Hot Topic (NASDAQ:HOTT)
Q4 2012 Earnings Call
March 13, 2013 4:30 pm ET
George Wehlitz - Chief Financial Officer
Lisa M. Harper - Chairman and Chief Executive Officer
Good afternoon, ladies and gentlemen. Welcome to the Hot Topic Fourth Quarter 2012 Earnings Conference Call. Before we begin, I would like to remind you that during the course of this conference call, the company will be making certain forward-looking statements, such as statements relating to financial results, guidance and future financial performance, merchandise assortments, 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 Topic 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 periodic reports that Hot Topic files with the Securities and Exchange Commission, including the most recent annual report on Form 10-K and quarterly report on Form 10-Q.
All forward-looking statements made on this call speak only as of the time they are made, and Hot Topic undertakes no obligation to update these statements to reflect subsequent events or circumstances.
The company would also like to point out that on March 6, 2013, it entered into an agreement and plan of merger with companies beneficially owned by Sycamore Partners Management LLC. Information regarding the proposed transaction are supported in filings made with the SEC on both March 7, 2013, and March 8, 2013. In light of the announced transaction, there will not be any question-and-answer period. The company will only be providing prepared remarks during the call. To more effectively disseminate the information discussed this afternoon, the call is being webcast on the company's Investor Relation 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, passcode 41187953 for approximately 2 weeks.
Now I'll turn the call over to Hot Topic's Chief Financial Officer, George Wehlitz. You have the floor, sir.
Thanks. Hi, this is George, and welcome to the call. While on hold, you've been listening to Now by Paramore. My partner on the call today is Lisa Harper. I will begin by reviewing the fourth quarter results and making a few comments on the balance sheet. Following the Q4 details, Lisa will provide you with her thoughts on the fourth quarter performance.
All comparisons discussed are for fourth quarter, 14 weeks for this year versus 13 weeks last year, unless otherwise noted.
Total net sales for the fourth quarter increased $23.1 million. The components of this increase are as follows: $10.5 million for the extra week; $2.4 million in sales increase for Hot Topic comparable sales; $1.6 million in sales gain from Torrid comparable sales; $8.6 million sale increase from new and noncomparable Hot Topic, Torrid and Blackheart stores, net of closed stores.
The total net sales for the year increased $43.8 million. The components to this is as follows: Again, $10.5 million increase for the extra week; $16.8 million in increased sales for Hot Topic comparable store sales; and $4.1 million sales increase from Torrid comparable sales; and lastly, $12.4 million increase in new and noncomparable stores for Hot Topic, Torrid and Blackheart net of closed stores.
The Hot Topic division had an average transaction value increase of 5%, but the number of comparable transactions were down 3% from last year. Torrid had a 3% increase in the number of transactions, with a 2% increase in the average dollar sale.
At Hot Topic, apparel was 59% of total sales for the quarter compared to 54% last year. At Torrid, apparel was 78% of total sales for the quarter compared to 75% last year.
Gross margin was 38% of sales compared to 35.4% last year. The 260-basis-point improvement breaks down into the following categories: 170 basis points increase in merchandise margin, primarily due to higher realized markup and inventory shrink improvement, partially offset by promotional activity; 50 basis points decrease in store occupancy expense as a percentage of sales due to leverage on higher sales, partially offset by expenses from an increase in number of stores; 40 basis points decrease in store depreciation expenses due to lower expense from comp stores, store closures and leverage on higher sales; 20 basis points decrease in distribution center expenses as a percentage of sales, primarily as a result of leverage on higher sales; and 20% basis point increase in buying payroll expenses.
In the fourth quarter, selling, general and administrative expenses were 29.8% of sales compared to 28.3% last year. The 150-basis-point increase breaks down as follows: Performance-based bonuses increased 190 basis points; store payroll expenses increased 20 basis points as a result of increased number of stores and higher store performance bonuses. Other store expenses percentage decreased 60 basis points primarily due to leverage on higher sales, lower utility costs and lower telecommunication costs.
Fourth quarter operating income was $19.1 million versus $14.8 million last year, a 29% increase. Our effective tax rate was 36.8% versus 39.9% last year.
Our resulting net income for the fourth quarter was $12.1 million or $0.29 per share, versus $9 million or $0.21 per share last year, an EPS increase of 38%. This year's fourth quarter EPS includes $0.02 per share loss for expenses related to Blackheart operations.
During the quarter, we opened 5 Torrid stores and 5 Blackheart stores. We closed 2 Hot Topic stores and 1 Torrid store, and we also remodeled 1 Hot Topic store during the quarter.
Our cash position remained strong, with cash, cash equivalents and investments, both short and long-term, of $52 million versus $68 million last year, and that includes the $25 million stock buyback that we completed during Q4. The total inventory at cost was $81 million. On a per-square-foot basis, inventory was 5.7% higher at the end of Q4 compared to last year, as this is in line with our guidance that we previously gave of mid-single-digit increase.
Our capital expenditures for fiscal 2012 were $36 million, primarily related to our store construction projects and IT projects. Cash flows from operations activities increased in fiscal '12 by $7 million compared to last year.
Now I'll turn the call over to Lisa.
Lisa M. Harper
Thanks, George. Good afternoon, everyone, and thanks for joining us today. We're pleased with the company's performance during the fourth quarter of 2012. Overall, we saw strong performance of both core divisions in terms of top line sales growth and gross margin improvement.
The major highlight of the quarter and the year was the improved performance of Torrid, where new merchandising, sourcing and branding strategies continued to drive sales and margin. At Hot Topic, our fashion and license merchandise performed exceptionally well. Also during the fourth quarter, we launched a new test concept, Blackheart lingerie.
Now I'd like to talk about each of the brands. We remain enthusiastic about Torrid as a growth vehicle for the company. In the fourth quarter, Torrid generated a comp increase of 5.4%, with stores delivering a comp increase of 5.9%, and torrid.com delivering the comp increase of 3.5%.
As expected, we continued to see improvement in our merchandise margin rate at Torrid, driven by the new vertical merchandising model, as well as improved markdown optimization and allocation strategies.
Our vertically design-and-source fashion apparel collections continued to be well-received by the customers. Apparel generated a 10% comp increase and represented 77% of the business, as compared to 74% last year.
Within apparel, we were up 5% in bottoms as a result of strong denim business, and we were up 14% in tops. In accessories, comps declined 24%. We continue to focus on strategies to improve this business, with the largest opportunities in footwear, size-specific jewelry and a broader assortment available online.
Intimate apparel continues to perform well and comped up 16%. Accessories and intimates combined produced a negative 8% comp for the quarter, with the continued improvement in intimates helping to offset some of the softness in accessories.
As I mentioned earlier, torrid.com comped up 30 -- 3.5%, with regular price merchandising comping up 8% and clearance merchandise comping down double-digits as a result of lower clearance inventory levels compared to last year.
Moving onto Hot Topic. Hot Topic delivered a 2% comp increase. We continued to see strong top line sales and margin results from our fashion apparel and tee businesses. The fashion assortment contributed 14% of sales in the fourth quarter versus 13% a year ago with a 14% comp. Tees and hoodies contributed 44% of our business versus 41% a year ago, driven by licensed and private label tees, which continued to perform well. Music, tees and hoodies continued to be softer than usual due to a softer release schedule.
Accessories and others made up 41% of the business versus 46% last year, the result of an 8% comp sales decline and the increase in penetration of fashion apparel and tees and hoodies.
In Q4, Hot Topic -- sales at hottopic.com were up 3%. Sales of regular-priced merchandise were up 4% and sales of clearance merchandise were down double-digits. As was the case with Torrid, we had lower clearance inventory levels online compared to last year.
Now I'd like to spend a minute on Blackheart. You'll recall we launched a test of a new concept, Blackheart Lingerie, in November. Throughout the quarter, we opened 5 stores and an online store and have been testing product and marketing initiatives to reach our older Hot Topic customers, as well as new customers, with a new option in edgy lingerie.
As George mentioned, this initiative negatively impacted our earnings in the fourth quarter by $0.02. As mentioned earlier, we announced last week that the company entered into a definitive acquisition agreement for Sycamore Partners to acquire Hot Topic for $14 per share in cash, for a total of approximately $600 million.
The agreement, which was unanimously approved by Hot Topic's Board of Directors, represents a premium of approximately 30% over Hot Topic's closing stock price on March 6 and an approximately 40% premium to Hot Topic's average closing price over the previous 6 months.
Although Hot Topic was not actively seeking such a transaction, our Board determined that Sycamore's offer was worthy of consideration and ultimately, the best way to maximize value for shareholders who will receive substantial and immediate value for their shares. The transaction is subject to approval by Hot Topic shareholders, as well as regulatory and other customary closing conditions. We anticipate this transaction will close in the second or third quarter of fiscal 2013.
In connection with the proposed transaction, Hot Topic Inc. will prepare a proxy statement to be filed with the SEC, which will contain detailed information about this transaction and the Board's decision-making process. When completed, a definitive proxy statement and a form of proxy will be mailed to shareholders of Hot Topic. Hot Topic shareholders are urged to read the proxy statement regarding the proposed transaction.
This concludes our comments on today's call. Thank you very much for your interest in the company and for joining us today. Good-bye.
Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.
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