Before I even opened Hot Topic's (NASDAQ:HOTT) second-quarter press release or analyzed its most recent conference call, I fully expected to see abysmal results. Was my hunch correct? Yep. Following an earnings warning issued by the company, my colleague Alyce Lomax did a writeup on the teen retailer a few weeks before actual results were released. Was that my clue? Nope, I was overseas and unfortunately missed her article.
OK, so what was my hunch based on? The company's pattern of poor performance. Hot Topic simply has been unimpressive as a company since I've followed it. And so long as it maintains its Goth, punk, and rock tee ways, I fully anticipate it to continue struggling.
The situation may not be hopeless, however. An analysis of its second-quarter earnings conference call suggests that management is finally taking the need to expand into more mainstream fashion seriously. In this latest Folly Volley roundtable discussion, Hank Schofield and Bodhi Zappa join me once again, this time to determine whether there is a ray of hope in what has been a dark and gloomy underperformer.
Women are buying
Jeremy
: Bodhi, you are the eternal optimist, but I suspect that even you will have trouble finding comfort in Hot Topic's latest results. The company lost $0.02 per share for the quarter. Net sales did increase 5%, but the big red flag was the 5.5% drop in comparable same-store sales that followed a 3.5% decline in comps in the year-ago period. Is there any good news?
Bodhi: Bro, spend a little time chillin' in the sun of southern Cali, and you'll be an eternal optimist too. The good news? One thing I found refreshing in the call is that management didn't blame the stars and quasars for poor results. How many CEOs do we hear regularly pointing the finger to a challenging economic environment, and then totally glossing over some of the operational blemishes that are just as problematic?
Beyond this, it is also good to hear the retailer is having some success in its women's category. Comps in this segment increased 6% versus a decline of 10% in the comparable period a year ago. Weakness continues to come from bottoms, but this was more than offset by strong sales in fashion tops and novelty tees.
Hank: Bodhi, it's a good thing McLaughlin didn't play the economic card; no one in their right mind would buy it from a concept with a history of poor sales.
While I do agree it is a positive that its expanded fashion offerings appear to be paying off in the women's category, the same cannot be said for men's. Men's comps were hammered, dropping 18%, which follows a 9% decline in comps last year. One of the primary culprits for these dreadful figures was novelty tees.
What a surprise? Hard to believe it was only cool to wear a Napoleon Dynamite tee for like ... a minute.
Men dropping Hot Topic like a hot potato
Jeremy
: Thanks for laying on the sarcasm nice and thick, Hank.
During the Q&A portion of the call, McLaughlin asserted, "We feel like we're getting more of our share of that women's customer when you look at the women's business and you look at fashion accessories. So it really is an issue with the men's customer." Bodhi, they've identified the problem, but what's the solution?
Bodhi: McLaughlin indicated there are basically two types of male customers they are dealing with: the head-banging rock tee types, and the more fashion-oriented. She is confident Hot Topic still maintains a solid position with the former, but the latter is where they are lagging behind.
Hank: And the hurdle they're facing according to McLaughlin is that the company hasn't offered men's fashion for "several years now," and it takes time to bring in those men who are looking to sport a fashionable pair of jeans.
Bodhi: Piggybacking on that, McLaughlin confirmed with one analyst that the product being offered isn't the issue, rather it is simply about getting the word out and building momentum.
Hank: We shall see if that's the case. Later in the call when addressing the apparent delay from male shoppers, McLaughlin added, "I personally have never felt our assortment looks as good as it looks right now."
No offense to Goth enthusiasts, but is that really saying a whole lot? McLaughlin feels good about the new lineup and is hopeful that the Christmas season will validate the fashion moves; it just remains to be seen if men share her taste.
Cost control is not enough
Jeremy
: It doesn't appear that customers were buying during the back-to-school shopping season, so we'll see how long we can continue to characterize Hot Topic's dilemma as a delay before it becomes an outright disaster. The company is making some progress when it comes to cost management, but until it can figure out a way to get customers back into the stores, no amount of expense control is going to salvage the situation. In this Fool's opinion, Hot Topic's turnaround efforts remain best viewed from the safety of afar, rather than as risk inside one's portfolio.
More Folly Volley madness on the apparel industry:
- Nordstrom (NYSE:JWN) is looking good, but it isn't without blemishes.
- What's hot and what's not for the apparel giant Limited Brands (NYSE:LTD).
- And, Christopher & Banks (NYSE:CBK) displayed a remarkable turnaround.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Fool's disclosure policy is no mere novelty.
