What do Planet Hollywood, TheGap (NYSE:GPS), Toys "R" Us (NYSE:TOY), and now Hot Topic (NASDAQ:HOTT) have in common? They all made a critical mistake. Too busy swigging down the elixir of expansion, they ignored the malady of waning popularity.
History has shown that trying to cover up shortcomings in same-store sales by ambitiously growing your unit count is a losing game. You just clone the sickness when you do that. In fact, you can only make things worse by multiplying a concept on the decline.
Hot Topic wrapped up a disappointing fiscal year, with earnings falling from $0.96 to $0.83 a share. While most specialty retailers produced robust same-store sales growth in 2004, Hot Topic saw comps slide by 2.9%. Any sane company would hit the brakes, pop open the hood, and make the necessary adjustments. Hot Topic's solution? Add another 110 stores in 2005 to its empire of 668 namesake and Torrid mall haunts.
There's something just flat-out wrong when a retailer issues an earnings press release that mentions expansion plans and square-footage additions over the past year but never once divulges that the cash registers aren't ringing like they used to. Sure, we all knew that the January quarter's comps were off by a shameful 6% back in February, but it's worth repeating so that investors don't confuse sales growth with a lack of performance at the store level.
Maybe it wouldn't be too much to have the company explain how it originally expected to earn between $0.49 and $0.52 a share in the January quarter. It eventually reduced that range to just $0.37-$0.43 a share and landed on the short end of that half-pipe by earning just $0.38 a share during its most potent quarter.
Hot Topic serves the alt-rock niche of teenage shoppers, yet it's clearly slipping these days. More rope isn't the solution -- a firmer grip is.
Meanwhile, Urban Outfitters (NASDAQ:URBN) grew its comps by 22% during the same 12 months. Aeropostale (NYSE:ARO) saw its same-store sales climb by 9%. Those teen-fashion retailers have to answer to no one if they want to expand their base aggressively. Go for it. Yet for Hot Topic, an introspective pause would do it some good. It may not like what it sees, but that's the point. Hot Topic still has a chance to spit out the expansion elixir and get better before it starts drinking again.
Here are some of the company's more recent woes:
- It won't cost much to change the name to Rot Topic.
- The third quarter wasn't so hot, either.
- A bad summer is never a good start.
Longtime Fool contributor Rick Munarriz enjoys the mall -- even the food court. He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
