Edgy specialty retailer Hot Topic (NASDAQ:HOTT) has grown lukewarm. Last night, it warned investors that things weren't going according to plan, slashing its earnings outlook on weakening store traffic.
Surely, you saw this coming. Just last week, we took a closer look at the once-crisp concept's sluggish June comps. We pitted the chain's dip in same-store sales against the more robust showing at rival American Eagle Outfitters (NASDAQ:AEOS) and figured that it was more than just the casual preppies spending more than the alternative crowd.
"But what can you make of Hot Topic's slide?" we asked. "While the company also produced a 20% uptick in sales last month, that's actually a troubling sign when you consider that the company may be expanding too quickly at a time when its stores may be in need of repair. Sales at the store level have been eroding all year."
Being an active participant in today's share-price collapse could have been avoided if you had heeded that simple paragraph. What good is growing a concept if sales at the store level are starting to fall apart? You can't make that up in volume -- only magnify it. The same thing once happened to such retailers as Gap (NYSE:GPS), Restoration Hardware (NASDAQ:RSTO), and Toys "R" Us (NYSE:TOY). They temporarily lost their focus by paying too much attention to the next location rather than the last one.
Hot Topic's news isn't pretty. It sees July comps falling by as much as 8%. Yes, the erosion continues, and it couldn't come at a worse time. As a result, it is looking to earn just $0.10 a share in its current quarter while talking down the critical back-to-school and holiday quarters that follow.
Hopefully, Hot Topic can set aside its anti-establishment theme long enough to learn from its retailing ancestors. Hit the brakes on the expansion efforts. Identify the problems. Start moving again only after the problems have been properly addressed.
It's the only way to find your way back once you've gotten lost.
Have you been to a Hot Topic lately, or is it just not your scene? Where do you do most of your apparel shopping? Do I match? All this and more -- in the What to Wear? discussion board. Only on Fool.com.
Longtime Fool contributor Rick Munarriz was at a Hot Topic store earlier this month and walked away empty-handed. He does not own shares in any companies mentioned in this story.
