Back in May, when I last looked at apparel chain Hot Topic (NASDAQ:HOTT), I implied that it should consider mixing up its Goth-based product line to increase customer traffic. After another round of disappointing results, it is important that leadership gets the message.
Since I've spent time in mosh pits filled with black-clad youth and grew up a fan of Star Wars, I am not completely opposed to Hot Topic's product mix. That said, if the company intends to keep its all-dark theme, it would have to incorporate more trendy and higher-quality clothing.
Abercrombie & Fitch's (NYSE:ANF) higher-end REUHL tastefully incorporates darker styles into its line of high-quality clothing: You can see the success in the company's stock price increasing more than 8% in recent trading. Even higher-end retailer Guess? (NYSE:GES) knows how to mix it up, sprinkling a little dark rock stylin' with its club and beach clothing.
Hot Topic should not only raise the quality of its dark clothing but also consider bringing some light into the store. Some yin and yang action may be the right balance to get customers back. Chico's (NYSE:CHS) has shown with its White House-Black Market stores that mixing opposites can be a winning recipe. Hot Topic can become that balance for today's high school, college, and graduate students.
But what separates Chico's, Guess?, and REUHL from Hot Topic is that the former are using trendsetting styles. Hot Topic supporters might argue that bringing in higher-end labels would result in losing loyal customers. My response: "Yeah, and . ?" This company hasn't been able to improve significantly in five years even with those "loyal customers" -- if you can call the 6.2% decrease in third-quarter comp-store sales evidence of loyal customers. This type of stagnation should be unacceptable to investors.
A glance through Hot Topic's latest quarterly report suggests that its stock is unlikely to do much anytime soon: Comps are way down, top-line growth is just 6.6% while inventories are up 22.3%, and gross margins declined to 32.9% from 35.7% a year ago. Folks, this just isn't improvement no matter how you spin it.
But all is not lost for Hot Topic. Its solid net cash balance, although it's decreased by 50% over the last year, can buy it time to ramp up its style. But if it fails to turn from the dark side, not even a fierce and hairy Wookie or a smooth-talking gunslinger can save it.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
