Hot Topic Inc. posted robust sales and comparable store sales (comps) results for the holiday season for the combined months of November and December. Moreover, the company maintained its guidance for the fourth quarter.
Hot Topic’s comps for the nine weeks ended December 29, 2012, inched up 2.2% compared with 1.8% reported in the comparable year-ago period. The increase in comps was driven by a 1.6% rise in comps at the company’s namesake stores and a 5.5% hike in Torrid stores.
Hot Topic’s net holiday sales increased 4.0% year over year to $177.3 million, on account of robust sales in Torrid concepts stores as well as marginal improvement in the company’s namesake stores. On a segmental basis, net sales inched up 0.8% year over year to $141.1 million at the company’s namesake stores, while Torrid stores registered a 18.8% increase with sales of $36.2 million.
Positive results during the holiday season mainly came from the new merchandising and sourcing strategies at Torrid. Further, the company continued to benefit from favorable customer response to the fashion apparel and tee businesses, which largely made up for the drag in the accessories category.
Year-to-date Sales Data
Year to date, the company’s total sales grew 4.2% to $686.0 million driven primarily by strong sales at Torrid concepts. Net sales improved 1.7% year over year to $514.2 million at the company’s namesake stores, while Torrid stores registered a 12.3% increase with sales of $171.8 million.
Comps were up 3.4% compared with the 1.3% rise reported in the year-ago period. This increase was driven by 3.5% and 3.0% comps growth at the company’s namesake stores and Torrid stores, respectively.
Management maintained its earnings guidance for the fourth quarter, projecting earnings in the range of 23 cents – 27 cents per share compared with 21 cents earned in the fourth quarter of 2011. The company’s guidance is based on comps growth in the low to mid-single-digit percentage range. The current Zacks Consensus Estimate for fourth quarter earnings stands at 25 cents per share.
Hot Topic also provided initial guidance for fiscal 2013 (52 weeks ended February 1, 2014), anticipating a 30% – 35% increase in earnings compared to fiscal 2012. This guidance assumes comp sales to increase in the low-single-digit range.
Further, management remains confident about its business prospects in 2013, anticipating continued growth from its Torrid segment. Buoyed by such an overwhelming outlook, the company reaffirmed its plan to open 40 new Torrid stores, 15 new Hot Topic outlets and an additional 5 to 10, newly introduced Blackheart stores in 2013.
Share Repurchase Program
Through December 2012, the company bought back about 2,535,370 shares at $9.86 per share, valued at $25 million. This buy back was in line with the company’s previously announced share repurchase authorization of up to $25.0 million.
Hot Topic’s core business strategy focuses on music/pop culture related merchandise and mainly targets customers in the teenage group. As of December 29, 2012, the company operated 619 Hot Topic stores across 50 states and in Puerto Rico as well as in Canada, 190 Torrid stores and 5 Blackheart stores. The company’s e-commerce business looks strong and it runs three e-commerce sites - hottopic.com, torrid.com and blackheartlingerie.com.
Hot Topic regularly monitors store sales and takes prudent steps to align merchandise mix in accordance with the rapidly changing preferences of its target customers. Furthermore, the company periodically evaluates its stores and remodels or relocates them in compliance with the latest trends.
However, Hot Topic’s business is seasonal in nature and generates high proportion of sales during fiscal third and fourth quarters, which are characterized by the back-to-school, Halloween and holiday seasons. As a result, the company is exposed to significant risks if the seasons fail to deliver the expected level of operating performance.
As a result, we have a long-term ‘Neutral’ recommendation on the stock. However, Hot Topic, which competes with Abercrombie & Fitch Co. (ANF - Analyst Report), carries a Zacks #2 Rank, implying a short-term Buy rating for the upcoming 1–3 months.