Hot Topic Loses Some Steam

|
 |  Includes: CLE, HOTT
by: Rick Konrad, CFA

Hot Topic (NASDAQ:HOTT) reported its July comps yesterday morning. Same store sales were down 7.2%.

Hot Topic is a retail chain that focuses on that most fickle of consumers, the teenager, selling her/him apparel, accessories, music, and gifts. Women's apparel showed a positive comp whereas everything else continued to be negative.

What is disturbing is that comparisons really are getting quite easy, yet management seems to be unable to turn things around.

Check out these same-store-sales trends:

........2006.........................2005
Jan -1%..........................-3%
Feb -8%..........................0%
Mar -13%.......................+5%
Apr -7%..........................-2%
May -6%........................-2%
June -3%........................-3%
July -7%.........................-5%
Aug .................................-7%
Sept................................-6%
Oct..................................-6%
Nov...................................0%
Dec..................................-6%

As an alter kacker, I am hardly the best judge of Hot Topic's stores or whether they understand today's teen. Nevertheless, there does not appear to be anything in the product assortment that is driving sales, at least according to a couple of store managers I have contacted.

Sticking to my own circle of competence, I did a quick comparison of HOTT versus Claire's (CLE) another retailer that I'm following with significant teen sales but a much broader base and far more encouraging fundamentals.

................................................................HOTT................................CLE

Gross Profit Margins [TTM]..............37.00%............................54.09%
Operating Profit Margin [TTM]........0.04%..............................17.71%
Gross Profit Margins [MRQ]..............36.70%............................54.10%
Operating Profit Margin [MRQ].......-1.75%...............................12.80%
Free cash Flow/ CFFO [TTM]..........-13.68%.............................66.37%
EV/CFFO [TTM].................................10.55.................................11.89
EV/EBIT [TTM]...................................23.64.................................8.42
ROIC [TTM].........................................7.90%...............................19.80%
P/E 07 est [consensus]........................22.44................................13.14
Five Year Growth e.p.s........................0.25%............................. 20.70%

As you can see, despite the turnaround possibilities that Hot Topic may present, even with today's 17% price collapse, the value is not yet compelling.

For more information, check out an interesting interview with Marla Schaefer, co-CEO of CLE in The Wall Street Transcript (subscription required)

Disclaimer: Neither I, my family, or clients have a current position in Hot Topic. I, my family and some clients do own a current position in Claire's Stores.

HOTT vs. CLE 1-yr chart: