It's one of my favorite lyrics ever: In "Silent Hedges," classic Goth band Bauhaus asks, "What happens when the intoxication of success has evaporated?" Anybody following Goth-oriented retailer Hot Topic (NASDAQ:HOTT) knows that the intoxication of that retailer's dissolved into mist at least a few years back.
Hot Topic did narrow its first-quarter loss -- a step in the right direction -- but only by a penny. (For all the numbers, see our Fool by Numbers for Hot Topic's first quarter.) Guidance wasn't too hot, either -- the company expects a second-quarter loss of $0.02 per share to $0.04 per share, with comps down in the mid-single digits. The retailer will also take a charge related to remodeling, as well as relocating some of its stores before their leases expire.
Goths may hate what the midday sun does to their customary pallor, but shareholders could use some sunny news. Margins improved, so Hot Topic has done better at selling full-priced merchandise; it also pared down its inventory (although management admitted in the conference call that it lacked some inventory it wished ithad more of). Hot Topic's cash on the balance sheet ballooned as well.
In the conference call, Hot Topic mentioned new Chief Music Officer John Kirkpatrick, who has worked for the music and creative affairs department at Viacom's (NYSE:VIA) Paramount Pictures, as well as at Warner Music's (NYSE:WMG) Elektra Entertainment and EMI's Capitol Records/Revolution Recordings. However, the company declined to specify exactly what new musical initiatives might be on the way. I'll be curious to see how it goes; my gut reaction is that I'd have rather seen the company pick someone with more indie cred than an executive fromthe major labels, which have their fair share of difficulty innovating. (And they're so mainstream!)
In his Foolish Forecast for Hot Topic, Rich Duprey observed that some of the retailer's stores are looking a bit less Goth, which sounds troubling. In the conference call, management said more people are coming in, possibly because people "thought of Hot Topic as a dark Goth store and are now interested in this new lighter version." Executives added that people who are not familiar with the concept might have been "afraid" before. If you know the Goth tradition -- well, a little fear is part of the experience. Is Hot Topic really trying to appeal to curious seekers and Abercrombie & Fitch (NYSE:ANF) types who decide to be "edgy" for a season? (One analyst did ask whether the company is tracking conversion rates related to this traffic. It's not.) Maybe that's a bad idea, strategy-wise.
The retailer's major issue has long involved catering to a supposedly nonconformist subculture and drumming up growth. (I've long wondered just how counterculture any mall-based chain can be.) Whether Hot Topic is more than skin deep is a troubling thought for the long term, since gimmicks don't make good long-term investments.
Cold, bleak whispers from the Foolish grave:
- Check the numbers with Fool by Numbers.
- Rich Duprey lent plenty of observations in his Foolish Forecast.
- Last quarter, you could say Hot Topic got Goth served.
David and Tom Gardner have recommended a few retail stocks for Motley Fool Stock Advisor. To find out which ones, click here for a 30-day free trial.
Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.
