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Hot Topic, Inc. (NASDAQ:HOTT)

Q4 2008 Earnings Call

March 11, 4:30 pm ET

Executives

James McGinty – Chief Financial Officer

Elizabeth McLaughlin – Chief Operating Officer

Christopher Daniel – President, Torrid

Analysts

Adrienne Tennant – FBR Capital Markets

[Steff Linset – Piper Jaffray]

Kimberly Greenberger – Citigroup

Holly Guthrie – Boenning & Scattergood

Jeff Van Sinderen – B. Riley & Company

Jennifer Black – Jennifer Black & Associates

Operator

Welcome to the Hot Topic fourth quarter 2008 earnings release conference call. (Operator Instructions) I would like to remind you that during the course of the conference call the company will be making forward-looking statements such as statements relating to financial results, guidance and future financial performance, merchandise assortment, new initiatives and related matters and statements relating to key personnel and operational issues.

These statements as well as related information posted on the Hot Topics Investor Relations website involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties are discussed from time to time by the company and are more fully set forth in the period reports that Hot Topic files with the Securities and Exchange Commission including the most recent annual report on From 10-K and quarter report on Form 10-Q.

All forward-looking statements made on this call only are made and Hot Topics undertakes no obligation to update these statements to reflect subsequent events or circumstances. To more effectively disseminate the information discussed this afternoon, the call is being webcast on the company's investor relations website at http://investorrelations.hottopic.com and a replay will be available on that site. A replay will also be available at 888-286-8010 pass code 45637162 for approximately two weeks.

Now I will now turn the call over to Hot Topics Chief Financial Officer, Jim McGinty.

James McGinty

Good afternoon. This is Jim and welcome to the call. While on hold you have been listening to Party in your Bedroom by the band Cash Cash. My partners on the call today are Besty McLaughlin, Jerry Cook and Chris Daniel. For competitive reasons we will not be discussing any specific forward-looking product information during this call.

I will begin by discussing the fourth quarter results and then comment on the balance sheet and cash flow. Following these details, I will turn it over to Betsy who will provide you with additional color on the quarter and the outlook.

First the results of the fourth quarter. All comparisons discussed are to the same period a year ago unless otherwise noted.

Overall, total company net sales during the quarter increased by $17.3 million due to $10.7 million of sales gain related to the Hot Topic comparable store sales increase of 6.5%, a $6.6 million sales increase in internet sales, a $1.8 million sales gain from new and non comparable Torrid stores and $1.6 million sales gain from new and non comparable Hot Topic stores, a $300,000 sales gain from relocated or remodeled stores, and these gains were offset in part by a $900,000 sales reduction related to the Torrid comparable store sales decline of 2.7%, along with a $2.8 million sales reduction from closed stores.

For the quarter, total company consolidated comp increase was the result of a high single digit increase in the average number of transactions in comparable stores partially offset by a low single digit decrease in the consolidated average transaction value.

At Hot Topic, apparel was 56% of the total sales in the fourth quarter versus 59% last year. At Torrid, apparel was 75% of the total sales in the fourth quarter versus 77% last year.

Gross margin was 38.6% of sales compared to 36.4% last year. This is the highest quarterly gross margin achieved by the business since 2003. The 220 basis point increase breaks down into the following categories; merchandise margin improved by 130 basis points driven primarily by the favorable higher realized markup along with lower shrinkage and associated discounts.

Store occupancy expenses declined 50 basis points primarily as a result of the leverage gained on the higher sales space. Store depreciation expenses declined 40 basis points against the leverage on the sales improvement as well as fewer store remodels and relocations.

As a percent of sales, buying and distribution costs were flat to last year. In the fourth quarter, selling, general and administrative expenses were 29.0% of net sales compared to 27.9% last year. SG&A expenses in the fourth quarter of fiscal 2008 include approximately $460,000 in charges associated with store impairment and asset write off. Impairment in the fourth quarter a year ago was approximately $600,000.

Excluding these non recurring charges for both this year and last, SG&A expenses were 120 basis points higher this year. This breaks down into the following categories; other G&A expenses including administrative depreciation and amortization increased 160 basis points due to the accrual of performance based bonus expense.

Marketing expenses increased 30 basis points to last year related to the launch of Shock Hound and in store events. Payroll declined 20 basis points due to leverage on the comparable store sales, partially offset by an increase in store bonus payouts.

And lastly, other store expenses declined 50 basis points due to savings in telecommunication fee, pre opening expenses and physical inventory costs.

Fourth quarter income increased $3.9 million to $22.9 million. Operating margin for the fourth quarter was 9.6% of sales versus 8.5% last year.

Interest income was $200,000 lower in the fourth quarter as a result of substantially lower interest rates. Our effective tax rate was 39.2% for the fourth quarter versus 39.9% a year ago.

We reported fourth quarter earnings per diluted share of $0.32 compared to $0.27 a year ago, a 19% increase year over year. During the quarter, Shock Hound diluted the earnings per share by approximately $0.03.

During the quarter we opened one new Hot Topics store and two new Torrid stores and closed three Hot Topics stores and one Torrid store. We also remodeled two Hot Topic stores during the quarter bringing the total number of remodels and relocated stores during fiscal 2008 to 14.

Cash, cash equivalents and short term investments were $98 million, up 83% versus a year ago. The significant increase in cash and investments is primarily a result of our improved cash provided by operations coupled with lower capital expenditures this year. We now have approximately $8 million in auction rate securities classified as long term investments.

Total inventory cost was approximately $80 million. On a per square foot basis, inventory was approximately flat to last year at the end of the fourth quarter.

Capital expenditures were $4.5 million in the quarter primarily related to three new stores and two Hot Topic remodels as well as the additional store projects scheduled in the first quarter of 2009, various IT initiatives including the development of Shock Hound.

Now, I'll turn the call over to Betsy.

Elizabeth McLaughlin

Good afternoon. We are pleased to report both a comp sales increase and positive earnings growth for the fourth quarter. Total company sales increased 8% to $238 million and earnings per share grew by 19%. In this very challenging environment these results are a testimony to the commitment and tenacity of those teams at Hot Topic and Torrid.

In the Hot Topic division, we achieved a 6.5% comp increase. The average number of transactions per store per day were up a high single digit, offset in part by a low single digit decline in the average transaction amount. Hottopic.com achieved a 59% increase in sales over last year.

All geographic regions that Hot Topics comped positively for the fourth quarter. Texas posted the strongest performance with a mid teen comp increase while the Northwest was the weakest.

Throughout the quarter we were less promotional than last year and maintained tight control over inventory. We entered the first quarter of '09 in a strong clean inventory position, and as Jim said, overall inventory per square foot was flat to last year and our aged inventory at Hot Topic was 20% below last year and the end of the fourth quarter.

Here are the details on Hot Topic by major category; accessory comps were up 15%. Fashion accessories which makes up the majority of the accessory classification, produced a mid teen comp increase. Licensed accessories also turned the corner and produced a positive double digit comp.

The women's category comped up 15% also. Novelty Tee's produced a comp increase in the mid double digits. Women's bottoms also continued to produce positive comps as a result of strong sales in denim.

The men's category comped up 4%. Both men's novelty Tee's and fashion bottoms comped in the teens. Men's bottoms were also driven by increases in denim.

The music category comped down 6% for the fourth quarter. Continued strength in junior rock apparel and CD's were more than offset by declines in men's rock Tee's.

In the late third quarter, we began to see a shift in the sales mix by genre. Receipts were subsequently adjusted over the course of the fourth quarter and we have begun to see steady improvement in rock Tee's as was evidenced by the music categories' positive 2% comp t hat was reported with our February sales results.

During the fourth quarter we continued to make progress with our music and licensing initiatives. Three worth noting are as follows: first in conjunction with our program of artist in store signings, we tested and subsequently rolled out live in store acoustic music events. Driven by our store and field teams knowledge of the local music scene, emerging bands have the opportunity to market and perform in their local Hot Topics store. We will continue both of these programs in 2009.

We also launched Shockhound.com, the first e-commerce site to allow the customer to purchase both music and merchandise in the same shopping cart. Shock Hound offers the music customer a community environment where they can share in the discovery of new music and view exclusive video editorial content.

We have been pleased with the sales conversion of the site visitors and have experienced a higher than expected merchandise to download mix. As we move through 2009, we are focused on marketing initiatives and partnerships that will increase the site's exposure and increase traffic to Shockhound.com.

Third, we embarked on a deliberate strategy to retain incremental customers who experienced Hot Topics for the first time as a result of their passion for a new emerging band or a significant movie property. Tokyo Hotel, a top punk band from Germany and the book and movie property Twilight are both examples of catalysts which resulted in many new teens being exposed to our stores.

Initiatives to capture these customers beyond a specific license or band and convert them to regular Hot Topics shoppers were put in place during the fourth quarter. In the case of Twilight, the licensed product continues to perform very well. Our total division comps have increased over the past two months while sales of Twilight specific merchandise has declined as a percentage of our total sales mix.

As we evaluate selling trends, we believe we are making progress in gaining market share of this incremental teen customer.

Now on to the Torrid business. Torrid was down 3% in comp stores in the fourth quarter, consistent with the low single digit comp decline experienced throughout fiscal 2008. The comp decline was attributable to a low single digit decrease in the number of transactions along with a low single digit decrease in the average transaction amount.

Apparel comped down 5% and the accessory classification comped up 4%. Torrid.com continued its strong performance generating a 39% increase in sales over last year. At Torrid we continue to generate improved gross margins due to better initial markups and a lower mark down rate resulting from tight control over inventory.

As we mentioned in the last call, we launched a Torrid proprietary credit card program during the third quarter. During the back half of the year, we opened over 20,000 credit card accounts that generated average purchases that were 80% higher than the average Torrid purchase.

We were also able to market these credit card holders along with the loyalty members to drive transactions via our direct mail effort.

In terms of overall sales productivity, Torrid generated approximately $334.00 per foot in 2008. Our goal remains to drive productivity to a $400 per foot level which will drive a level of profitability and pay back the new Torrid store investment.

Overall, we continue to approach both businesses cautiously, given the macro environment and are being very deliberate when considering the funding for additional inventory or capital. That said, we will aggressively address opportunities, particularly in the Hot Topics business as we continue to find strong demand in particular items and categories.

Lastly, I want to reiterate our commitment to controlling or expenses and ensuring the preservation of our strong balance sheet. Jim will now discuss our guidance.

James McGinty

Regarding guidance for our first quarter of fiscal 2009 we expect sales to be up in the range of $168 million to $172 million based upon first quarter comp store sales up in the mid single digit range. It's worth noting that sales in March will be negatively impacted by the timing of the Easter holiday versus last year. Given this shift, we anticipate March's comp to be negatively impacted by approximately 400 basis points and the April comp to benefit by approximately 500 basis points.

We are expecting a comp increase at the low end of the mid single digit percentage range for the combination of the March/April period. We are expecting inventories at the end of the first quarter to be up in the mid single digit percentage range on a per square foot basis versus last year.

Our guidance assumes approximately 44.5 million shares outstanding for the first quarter. This will yield first quarter fiscal 2009 guidance in the range of a net loss of $0.01 to net earnings of $0.01 per diluted share.

Included in this guidance is a reduction to earnings of approximately $0.02 per diluted share related to Shock Hound and another $0.02 related to higher performance based compensation expense.

We are now guiding our fiscal 2009 capital expenditures to be in the range of $30 million to $32 million versus our previous guidance of $33 million to $36 million.

For the year, we expect to open few if any new stores at either division and we continue to expect to remodel or relocate 20 to 25 Hot Topic stores. We now expect to close approximately 10 Hot Topic stores and 5 Torrid stores.

In addition to the CapEx for specific store projects, the new guidance planned improvements in our information technology infrastructure including technological improvements at the store level, the purchase of new computer hardware and software and the further development of our internet sites.

At this time we will take questions relating to the results and outlook.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Adrienne Tennant – FBR Capital Markets.

Adrienne Tennant – FBR Capital Markets

My first question is on the in store music event, can you talk about the progression of how you came about and discovered these in store music events, how many you did in '07, maybe the progression to '08 and then how many we should think about in 2009. We actually saw one of them at the Springfield mall and it was pretty incredible to see it in action. And then secondly, can you talk about SG&A dollar growth. It obviously bumped in the fourth quarter due to bonus accrual but should we be thinking about dollar growth in Q1 as being in the high single digit range, high single to low double digit range?

James McGinty

In terms of SG&A I'll take that one first. You should be thinking about that in terms of increasing at a faster clip than sales because of some of the things we talked about with both Shock Hound which was nearly as significant last year as it was pre-launch, and the performance based bonus which will manifest itself throughout the year more evenly than it did last year where it was really back end loaded.

Elizabeth McLaughlin

On the in store events, back in 2007 when we architected the music strategy, it was a five year strategy. One of the pieces was to get some of the bands who were on tour to be able to visit stores that married up to their tour dates and do in store signings and customers could meet the band and get autographs.

And so we actually started testing it in 2007 and did I'm not sure how many, probably a dozen big ones in '07 and found that the response was really terrific both from the bank standpoint of being able to meet their fans and get exposure and also from the fan standpoint.

So in 2008 we ramped up that program and I think we have several every single month where we had a very, very large draw to multiple malls across the country. And then mid year we added this local music performance program and it's really predicated on the intelligence of the store managers and the district managers and their understanding of the local music scene.

So through the back half of 2008 I think we did about 1,000 of them and again, we had 700 stores, 780 stores, so that's one and a half, one and a third per store and again, very good response not only from customers but also from these emerging bands who don't have a lot of places to get exposure with so many clubs shutting down and individual independent record stores.

There really is not place for them to be seen and both MySpace and You Tube, while they're great platforms, there are millions of other bands that they are competing with. So it's an interesting opportunity for these bands to be performing in their local Hot Topics store.

So as we move into 2009 we are ramping up on both of those programs. It will be more than 2008. The in store signings are certainly planned events. All of the organic events at the local scene are really decentralized so it's not a matter of us throwing out a number. It will happen as it happens and it will be more than 2008, we're just not sure of how many it will be. It's just based on each store and what's happening in their scene at that time.

Adrienne Tennant – FDR Capital Markets

For the local events, do they perform in the store? Do you move the merchandise and how many people can get in the store? Since these local bands don't have a T-shirt or a CD is it just bringing in the foot traffic or is there something that they would actually have to transact in the stores to see the band?

Elizabeth McLaughlin

Well the way that it works, yes, we move the fixtures to the side and open up some space. It depends on the size of the store. There are small stores that obviously can't accommodate any more than probably 40 people, and there are large stores that can accommodate over 100 people. So it depends on the actual footprint.

It also depends on the band and how well developed their fan base is. They do the marketing so it depends on how committed they are to getting the word out to their fans and to prospective fans along with what we advertise in the store.

Interestingly enough, all most every local band has a CD because it's easy to do now. So we have yet to have a band who doesn't have a CD that is pressed and ready for sale, and many of them also have T-shirts and can bring those in. I'd say over half of them actually have T-shirts to sell and probably close to 100% have CD's to sell.

So we give them the opportunity during right after they do their show to be able to sell their CD's and their products.

Adrienne Tennant – FDR Capital Markets

Do you take a percentage of it?

Elizabeth McLaughlin

We do not.

Adrienne Tennant – FDR Capital Markets

So really the benefit to you is the introduction and being the go to place for the music event.

Elizabeth McLaughlin

I think the benefit to us is we definitely support new music in the local scene and our customers know that. We are creating an interesting opportunity for bands and customers to learn about new music from a branding standpoint. We wanted to position ourselves as being the place to discover new music and what better way to do that than to bring in a new local band to a place that's accessible to most customers in the area.

Adrienne Tennant – FDR Capital Markets

Do you have the sales productivity for the Hot Topics stores, and then if you have a consolidated number that would be great too for 2008.

James McGinty

For the Hot Topic stores it's between about $480.00 a foot which is up from last year and consolidated, and keep in mind the consolidated numbers as well as the divisions exclude any sales from the internet, consolidated it's a little over, about $450.00 a foot.

Operator

Your next question comes from [Steff Linset – Piper Jaffray]

[Steff Linset – Piper Jaffray]

I just want to come back to a comment you made on Torrid. I think you're targeted $400.00 per square foot and you ended the year around $430.00 so just talk to some of the initiatives that you have in place how you're prioritizing those to get from the $380.00 range to the $400.00 goal. Number two, just on the deal structures on the lease renewals and some of the remodels that you're doing, if you could just update us on the lease patterns that you're seeing across A, B and C malls, and then lastly, just the merchandise margin drivers that we saw on the quarter, higher IMU changes in associate discounts and shrink, if you could just talk about which of those are ongoing in Q2 2009.

Elizabeth McLaughlin

First of all I think the sales per square at Torrid was $334.00 not $434.00 so I don't know where you got the $434.00 from. If we were at $434.00 we wouldn't be going. So we're at $334.00 moving to $400.00, you know we've been talking about this over the past year that we know at $400 a square foot, that's the profitability level that we want to see before we ramp up store growth which is why we have put our capital investment this year into the dot.com as the pay back of the dot.com is a one year verses at $334.00 a foot, the pay back at Torrid stores is approximately three years.

So it's a top line issue. It's about driving positive comps and gaining new customers. It's a little tough in this environment to gain new customers, but I have to say given Torrid's performance this last year in spite of the rest of the consumer melt down on the women's side of the business, we feel good about the existing customers and the extra we're getting out of them. That's really the Torrid strategy.

In addition to that, we also after the fourth quarter had positive comps in the regular price business at Torrid. That was also a good sign that the assortment is correct and that we're able to get more out of that customer who's walking in the door.

James McGinty

In terms of the lease renewals and overall occupancy expense reductions, what we're seeing is a significant savings because of the structure of our leases related to either high vacancy rates in malls that allow us to negotiate with the landlords as well as kick out clauses that we have built into most all of our leases that after a period of time enable us to, if we're not achieving a certain level of volume kick out, in which case we're talking to landlords because they would in most cases like us to stay, and we come up with some type of negotiated rent.

In terms of how that impacted us in 2008 what the carry forward affect is, we probably save $2 million in 2008 in occupancy and we expect that to continue going into 2009.

I think your third questions was on components of the merchandise margin and what the expectation of that is for 2009. I think one of the key metrics that you can look at that we provide each month is the breakdown of our sales change by major category. In terms of accessories, running the larger increases [audio break] and our inventory results as we go forward particularly in the front half of the year.

[Steff Linset – Piper Jaffray]

Back to your comments on lease negotiations, the $2 million in '08, was that due to rent rate reductions or more so due to the structure of your newer leases on your remodels.

James McGinty

It's not the newer leases on our remodels. It is the rent reductions on the existing fleet.

Operator

Your next question comes from Kimberly Greenberger – Citigroup.

Kimberly Greenberger – Citigroup

Could you talk about the merchandise margin improvement? How much of that was the mix shift from accessories to apparel, if you could just aggregate it for us versus a lower promotional cadence. I know you commented throughout the quarter that you had less promotions and markdowns than last year.

James McGinty

It really is about half on the mark up side, half on the lower promotions so we're getting it from both sides of the pricing equation.

Kimberly Greenberger – Citigroup

Could we expect a similar increase to continue here at least in the first three quarters of '09?

James McGinty

Maybe not to the same degree because now we'll be going up against some stronger numbers and lower levels of promotional activity so we certainly always strive to make margin improvements but it will get continually more challenging.

Kimberly Greenberger – Citigroup

I'm wondering if you can comment on Torrid. There was some nice improvement in February. To what do you attribute that? Do you think the improvements that you saw in February are a sign that the strategies put in place for Torrid are getting traction?

Christopher Daniel

Actually I do think it's a nice validation that some of the decisions that we made earlier in 2008 to focus on fashion, to focus on our most loyal customer base follow up with a marketing program that promotes regular price selling, all that seems to be working so I think that is what you saw in February.

Kimberly Greenberger – Citigroup

And you think that is the direction you'll likely go here in 2009?

Christopher Daniel

It's not a short term strategy, no. That's the plan.

Operator

Your next question comes from Holly Guthrie – Boenning & Scattergood.

Holly Guthrie – Boenning & Scattergood

You mentioned a shift in the genre of music which led to some of the recent improvement. Could you talk a little bit about the genesis of that shift and does it have anything to do with some of the new customers that are in the store and I guess the music that we were listening to was, I guess it was like techno pop and is that some of the new genre that's selling in the store now?

Elizabeth McLaughlin

We experienced genre shifts every few years and I think what I was trying to communicate is that we had a very large genre shift at the end of the third quarter and probably should have been quicker to react to that, so we didn't have to wait until February to have improved comps, but be that as it may, it took us a little while to get ourselves back in line.

The nature of those genre shifts is partially some of the new customers but really it's the existing customers who are opening themselves up to different types of music, and for competitive reasons, I'm not going to discuss what the specifics are of those genre shifts, but suffice it to say, that it's a little of both; both the existing customer changing their preferences as well as some of these new customers who are bringing a different mindset to the table.

Holly Guthrie – Boenning & Scattergood

And then a question on Shock Hound, could you maybe give us a little bit more color on the spending on Shock Hound this year as you start to build more partnership relationships to increase the exposure of the brand, and also you said you were please with it. Could you talk about Shock Hound, what you're looking at that you're pleased with, hits, orders, domestic, international, what attributes are you seeing that are pleasing?

James McGinty

In terms of the investment in it last year and the prior year to get Shock Hound up and running, it involved about $6 million to $7 million in CapEx to fully develop the site, and in terms of the cost that we're talking about going forward are less capital intensive than really more about the expenses and depreciation on what has already been spent.

So when we're talking about first quarter, we're providing guidance that says it's going to cost about $0.02 it's really related to the ongoing expenses until we build up a big enough traffic base on the site.

In terms of what we're talking about when we discussed being pleased, really it's about conversion rate.

Elizabeth McLaughlin

I think there's a few things that we're very please about as far as Shock Hound is concerned; some of them metric oriented, some of them not. Starting with just the reaction that we have received from Hot Topic customers, non Hot Topic customers, the technical environment, the artist environment, the reactions have all been very, very positive and complimentary, not only the workings of the site and the technology and the software but also the content and the editorial point of view.

So it's a world that usually very, very critical of any new e-commerce site and any new website and we've been very, very please and have very few negative reactions which is nice.

We also are pleased with the hang time on the site, those customers who come onto the site seem to hang on and spend time looking at the site and exploring which is exactly what we wanted. We also are very pleased with the breadth of preferences that are being exhibited.

We knew when we launched Shock Hound it was a much wider net than the Hot Topic rock piece of the business. We didn't know how wide it was, and we are constantly encouraged as we look on and see the top selling albums, the top selling artists how wide the preferences are and what people are buying. So that leaves us to believe that it's a much greater world of music discoverers out there than perhaps what you would see if you were looking at Hot Topic.

We also are very pleased with the intelligence that we're gathering both from customers and from artists and the exposure that they have has made us all the more attractive to artists so there is much intel that we are getting both from what's happening in the industry as well as the intelligence we can provide based on the customer comments and that type of research.

What we're not pleased with is the traffic. I mentioned that when somebody gets on and they buy, they're buying more merch than downloads which is very, very good for margin and we are conversion those that visit the site is in line with what we wanted, but we just need more traffic. And part of the issue is we issued at the end of October, early November at a point in time where we really did not market as well as we could because of the timing and going into holiday and certainly what's happened in the consumer environment.

So we have dedicated ourselves in 2009 to finding those partnerships and finding those ways to drive traffic to Shockhound.com because that's the piece that we're missing right now. If we increase the traffic and can maintain the conversion rate and the purchasing patterns, we'll be very happy.

Holly Guthrie – Boenning & Scattergood

Are the international artists also bringing an international customer to the store or do you think you need more marketing dollars to pull those customers in.

Elizabeth McLaughlin

It's some, but I think it's a very small piece. I mean those that you would expect to be the biggest artists are, and whether that's a Taylor Swift or a Kelly Clarkson or Lowell Lane, those are the artists that are driving traffic to the site.

Operator

Your next question comes from Jeff Van Sinderen – B. Riley & Company.

Jeff Van Sinderen – B. Riley & Company

I had a follow up on Torrid. I know you're talking about merchandise margins there and just wondering, is there an opportunity to help out or help drive IMU through sourcing at Torrid?

Christopher Daniel

Absolutely. That's been an ongoing process. We got into the direct sourcing product development game about 18 months ago. We continue to add and grow that team and continue to do more product on a direct basis, internally designed and sourced. So yes, there's opportunity.

Jeff Van Sinderen – B. Riley & Company

So it's not just on the accessory side. That could also apply to apparel as well.

Christopher Daniel

Yes, it did.

James McGinty

And just so you know, in terms of initial markups, they've made tremendous strides in the last few years at Torrid. Despite the fact that Torrid is a much heavier apparel to accessories mix than Hot Topic and the realized initial mark ups are higher at Torrid than at Hot Topic.

Jeff Van Sinderen – B. Riley & Company

Just wondering how we should think about your latest thoughts on your approach to New Moon and how that's going to look.

Elizabeth McLaughlin

Well, how's it going to look? It's coming. The movie is due to be released using the same time table as last year, so in November and we're working right now on the assortment and the timing. So nothing to share on the call. Actually nothing to share with anybody at this point.

Jeff Van Sinderen – B. Riley & Company

So it's still in the works basically is what it sounds like.

Elizabeth McLaughlin

That's right.

Jeff Van Sinderen – B. Riley & Company

My last question just generally relates to your guidance. Your business really does appear to be getting some real momentum and just wondering in terms of your sequential, your guidance has sequentially lower comps for March and April which is surrounding the Twilight DVD release. Are you just trying to be conservative there or is there something else behind your thinking about March/April combined that we should be thinking about?

James McGinty

Certainly there is the calendar shift but I will tell you also that we've had given our guidance for both earnings and sales, we're really not giving a tremendous amount of consideration to the DVD itself and the fact that we'll be offering that to customers, and there's a couple of reasons. One, we've never offered this many to customers in this type of unique setting. Also, it's very low margin.

So incremental sales don't translate the same way as they do for other Hot Topic products so we're kind of in a wait and see mode on that.

Operator

Your next question comes from Jennifer Black – Jennifer Black & Associates.

Jennifer Black – Jennifer Black & Associates

Chris, this question is for you. I wondered what percent of your business is accessories right now and where you would hope that number to be over the next couple of years, and then also your dresses look great and I wondered if your dresses are a higher percent of your merchandise versus a year ago.

Christopher Daniel

Accessories is about 25% of our business currently. It's slightly higher than it was a year ago. There's a lot of really great trends in accessories right now so we'll keep following the trends and the percent will fall where the percent will fall. It's an easy category for us to invest in so we're comfortable that we can manage inventory there.

Thanks for the props on the dress assortment. Dresses is growing. Again, it's totally trend driven. Dresses have been a strong trend in our business for almost a year. We think it is a really important trend through third quarter.

So we'll continue to fund and grow that business as well. Again it is a shorter lead time business so the inventory risk is sort of minimal and the sales are nice. So that's where we'll go.

Jennifer Black – Jennifer Black & Associates

Are you close to finding a Chief Merchant for Hot Topics?

Elizabeth McLaughlin

We continue to search and we think we're doing okay as is right now, so when the right person comes along we will jump at the opportunity. Until then, we will man the ship appropriately.

Operator

We have no further questions at this time.

Elizabeth McLaughlin

Thanks for joining our call, and we look forward to speaking to you at the next call. Thanks. Have a good day.

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Source: Hot Topic, Inc. Q4 2008 Earnings Call Transcript
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