Please ensure Javascript is enabled for purposes of website accessibility

Hot Topic's Cooling Off

By Alyce Lomax – Updated Apr 6, 2017 at 2:05AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Here comes the big chill.

In March, I noted that Hot Topic's (NASDAQ:HOTT) stock has been hot, but I wondered for how long. Given its most recent quarterly earnings news, the stock looks like it's due to cool off considerably.

Hot Topic's first quarter did manage to beat analysts' expectations. The firm swung to a profit of $1.2 million, or $0.03 per share, versus a loss of $1.4 million, or $0.03 per share this time last year. Total revenue increased 10.1%, to $175.1 million, and same-store sales jumped a solid 7.1%.

However, there was some chilling news in Hot Topic's second-quarter guidance. Analysts were expecting a modest profit of a penny per share, but now it looks like Hot Topic will report a second-quarter loss of $0.04 to $0.06 per share, with same-store sales expected to fall in the mid-single-digit range.

Hot Topic's never been my idea of a great long-term retail stock; it peddles merchandise that caters to teen trends, which are notoriously short-lived. Even though its emphasis on music- and pop culture-related merchandise seems to come from a subversive bent, I've often questioned whether it really gives off any sense of authenticity.

Furthermore, lately, it seems as if a great deal of Hot Topic's turnaround success has been due to the brisk sales of items related to the popular Twilight franchise. However, that trend doesn't strike me as particularly sustainable. And of course, investors who have tangled with stocks such as Crocs (NASDAQ:CROX) or Heely's (NASDAQ:HLYS) have probably noticed that fads can be lucrative in the short term and disastrous over the long haul.   

In addition, investors might look no further than Abercrombie & Fitch (NYSE:ANF) to see how fickle teens can be; that stock has waxed and waned over the years as teens cycled in and out of finding Abercrombie an attractive brand. Lately, judging by recent financial results, its high-priced fashions are definitely looking to be a bit "out."

Given the recent tumble in its stock, Hot Topic looks a bit cheaper on a relative basis than it did in March. Back then, I noted that it was trading at an outsized 21 times earnings, while other teen retailers with solid performance were trading at far cheaper multiples, firms such as Buckle (NYSE:BKE) and Aeropostale (NYSE:ARO).

Even with the recent pullbacks in Hot Topic's stock price, though, it looks to me like Hot Topic is due for a major cooldown, and I still believe long-term investors should avoid it.

Try on more Foolishness:

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy. Try any of our Foolish newsletters today, free for 30 days.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Abercrombie & Fitch Co. Stock Quote
Abercrombie & Fitch Co.
ANF
$15.88 (1.73%) $0.27
Aeropostale, Inc. Stock Quote
Aeropostale, Inc.
AROPQ
Crocs, Inc. Stock Quote
Crocs, Inc.
CROX
$66.71 (-3.01%) $-2.07
The Buckle, Inc. Stock Quote
The Buckle, Inc.
BKE
$32.24 (-0.80%) $0.26

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.