Back in 2001, when Hot Topic (NASDAQ:HOTT) was still sizzling, one Fool asked whether this rebellious teen retailer was the next Gap (NYSE:GPS). Given the negative trends that have befallen both retailers as time has passed, it's still a logical question (albeit for the polar opposite reason), making that headline strangely prescient.
Given Hot Topic's downward spiral over the last couple years, it stands to reason that many investors are looking for a turnaround from the retailer, which focuses on music-inspired clothing and teen gear (emphasizing goth and punk fashion). However, May's sales figures haven't given too much reason for hope. Hot Topic's same-store sales fell 6% (compared to a 1.9% decline this time last year); net sales increased 6% to $45.9 million. There was a silver lining: The last 11 days of May showed improved comps.
It's not exactly pleasant news given the fact that today's raft of May same-store sales data showed that some teen-oriented retailers didn't have to sweat it. Standouts included American Eagle Outfitters (NASDAQ:AEOS) and Zumiez (NASDAQ:ZUMZ).
I've always had more than a passing interest in Hot Topic, given my own punk rock teenage years. However, one element that always bothered me was the idea of subculture going pop culture -- I mean, it's sort of an oxymoron, isn't it? (In my day, a punk going to the mall for anything other than startling passersby was quickly dubbed a poseur, so the idea of a mall-based punk retailer chafed at some of my old-school sensibilities.)
Then again, given current trends, how has Hot Topic managed to blunder for so long? Its merchandise emphasizes music and the growth of digital downloading, satellite radio, and devices like Apple's (NASDAQ:AAPL) iPod. Even Internet theories like the "long tail" effect might lead one to think Hot Topic's in a hot spot. (Incidentally, management said in its most recent earnings conference call that it is experimenting with music downloads online, as well as new musical initiatives in stores.)
On the other hand, as Stephen Simpson pointed out last quarter, Hot Topic does have a well-defined niche: rebellious teens. And despite my concern -- what's so rebellious about a chain store in the mall? -- it's also a pretty convenient way for young people to appall their parents. Furthermore, its Torrid stores serve what has been described as an underserved market: fashion-forward apparel for plus-sized girls.
Hot Topic doesn't lack innovation, either. A Fortune article this past winter noted that it enlists its young employees to help spot trends by reimbursing them for concert tickets (in exchange for reports on fashion and accessories they observe at the shows). (Business 2.0 recently pointed out that another edgy, youth-oriented retailer, Urban Outfitters (NASDAQ:URBN), uses similar guerilla tactics.)
It seems to me that the pros outweigh the cons when it comes to Hot Topic pulling off a turnaround, but I agree with Fools who have written about Hot Topic recently -- it's still got a lot of work to do, despite the reported improvement at the tail end of May. It may be contrary to my rebellious past, but I'd still steer clear of Hot Topic for the time being.
For more on Hot Topic, see the following Foolish stories:
- Check out the Foolish Forecast for Hot Topic's first quarter.
- Back in February, Hot Topic got a Foolish cold shoulder.
- Then again, with a stock this cheap, should you buy before it's too late?
Gap has been recommended by both Motley Fool Stock Advisor and Motley Fool Inside Value .
Alyce Lomax , who hardly ever met an article of black clothing she didn't like, owns shares of Urban Outfitters, but none of the other companies mentioned.
