and fashion. Hot Topic gets it right, and keeps it fresh, luring mall-wandering teens back for more, more, more.
Shares are up over 9% today, not terribly far off their 52-week high of $29.87, after the company posted incredible third-quarter results. Sales jumped 31% to $161.5 million, and net income grew 53% to $15.3 million. Comparable-store sales expanded by an exceptional 10.8%.
While some retailers, such as Abercrombie & Fitch (NYSE:ANF) and American Eagle (NASDAQ:AEOS), are finding attracting teens a significantchallenge, Hot Topic makes it look easy. One thing that helps it, and also benefits fellow teen retailerPacific Sunwear (NASDAQ:PSUN), is that its stores aren't dependent on one brand. Both Hot Topic and Pacific Sunwear sell multiple brands of clothes, shoes, and other accessories in their locations. The fashion risk's lower than with a single-branded store.
Hot Topic also does something different with its Torrid chain, which features clothes for "plus-size" teenage girls. Smart move. There's virtually no competition here, and cannibalization of its namesake stores is minimal. Torrid's actually performing so well for Hot Topic that it now plans to expand the store base by 50% in the next year, adding 25 new stores.
Hot Topic's loyal customers believe that different is better, and they strive to set themselves apart with their Goth or punk or '80s-inspired looks. (I'll leave out the obvious irony of shopping at a chain store to accomplish this fashion transformation.)
For Hot Topic the company, different is also better. By having a different niche than other teen retailers, by approaching its merchandising in a different manner than everyone else, and by reaching different market segments than others, Hot Topic has succeeded. Its shareholders have, too, and given the company's ability to pull it off again and again, that doesn't look likely to change.
LouAnn Lofton owns shares of Abercrombie & Fitch, and would have loved Hot Topic during her own high school Goth phase.
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