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Wednesday was a busy day for Hot Topic (NASDAQ:HOTT), the goth-friendly retailer. After the market closed, the company released same store sales for March, which came in at -7.5% versus the expected -11.2%. The company continues to report on a very impressive 2009 period which was boosted by massive Twilight-related sales.

On the brighter side, the Torrid division posted a same store sales increase of 9% for March and 9.7% for the quarter to date. Geared toward plus-size females aged 15-29, Torrid's 155 stores represent just 19% of the store base but 26% of total sales, truly a critical piece of Hot Topic's future prospects.

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More important than the sales number is management's decision to return cash to it's rightful owners - the shareholders!! Hallelujah.

The company announced not only a $1.00 one-time dividend, but also an ongoing quarterly dividend of 7cents, which is 28 cents annually for a 4% dividend yield. In one fell swoop, Hot Topic became the highest yielding apparel stock you can buy in the public markets:

Betsy McLaughlin, Chief Executive Officer, commented, "By initiating a dividend, our Board of Directors has demonstrated its ongoing commitment to enhancing shareholder value for our broad investor base. The strength of our balance sheet and the substantial free cash flow generated by our business provide us with the financial flexibility to return capital to our shareholders in this manner.

That yield didn't stick of course, as the shares jumped 19% in after hours trading to 8.40 per share, taking that yield down to 3.3%. This still makes it the second-highest yielding apparel retailer among its peers.

Hot Topic has $2.77 per share in cash and equivalents, or 40% of it's stock market value. That's worth keeping in mind when considering the company's "message" by paying a dividend. With a cash cushion like that, the company can have some very weak quarters and not interrupt the dividend payments. Still, the initiation of a dividend is great for shareholders in that it instills discipline on the management. Not that they didn't have it before, but this doesn't hurt. The shareholder blow-back from a cancelled or suspended dividend is substantial, so a management that commits to paying one is vowing to stock to it.

CEO Elizabeth McLaughlin owns 350,000 shares of stock, so she'll participate in the dividend payments. What is remarkable though, is how many options remain outstanding. Remember these option owners get nothing from dividend payments, so it's surprising to a cynic like me to see such shareholder-friendly actions: (Click to enlarge)


The reason I think this move is so big for apparel retail is that there are large cash balances sitting on balance sheets at many of these companies, looking for a happy home in shareholder trading accounts. In a world of dwindling opportunities for safe fixed-income investing, equities that pay dividends and still have upside capital appreciation potential are in the sweet spot.

The retailers below don't need to jump in with two feet, paying juicy yields while we're still working through a dreadful recession. That said, they can pay "one-timers" that are not a commitment to an ongoing dividend program, and follow that up at their own pace with a gradual quarterly dividend. It's also not necessary for companies earlier on in their growth phase to be putting money aside for dividends, but that's not really the case with the "yet to start paying dividend" retailers below, whose average store base of 936 is closer to mature than it is to "early growth."

Nice work Hot Topic, lets hope others follow the lead!

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Disclosure: No position

Source: Hot Topic: Suddenly the Highest Yielding Retail Stock