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Hot Topic Inc. (NASDAQ:HOTT) reported third quarter fiscal 2010 earnings of 5 cents a share, in line with the Zacks Consensus Estimate. However, it dropped substantially from the prior-year earnings of 13 cents a share. Earnings per share in the reported quarter exclude approximately 4 cents related to the impairment of ShockHound assets. Including impairment charges, earnings per share came in at 1 cent.

Total revenue declined 3.4% year over year to $183.2 million, meeting the Zacks Consensus Estimate. The Hot Topic division of the company recorded revenues of $144.3 million, posting a steeper decline of 4.5%, followed by Torrid at $38.9 million, recording a 3.4% year-over-year growth.

Total company comparable-store sales dropped 5.0% for the quarter, with Hot Topic and Torrid declining by 5.8% and 1.5%, respectively.

Cost & Margin Performance

Cost of goods sold, including buying, distribution and occupancy costs, dipped 0.8% to $118.7 million. Based on revenues, it increased 170 basis points to 64.8%. Consequently, gross profit went down 7.6% to $64.6 million and gross margin contracted 160 basis points to 35.3%.

Selling, general & administrative expenses grew 6.5% year over year to $64.2 million, and based on revenues increased 320 basis points to 35.0%. Operating income in the quarter came in at $321,000, compared with $9.6 million in the year-ago quarter.

Financial Details

As of October 30, 2010, Hot Topic had cash and cash equivalents of $58 million, down from $91.4 million as of October 31, 2009. Shareholders' equity came in at $220.1 million compared with $268.1 million in the prior-year period.

Store Update

During the quarter, the company opened four Hot Topic stores and closed three. The company remodeled or relocated nine Hot Topic stores during the quarter.

The company ended the quarter with 680 Hot Topic stores and 155 Torrid stores, compared with 680 Hot Topic stores and 156 Torrid stores at the end of the third quarter of fiscal 2009.

Outlook

The company expects fourth quarter of fiscal 2010 earnings per share in the range of 11 cents to 14 cents. Hot Topic expects comparable-store sales to decline in the low single digits.

Peer Performance

Hot Topic’s close competitor Abercrombie & Fitch Co. (NYSE:ANF) reported adjusted earnings per share of 56 cents in its third quarter ended October 30, 2010, surpassing the earnings of 35 cents in the year-ago quarter. Sales increased 18% year over year to $885.8 million and comparable-store sales increased 7%.

Our Take

Hot Topic’s niche market position, strong brand recall, ability to tweak merchandise in line with rapidly changing trends and a debt-free balance sheet augur well for operating performance. However, macroeconomic headwinds, intense competition from other specialty retailers and the seasonal nature of the business severely undermine the company’s future growth prospects. Until we see business trends improving, the Neutral rating is being maintained. The company has a Zacks #4 Rank (Sell) implying downward pressure on the stock over the near term.

Hot Topic is a shopping mall-based specialty retailer operating the Hot Topic and Torrid store concepts across the U.S. as well as the e-space music discovery concept, ShockHound. The company’s business strategy is based on the foundation of pop culture and its appeal to teen customers, its target audience. Hot Topic operates in a unique market niche by focusing on music and music/pop culture-oriented merchandise, offering products that are typically not available at other retailers.

Source: Hot Topic In Line