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Hot Topic Inc. (NASDAQ:HOTT) reported fourth quarter fiscal 2010 earnings of 12 cents a share, in line with the Zacks Consensus Estimate. However, it dropped substantially from the prior-year earnings of 18 cents a share. Earnings per share in the reported quarter exclude approximately 13 cents of expenses related to the implementation of the previously announced cost reduction plan. Including the said expenses, loss per share came in at 1 cent.

For fiscal 2010, the company reported loss per share of 1 cent a share compared with earnings per share of 27 cents a share in fiscal 2009. Loss per share excludes the 17 cents a share of expenses related to the implementation of the cost reduction plan and the non-cash impairment of ShockHound assets. Including these expenses, loss per share came in at 18 cents a share.

Total revenue declined 0.8% year over year to $212.4 million, marginally beating the Zacks Consensus Estimate of $210.0 million. The company reported a same-store sales decline of 2.1%, narrowing the gap from a fall of 11.5% in the year-ago period. Hot Topic reported same-store sales decline of 2.5% while Torrid registered a decrease of 0.4%.

Cost & Margin Performance

Cost of goods sold (COGS), including buying, distribution and occupancy costs, increased 4.7% to $144.1 million. Based on revenues, COGS increased 360 basis points to 67.8%. Consequently, gross profit went down 10.8% to $68.3 million and gross margin contracted 350 basis points to 32.2%.

Selling, general & administrative expenses grew 8.9% year over year to $69.0 million, and based on revenues increased 300 basis points to 32.5%. Operating loss in the quarter came in at $0.713 million, compared with an operating profit of $13.187 million in the year-ago quarter.

Financial Details

In fiscal 2010, Hot Topic had cash and cash equivalents of $76.6 million, down from $91.4 million in fiscal 2009. Shareholders' equity came in at $217.5 million compared with $277.0 million in the prior-year period.

Store Update

During the quarter, the company closed 23 Hot Topic stores, opened 1 Torrid store and closed 3 Torrid stores. The company remodeled four Hot Topic stores during the quarter.

The company ended the quarter with 657 Hot Topic stores and 153 Torrid stores, compared with 680 Hot Topic stores and 156 Torrid stores at the end of the fourth quarter of fiscal 2009.

Peer Performance

Hot Topic’s close competitor Abercrombie & Fitch Co. (NYSE:ANF) registered earnings of $1.38 per share in the fourth quarter of fiscal 2010, thereby surpassing the Zacks Consensus Estimate of $1.32 per share and handily beating the prior-year net income of 91 cents per share.

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 #5 Rank (Strong 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 Reports In Line, Earnings Down From 2010