Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Betsy McLaughlin - Chief Executive Officer, Director

Chris Daniel - President of Torrid

Gary Cook - President

James McGinty - Chief Financial Officer

Analysts

Lauren Levitan - Cowen & Company

Kimberly Greenberger - Citigroup

Stephanie Wissink - Piper Jaffray

Liz Pierce - Roth Capital Partners

Janet Koppenberg - JK Research

Jeff Van Sinderen - B. Riley

Holly Guthrie - Janney Montgomery Scott

Barbara Wyckoff - Buckingham Research Group

Brad Stephens - Morgan Keegan

Dana Telsey - Telsey Advisory Group

Crystal Kallik - D.A. Davidson

Hot Topic Inc. (HOTT) Q1 Earnings Call May 21, 2008 4:30 PM ET

Operator

Good afternoon ladies and gentlemen and welcome to the Hot Topic fourth quarter 2007 earnings release conference call. (Operator Instructions)

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 related to financial results guidance and future financial performance, merchandise assortment, new initiative and related matters and statements related to key personnel and operational issues.

These statements, as well as related information posted on the Hot Topic’s investor relations website, involve risks and uncertainties that may cause actual results to differ materially from those projected in 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 its most recent annual report on Form 10-K and quarterly report on Form 10-Q and as will be updated by our upcoming annual report on Form 10-K for fiscal 2007.

All forward-looking statements made on this call speak only as for the time they are made and Hot Topic undertakes no obligation to update these statements to reflect subsequent events or circumstances.

To more effectively disseminate the information discussed this afternoon, this call is being webcast on the company’s investor relations website at http://investorrelations.hottopic.com and a replay will be available on that site. A replay will also available at 888 286 8010 with the passcode 19194201 for approximately two weeks.

Now I’ll turn the call over to Hot Topic’s Chief Financial Officer Jim McGinty.

James McGinty

Welcome to the call. Just a couple of corrections here; this is the first quarter 2008 earnings call and you can refer to the information on Form 10-K for the year ending 2007 which has been filed. One other correction, the replay is available at the number that was stated; however the passcode is 70112586. While on hold you have been listening to “Ready Set Go” from Tokyo Hotel.

My partners on the call today are Betsy McLaughlin, Gary Cook and Chris Daniel. For competitive reasons we will not be discussing any specific forward-looking product information during this call. I will begin by discussing the first quarter results and then comment on the balance sheet and cash flow. Following these details I will turn it over to Betsy who will provide you with additional color on the quarter followed by second quarter guidance.

First the results for the first quarter; all comparisons discussed are to the same period from a year ago unless otherwise noted. Overall total company net sales during the quarter increased by $1.7 million due to a $4.9 million sales gain from new and non comparable Torrid stores, a $1.4 million increase from internet sales, a $1.4 million sales increase from Hot Topic remodeled and non comparable stores, a $2 million sales reduction from closed stores and a $4 million sales loss related to the consolidated comparable store sales decline of 2.8%.

For the quarter, the total company comp decline was a result of a 2% decrease in the average number of transactions in comparable stores and a 1% decrease in the consolidated average transaction value. At Hot Topic apparel was 56% sales in the first quarter versus 56% in the corresponding period last year. At Torrid, apparel was 80% of the total sales in the first quarter similar to last year. Gross margin was 32.5% of sales, compared to 32.8% last year.

The 30 basis point decline breaks down into the following categories: Merchandised margin declined 10 basis points due to slightly higher freight as well as higher mark downs that were off set by a higher realized mark up. Stores occupancy and depreciation expenses increased 40 basis points due to the cost associated with the stores that if remodeled or relocated over the past year as well as the de-leveraging and the lower average store volume.

Distribution and buying cost improved by 20 basis points due to lower receipts, lower freight out and lower outside temp personnel expenses result of improvements in productivity. In the first quarter selling, general and administrative expenses were 34.2% of net sale compared to 34.0% last year. SG&A expenses in the first quarter of fiscal 2008 include approximately $800,000 in charges associated with impairment and assets write off for the store impairment and write off of certain fixed assets associated with our store telecommunications conversion to DSL.

Impairment in the first quarter a year ago was less than $200,000. Excluding these charges for both this year and last year SG&A expenses were 20 basis points lower this year. This breaks down into the following categories. Administrative, depreciation and amortization declined by 20 basis points related to computer software and hardware; store -- other expenses declined by 10 basis points due to savings in telecommunications cost.

Marketing expenses declined by 10 basis points due to reduced cost in store signage. Lastly, other G&A expenses, including stock option expense were up 20 basis points last year. For the first quarter the resulting operating loss was $2.7 million versus a loss of $1.8 million last year. Interest income was $400,000 or 0.2% of sales. Our effective tax rate was 39.2% for the first quarter versus 38.3% last year.

During the quarter we opened a total of four new Torrid stores and closed four Hot Topic stores and one Torrid store. We also remodeled or relocated seven Hot Topic stores during the quarter. Cash, cash equivalent and short term investments were $42 million. The reason for the change from year end is the reclassification of 10 million in auction rate securities from short term investments to long term investments. While our auction rate securities are AAA rated and backed with federally insured student loans, given the current market environment we believe the liquidity status wants a longer term classification.

Total inventory of costs was just over $77 million; on a per square foot basis, inventory was flat at the end of the first quarter. Capital expenditures were $7.5million in the quarter primarily related to four new stores and seven Hot Topic remodels and relocations during the first quarter and the additional stores scheduled to be opened or re-modeled, re-located in the second quarter of 2008 as well as expenditures, persistence development including the development of ShockHound. Now I’ll turn the call over to Betsy.

Betsy McLaughlin

Thanks Jim. As we continue to fight to turn the Hot Topic business around, our music and items strategy have been validated with an improved first quarter comp trend as compared to last year. In a nut shell music and fashion accessories gained momentum, fashion apparel, health study and license down trended. As mentioned on the last call at Hot Topic our top priority is the continuing evolution of the customer’s music experience.

I’ll start with the recap by major category. The music category comped up 2% against the 16% comp decline a year ago. It’s our belief that our focus on the discovery of new rock music supported by a shift of inventory away from the major well known artist has re-established our music credibility with the Hot Topic customer. We generated study improvement during the quarter and men’s rock tees, junior rock tees and CDs.

Also during the first quarter we hosted numerous in-store signing events along with the Hot Topic hosted showcase at the south -- by southwest music festival in Austin Texas. We will continue to focus our marketing dollars on the support of newly emerging artists. We also began the expansion of our in-store music presence adding listening stations to all stores.

Accessories made the most significant progress. Overall accessories is down 1% in the first quarter versus the 16% decline in the fourth quarter of last year. Fashion accessories lead the way producing a positive 3% comp. Monthly comps for fashion accessories were February down 1%, March up 4% and April up 8%. The improvement across the board in fashion accessories validates our strategy to focus on unique items in each classification rather than a wide assortment of coordinated products.

License accessories continued to be played by the lack of strong pop cultural licenses and its category produced a double digit comp decline for the quarter. Inventories have remained in line with sales for licensed accessories and we have shifted forward receipts accordingly.

The women’s business decline 4% for the quarter compared to a 4% comp store gain last year. Women’s bottoms generated a mid double digit comp driven by a very strong item focused denim presentation. Unfortunately, it was not enough to offset women’s novelty tees that is suffering from the weak licensed cycle. Men’s comps are down 9% primarily a result of the weak novelty tee assortment. Unlike women, men’s also suffered from a shortfall in men’s fashion tops.

In both men’s and women’s we scaled back to go forward inventory levels in novelty tees until we have identified items and licenses that weren’t further investment. Within Hot Topic several new initiatives are scheduled for the second quarter. ShockHound our digital music initiative is on target to launch by the end of the quarter. As we get closer to the live date more specifics will be released.

We have also developed a direct to retail program, that’s DTR with key artists and studios. DTR allows us to procure a greater percentage of exclusive product and also enables us to achieve an improvement in markup. Our relationship with Paris Hilton is a great example of a pop culture figure who is working directly with us to produce market and exclusively sell this line of products. FYI Press product is due in our stores on June 6.

We also have engaged emerging in mid tier bands in this program and look forward to expanded exclusivities at the Hot Topic -- our Hot Topic will be able to offer our customers. Torrid was down 2% in comp stores during the first quarter; though clearly short of our internal plan the business was up against the strongest comparisons of 2007 in the first quarter which were a 7% comp. We continue to generate increases in the gross margin rate and average dollar transaction. Apparel and accessories were both down in comp stores for the quarter; 2% and 1% respectively.

Torrid.com continued the momentum into the first quarter with a 26% increase over the last year. The Torrid internet business continues to shows significant traffic growth with Diva Style members leading the way in terms of average dollar purchase and in terms of Diva Style in total during the first quarter our sign ups increased 20% and our qualified member count increased 8%. At Torrid we will continue to focus on driving brand awareness, connecting with each customer on what matters most to her, creating a true selling environment in the stores and developing our in-house design team to support our margin objective.

On a consolidated basis during the quarter we continued with our expense savings initiatives and prudent use of capital. Inventories and Opened-to-Buy are being monitored very closely to ensure that we are distributing our dollars to the most deserving areas. Given we began the quarter with inventory levels 5% over our way on a profit basis we are please to have ended the quarter with lower levels of inventory relative to guidance. New receipts were 5% lower than last year per average store.

Our May month-to-date comps are flat at Hot Topic and down less than 1% at Torrid. At this point our best estimate from May’s consolidated comp is a low single digit negative as the last two weeks of May have comparisons to Harry Potter products from last year. Aside from licensing which includes the Harry Potter product we believe the other categories within Hot Topic as well as Torrid can maintain their current trend. Jim will now provide guidance for the second quarter of fiscal 2008.

James McGinty

Based on our current expectations we are reissuing the following general guidance for the second quarter ending August 2, 2008. We expect total sales in the second quarter to be in the range of $164 million to $169 million based on a flat to negative low single digit comp. As discussed in our press release we expect to incur additional costs equating to approximately $0.01 to $0.02 per share for expenses relating to ShockHound our online music initiative. This brings our second quarter fiscal 2008 guidance to a loss in the range of $0.02 to $0.04 per share versus last year’s loss of $0.04.

Included in the guidance is an assumed share count of approximately $44 million. We expect inventory at the end of the second quarter to be down in the low to mid single digit percentage range on a per square foot basis. Based on our current expectations we are issuing the following general guidance. We expect to open approximately 11 new Torrid Stores and three to four Hot Topic stores during fiscal 2008. Torrid opening by quarter expected to be approximately four in Q2, one in Q3 and two in Q4. We anticipate closing approximately 17 Hot Topic stores by the end of the year and three to four Torrid stores by year end.

We expect to remodel or relocate approximately 15 to 20 Hot Topic stores by the end of the year. At this time we will take questions relating to the results in our outlook. Please hold while we contact the conference operator who will give you further instructions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Lauren Levitan of Cowen & Company, please proceed.

Lauren Levitan - Cowen & Company

Thanks, good afternoon. Betsy can you talk a little bit more about the direct-to-retail program. Is that something that you think will have the ability to improve the weak trend that you’ve been seeing on the license side of the business and then also related to that can you give some sense of what you are expecting both on the licensed and music side with respect to releases for the heart of the summer period and into back-to-school if you are more optimistic about those external factors to drive the business, thanks very much.

Betsy McLaughlin

Okay as far as direct retail is concern Lauren I think the trend is a trend in licensing, so its not so much a matter that direct-to-retail will improve the pipeline because as you know we look for organic properties that are surfaced by customers and whenever we try to push a license it doesn’t work. So, the direct-to-retail program is really to address two issues: one, is to gain us more exclusivity and a better partnership with whoever it is that we are doing the deal with; actually we tested it last year with Supervad. The movie Supervad that was out first for -- into direct-to-retail and because we were early in it and with the buzz out there already we were able to help decide the product and of course carried it exclusively off for a nice period of time, so in helps certainly on the exclusivity level and also helps on the costs because as we go direct and cut off the middle man we are not paying those fees for a third party vendor.

As far as releases, what everybody looks forward to for license and music, yes license is tough. We have for the remainder of certainly the second quarter and into third quarter we still have the potter numbers to go up against in men, we’ve got a strong business from transformers last year, on the women side it fosters was big, hello kitty was big and so while there are some smaller licenses that we feel better about we are toughing it out here and trying to shift as much inventories we can into the other classifications that are doing well. Like you who had followed our business for a longtime you know that there is usually a cycle and the gain is that we can offset the license business with better music business, better accessory business, very rarely if everything’s going north, so I think we are -- our strategy is to play a conservative and to nurture some of those smaller and mid tier licenses but there isn’t anything on the horizon right now other than Dark Night, the new Batman movie; other than that there isn’t a big, big license that we feel will propel business in a big fashion over the next few quarters.

Lauren Levitan - Cowen & Company

Given that back drop what are your thoughts about the back-to-school season about the opportunity to drive positive comps during that time period against pretty easy comparisons from the last few years?

Betsy McLaughlin

I think that the opportunity for driving positive comps in back-to-school days in the fashion accessories assortment, certainly the music assortment; we continue to see strength of music and feel really good about music. Certainly we think that in license accessories we are going to go up again to some easier numbers and I think that by just nature of the comparison we’ll have an easier shot at better comps for the third quarter and I think fashion apparel -- if you look at how items focus to fashion apparel, is there is also an opportunity, of course doing back-to-school; bottom is that the key driver of fashion apparel actually if you look at the mix for the entire year, August has the highest sales mix in bottom and so I think we feel very, very good about that. So, I think the intention is that we will put our inventory into those categories that are doing well, we will be safe with our licenses and over all we should be able to see much improved performance.

Operator

Your next question comes from the line of Kimberly Greenberger of Citigroup; please proceed.

Kimberly Greenberger - Citigroup

Thanks Betsy. Could you just repeat for me the accessories comp for the quarter and how it compares to last year?

Betsy McLaughlin

The total accessories?

Kimberly Greenberger - Citigroup

Yes.

Betsy McLaughlin

Total accessories for the quarter was up one -- down 1% and last year was down 4%, for the quarter. Then I gave you numbers for fashion accessories I think in the script.

Kimberly Greenberger - Citigroup

Okay and that’s was the -- those are the monthly numbers that you gave and fashion accessories you said for the quarter was up 3?

Betsy McLaughlin

Right and the reason I did that is I thought it was important to see that even though we has the spring break shift, fashion accessories gained tremendous momentum as we moved through the first quarter.

Kimberly Greenberger - Citigroup

Right, that’s fantastic. I just want to follow up on Lauren’s questions about back-to-school. It sounded to me like your skinny denim program was working well for you; is that something that you see as like into back-to-schools and secondarily if -- as you’re seeing customers come in for denim, in particular on the women’s side, are they also more inclined to buy your tops and therefore could we see a little bit of improving momentum in your fashion tops business? Thanks.

Betsy McLaughlin

Yes, I mean we’re happy with our denim presentation. It’s made up of several components in our stores. We feel good about it, we feel good about it going forward and I don’t want to specifically talk about back-to-school but I think that we feel that we have continued momentum in women’s bottoms as we move to back-to-school. Currently the girl who was coming in and buying that skinny denim is also buying a music rock tee, a junior rock tee, our junior rock tee business is high double digits and so I think she is pairing that up with the junior rock tee, she is probably pairing that up with some fashion accessories, so I mean that’s the look. I do think that she is looking at the fashion apparel top and in women’s top specially are performing well also aside from novelty tees, so that a companion item but remember that our average ticket is $21.00 so I don’t know how much else she is buying. I think there are a whole lot of customers who are coming in buying the bottoms only and may be on their next visit in they may buy something else.

Operator

And your next question comes from the line of Stephanie Wissink of Piper Jaffray please proceed

Stephanie Wissink - Piper Jaffray

I have three actually; first could you just talk us through your thoughts on the time line for ShockHound? What’s the role out on the strategy for going live on the side; I see it’s still under construction and then the estimated full year drag, should we look at that $0.01 to $0.02 a quarter as being something to carry forward through year end?

James McGinty

Well, I will take the second question first. As far as the drag goes we are expecting most of the costs to be on the front end as we develop and as we launch to get the word out to get ShockHound up and running, so we talked about -- when we initially provided guidance for the year -- for the first quarter we said that there’ll probably be a couple of cents in the first, a couple of cents in the second and that was what we foresaw as the significant cost that we would incur. We didn’t know the exact timing, but we knew that that was probably the incremental expenses relating to getting this -- the site launch. So because we incurred about a penny in the first quarter and we think it would be one to two in the second -- that $0.01 to $0.02 additional will be in probably the third or the fourth quarter.

Betsy McLaughlin

And as far as the time line is concerned we are still marching to our launch date at the end of second quarter, so I think end of July, beginning of August, but we are on track on the development side of it, we are on track in the partnerships that we have with the major labels and the independents as well at the content generation and production. So we are feeling pretty good about our end of quarter launch.

Stephanie Wissink - Piper Jaffray

Great that’s very helpful and then secondly Betsy if you could just comment on Torrid. I know that your goal is to reach that $400 per square foot, what would be the operating contribution at that point if you were to hit that goal?

James McGinty

Stephanie we haven’t broken out the operating contribution for the divisions, but in terms of what we have talked about at $400 a foot we would -- a Torrid store would pay for itself in well under two years. At $350 a foot it’s a three year kind of pay back, so if you kind of work the math there and know that the individual store contribution gets into the very high teens at the $400 level and it’s in that mid teen range when you are at $350.

Stephanie Wissink - Piper Jaffray

Okay that’s exactly what we needed and then the last one was just on your closings of your stores whether it’s Hot Topic or Torrid, how many of those closings are actually cash flow negative versus those that are just on the threshold of meeting your internal return characteristics?

James McGinty

Most all of them are either one in a mall where the lease is expired and we see deterioration in that location or as you ask is cash flow negative and we either exercise the kick out or we are able to get out of the deal and its primarily the -- its many more Hot Topics stores; as we said about 17 this year versus Torrid being four or five.

Stephanie Wissink - Piper Jaffray

So that being said, what do you ultimately see the size of the Hot Topics fleet being at once the closures have been completed?

Betsy McLaughlin

I think somewhere between 6 and 650 correct. We don’t have a lot of stores that are cash flow negative so we got to help this leads, but as we go through and we evaluate the changes and some of the new lifestyle centers and we are removing and just a process of time and we think somewhere between 6 and 650.

Stephanie Wissink - Piper Jaffray

Okay actually just one more; if you could just give us an update on the remodeled charity?

Betsy McLaughlin

Well the remodeled strategy has not changed since the last call. We like the way it looks, we have gotten very good feedbacks, however it’s not generating enough increases to offset the renegotiated rent when you remodel a store, your faced with existing costs from developers and so the comps that need to be generated are in the mid double digit to be able to offset it and so what we elected to do last year as we moved into 2008 was that the remodeled program would involve moving those stores that were up already for a leased re-negotiation and their assets have been written off or close to being written off so that we did not have to incur the accelerated depreciation. So, as stores are being remodeled in the normal lifecycle of the fleet, as they will be remodeled in the new store design. As far as the conceptual part of the new store design we are happy with most part of it. We are still tweaking the music area, still tweaking some of the colors but -- feel very, very good about the expanded grand presence that we have just in being able to give out exclusionary for many of those customers who still have it in their mind that Hot Topic is the dark store.

Operator

Your next question comes from the line of Liz Pierce of Roth Capital Partners; please proceed.

Liz Pierce - Roth Capital Partners

Hi good afternoon. Betsey could you just -- Chris I can’t remember, if Chris is there maybe just talk a little bit more about the bridal that we’ve seen on the Torrid website and kind of the rational behind that.

Chris Daniel

Rational being we had -- we get requests all the time for certain lease businesses within our customer base bridals, one that comes up fairly often. We had -- we saw an opportunity to offer a price point and be the deliveries for our customer and it is just a test and that’s just online. So for the results are pretty good and the feedback from the customers has been great. So, we’ll continue to try logical expenses in the brand wherever we see the opportunity.

Liz Pierce - Roth Capital Partners

You said it did come from internally -- I mean request right -- customers, I mean this is -- I guess it opens a whole possibility of other opportunities.

Chris Daniel

It does. We are going to stay focused on our core business in stores right now.

Liz Pierce - Roth Capital Partners

Okay, all right and then Betsy in terms -- I was just reviewing kind of your comments that you made on the last quarter call about regular price versus full price selling and you are over the kind of where you were anniversary year for this and going back to full price selling -- but I think you made the comment that the clearance side of the inventory was -- if I’m not mistaken maybe just give us an update on how you see the comps for that section of the store?

Betsy McLaughlin

Well for the first quarter our average store -- measure regular price in clearance in terms of average store; for the first quarter our average store was up 1%, so I think that we have anniversaried much of the clearance that we had, so that was the issue going into the first quarter, so that’s really the update there. We feel pretty good about our clearance position now. It’s less than last year, our inventories are in line. As always when you miss sales and we missed a bit in the first quarter because we surely would have preferred to have stronger numbers at the end of the quarter we did have some incremental mark downs but other than that I think we are feeling pretty good about our regular price inventory and current business.

Liz Pierce - Roth Capital Partners

Okay and then my other question was on ShockHound in terms of how you let people know about it and particularly since I think the goal is on -- if I understand it correctly is to be about a variety of the genres.

Betsy McLaughlin

We actually said that we were going to be about rock, that’s our first adventure into ShockHound, so it is very much concentrated on rock music. There are a couple of different methods we are going to market this. We do have an external marketing firm that has tremendous experience marketing both web and music properties and companies and sites as well as some really interesting other companies that we have employed and that they are handling a good piece of the marketing. We also have involved some of them and we have more details on that as we move through the quarter but they are going to help us do some marketing and then of course we have our Hot Topic stores. Because we are concentrating on ShockHound rock, it really is a Hot Topic play as well and so we have the great advantage of having 650, 680 locations by which to market ShockHound. We also have a very, very strong base of web customers which we have all the data on and so we will also be using hottopic.com to get the word out, so I mean it’s really as a multi-prompt strategy on the marketing and of course what we are counting on is the viral marketing. We have got 8000 employees who are all phonetics about music and each of those 8000 employees have who knows how many MySpace friends and Imean friends and Face Book friends and so I think that between all of that we should see a fairly strong marketing presence as we -- probably this four weeks as we ramp up to the launch date.

Liz Pierce - Roth Capital Partners

Now that was my next question, so about four weeks out you start building that kind of pents-up-demand that does…

Betsy McLaughlin

Yeah

Operator

And your next question come s from the line of [Janet Koppenberg] of JK Research; please proceed.

Janet Koppenberg - JK Research

Hi. A couple of questions Betsy; if you look at the license business and the license accessory business which sounds like you expect it to continue to be tough; are the comparisons easier as we go into the back half of the year; do you see perhaps the decline moderating because of that and given the margin in some of the other businesses, can you offset more do you think you can give more than offset these declines as we go forward?

Betsy McLaughlin

Yes I think I mentioned on license accessory Janet that yes the comparisons do get easier and so by nature of the easier comparisons we should see some better performance that are license accessories.

Janet Koppenberg - JK Research

That’s easier, comparison is not because the product will get that much better.

Betsy McLaughlin

Not right now. Although let me see...

Janet Koppenberg - JK Research

And what about the effect of Halloween in the third quarter, how will that affect it?

Betsy McLaughlin

Well Halloween is not really a licensed accessory. Halloween has it’s own category, we separate our Halloween but I guess I want to be fair; licensed accessories is made up of multiple things. There is a music license accessories, there’s gifts, there’s all kinds of things that we put into the category of licensed accessories and there are some areas within the category that look like they are going to be better, so may be 30% will actually be earning if better business than last year but still a good portion of it, it will maybe look better because of the easier compares.

Janet Koppenberg - JK Research

Is it fair to say that fashion accessories can accelerate as we go forward?

Betsy McLaughlin

Absolutely and to your question about the offset, fashion accessories is the highest margin.

Janet Koppenberg - JK Research

Right and that was my point.

Betsy McLaughlin

Yeah.

Janet Koppenberg - JK Research

Fashion accessories accelerate and the client moderate -- perhaps we get a margin benefits?

Betsy McLaughlin

That’s yes that’s correct.

Janet Koppenberg - JK Research

Okay and are we having a square footage -- a negative square footage this year Jim?

James McGinty

We will have actually about flat over the course of the quarters in square footage because obviously we are opening 11 Torrid stores, we are closing a few Torrid stores and 17 Hot Topic stores. We’ll pick up a little bit of square footage because we relocated some Hot Topic stores. Net-net, it’s really about flat.

Janet Koppenberg - JK Research

Okay and Betsy going in from the back half when you think about men’s and women’s and I know the novelty tee side hurts the business but with the bottoms business strengthening is there -- I think you said you expect to see some positive comps is that true?

Betsy McLaughlin

That’s correct.

Janet Koppenberg - JK Research

Okay, I think that’s it. Lot’s of luck you guys -- oh no, one more Betsy -- Halloween. Can you expect that that business will continue to be top as it has in the last couple of years or are there some new opportunities you could share with us?

Betsy McLaughlin

Actually Halloween positively comp last year I think. I think it was up 4% or something. I don’t have the number in front of me, actually let me look for it -- yeah, yeah Halloween was up 4% last year. So, we actually were pretty pleased with the Halloween business last year and we actually think we can anniversary that and have made some changes for that to even be better, so I think we are good shape for Halloween.

Operator

Your next question comes from the line of Jeff Van Sinderen of B. Riley; please proceed.

Jeff Van Sinderen - B. Riley

Hi, a couple of questions for you guys; one in the stores where you have the new listening stations, I’m just wondering if you are seeing any improvement in CD sales or maybe some of the bought keys that are associated with the bands, do you have the new CDs on or you have CDs on that are maybe on the listening stations?

Betsy McLaughlin

Yes and yes.

Jeff Van Sinderen - B. Riley

Okay so does that.

Betsy McLaughlin

This is a good call.

Jeff Van Sinderen - B. Riley

Can you give us a sense of what the role out is going to look like for those listening stations? Is that something like goes to just your better performing stores now or?

Betsy McLaughlin

No actually it will be complete by end of June. So we have all stores -- we haven’t have music in all stores. You had music in about 400 stores and one of the things that as we talked about evolving music and the music experience and how important it is to the customer to have that music experience, we said “listen we got to find a way for them to actually be able to listen to music in all of our stores” and many of stores that don’t have CDs, don’t have it because we didn’t -- this footage is not large enough to have it, so we had some challenges and how do we put a listening station in and not disturb the other parts of the assortment given the square footage concerning it. So we actually worked out a way to be able to do that and what we -- we tested it and the test was very successful. What we saw was, we did not see transfer business, we saw incremental business and we saw that not only were they selling CD’s but there also was kind of a renewed interest in some of the newer music and again our strategy is to position ourselves as the place for new music discovery and if you are trying to expose customers to new music how do you do that if there is no place for them to listen to new music. So, in addition to the changes that we made as far as the assortment is concerned and the music that’s playing in stores has been shifted to highlight a greater percentage of all new music, we also settled up that they showed as listening stations and a smaller edited assortment of that new music, so that’s why we are rolling it out and should be complete by the end of June.

Jeff Van Sinderen - B. Riley

Okay that’s good to hear and now let me ask you as far as Torrid goes how should we think about the promotional cadence this quarter in terms of how do you are planning it.

James McGinty

It is about the same as last year.

Jeff Van Sinderen - B. Riley

Okay good and then finally, just -- I know the licensing businesses has been tough in some parts and doesn’t sound like its going to get great anytime in the next quarter or so, but are there any new classifications or new categories that you guys are considering potentially testing that maybe we haven’t thought of or having considered that anything -- is there anything there I guess that’s new that you can talk about new merchandise categories or classifications that you pretty much just sticking to what you have done in the past.

Betsy McLaughlin

There are a couple of new classifications, but obviously we don’t want to talk about them. I look forward, but I mean there are a couple of new classes specifically within the accessory world that look to be good.

Operator

Your next question comes from the line of Holly Guthrie of Janney Montgomery Scott; please proceed.

Holly Guthrie - Janney Montgomery Scott

Thanks and good afternoon everybody. I didn’t see or I didn’t hear the cost of ShockHound, was that a penny a share or did that change from the guidance.

James McGinty

In the first quarter it was a penny a share and what we guided the second quarter at was $0.01 to $0.02.

Holly Guthrie - Janney Montgomery Scott

Okay great and then a question on some displays in the men’s area, particularly it looks like you are showing a few more outfitting ideas in the men, putting shoes and denim and the tops together. Is that new in all stores? I guess I have seen it in my store and how have the men -- I mean it looks like it -- I mean I’ve only seen it for maybe three or four weeks; how are people responding to that?

Betsy McLaughlin

I don’t really know what you’re talking about Holly because we haven’t -- there is no company…

Holly Guthrie - Janney Montgomery Scott

No, it’s just a shot. If you put some chucks with some tees and denim on a stand up front and you guys it’s just -- it looks like you put them together for me that I hadn’t seen it in the store in the pathway, you put it all together, the corduroys and the…

Betsy McLaughlin

The only thing that might be is we have some forums in stores, to give the store folks a chance to put some outfits together. We are not buying anything in outfit forum, so I think that the idea is -- I mean certainly what I have seen and some of the new downtown stores, the new stores where they have that part window that has a platform, there is usually a theme for the platform, so it might be summer festival and so they put together a rock tee and a pair of shorts and a pair of chucks because it feels right for the uniform, but there is no intentions. I am being cautious that way and the direction is not that specific, but I can certainly see some of our better merchants in the stores trying to suggest and sell by putting suggestions together for the customer.

Holly Guthrie - Janney Montgomery Scott

Okay and -- okay I guess then there is no intention to sort of look to see if that -- if that hasn’t been a plan then your not looking to see if that’s actually helped the men’s fashion business, is that correct or I mean can you give me commentary on that business?

Betsy McLaughlin

Well I think we shifted fashion last year to be very item driven and what that means is there is a denim bottom, if denim bottom works, lets do it, let’s do it in the right way; we know they will probably buy that denim bottom with the rock tee or perhaps a hoodie, so we say concentrate on the bottoms, don’t worry about -- even if the bottoms fire don’t worry about the tops there. As we look at those men’s and women’s tops we said you got to have an item that’s different than every place else in the mall. It has to be unique to have profits, it has to be priced correctly. If there is some expressivity to it that’s great, if it’s the brand that can be expressive that’s great, but at the end of the day we really narrowed our fashion focus because; one, we don’t want to compete with the other retailers in the mall on sort of rent or price. So, I think it’s more of an opportunistic buy than it is a category that we say we have to have 15 tops every singe quarter. So it’s a different way of approaching the business which seems to be working.

Holly Guthrie - Janney Montgomery Scott

Great thanks. That’s helpful. Okay and then a question on gross margin. It was down a little bit in the first quarter, the first time in several quarters and you are going up against them -- increase in the first quarter of last year, going into the second quarter it looks kind of flat comparing the prior year to last year. Could you just talk about I guess the comparison against the second quarter going forward and then also talk about if there is anything in the first quarter that was a little bit more relevant to the first quarter that may or may not be impacting the margin going forward?

James McGinty

I think there is a couple of things; one, merchandized margin. I think we have got some good opportunities. Betsy talked about the greater penetration of accessories will lend itself to generating a greater merchant margin relative to the last year. The closer obviously we can get to a flat comp, the better work -- job to leveraging the occupancy and depreciation cost which are pretty much fixed but we do believe that we can get some gross margin gain in the second quarter. Like you said last year when you look at first and second quarter, big gross margin in the first quarter, not so much in the second, but I don’t think -- here it’s a little more opportunity.

Holly Guthrie - Janney Montgomery Scott

Okay great and then the closings that you stated for ’08, I think you said 17 Hot Topic, four to five Torrid; is that in addition to what you saw in Q1 or does that include Q1?

James McGinty

Now that is the full year.

Operator

And your next question comes from the line of Barbara Wyckoff of Buckingham Research Group.

Barbara Wyckoff - Buckingham Research Group

I got a little question for Chris. Can we talk about the productivity of the Torrid stores originally -- so the original fleet versus the newer doers and then how are you approaching the classification of development planning by region for Torrid.

Betsy McLaughlin

No there is not significant difference than there is in one store design versus the other. That’s your question to the original stores performed better or no; it’s more based on geography at this point. In terms of classification planning, going forward we will put more emphasis on key items which -- that’s been a continued focus. Due to some regional differences we don’t under light our time and attention on sorting different -- different assortments for the region; the brand we make some changes; long sleeve, short sleeve, more coats, fewer coats but content wise we keep the brand pretty solid no matter where it is.

Barbara Wyckoff - Buckingham Research Group

Okay that’s to the productivity; could you just give me the range sort of from the lowest to the highest, where are they?

Betsy McLaughlin

Well, I think what you normally see is just the normal L shaped curve and the dispersion between your highest performing and your lowest performing, just like you do in Hot Topic, so most -- obviously most of our stores fall in the $300 to $400 a square foot range.

Operator

(Operator Instructions) your next question comes from the line of Brad Stephens of Morgan Keegan; please proceed.

Brad Stephens - Morgan Keegan

Hi, good afternoon. Alright a couple of questions for you; first of all; could you tell us what kind of comps are up against at the two divisions in the second quarter and then second, I believe you said that you got 10 basis points of expense leverage on store and other -- on the negative; can you tell us what you are doing to pull back expenses to be able to get that and going forward how much is there left, some loose ends to tie up.

James McGinty

Okay that’s your first question on the comps for the second quarter a year ago, Hot Topic was down 77 before it was up 29 and your second was about the expenses and how much more opportunity there was? I mean we continued to go after a number of areas, the distribution center and productivity. There are still gains being made that are very significant. The same with the outbound freight to the stores, we are constantly looking at payroll issues, particularly store payroll which is our biggest expense point where we can make inroads there and obviously keep in a very tight rain on growth here at the head quarters, but in terms of how it relates to last year. I mean we fell like that we can get a flat comp, better if we can get leverage on our SG&A.

Brad Stephens - Morgan Keegan

Okay and then one other question. You commented earlier that when your leases come out for renewal that it takes a -- I believe you said a double digit comp to leverage at that point in the stores?

James McGinty

It’s not so much to leverage, it’s to really get a positive pay back on those stores. I mean you do need that double digit comp because you might get a 10% increase in your occupancy cost plus instead of being in your low depreciation period because you’ve already depreciated all your furniture’s and fixtures now you take on the full new store of fixed assets and you run higher depreciation costs. So all that factored in plus you got the conversion and get the pre-opening cost related to opening a new store, so you have to get into that double digit range, in those deals that your accelerating in order for them to make sense. If it’s a natural lease exploration that’s a different deal. It doesn’t take that kind of comp to make it worth while.

Brad Stephens - Morgan Keegan

Okay, so as we go forwarded it wouldn’t be fare to assume that, looks like roughly 10% of your store base comes up every year for renewal, so it’s not just a double needed leverage expenses, because obviously depreciation will step down on the older stores.

James McGinty

Right

Operator

Your next question comes from the line of Holly Guthrie of Janney Montgomery Scott.

Holly Guthrie - Janney Montgomery Scott

Hi, thanks guys for taking my follow-up. I was just wondering, you had a question earlier and it was about regular verses full price selling and Betsy you said the average store in Q1 was up 1%; were you talking about the mark downs in the stores; what was that 1%?

James McGinty

That was the regular price business.

Operator

Your next question comes from the line of Dana Telsey of Telsey Advisory Group.

Dana Telsey - Telsey Advisory Group

Good afternoon everyone. I have jointed a couple seconds late. Can you talk about the accessories business the never out strategy and given the changes that you’ve made in accessories and just process and everything? Have you -- that translated into any other categories, where you’ve made enhancements like that either for Hot Topic or for Torrid? Thank you.

Betsy McLaughlin

Yes the never out strategy for people who don’t know, that was the strategy we employed at the fourth quarter last year whereby we took all of the fashion classifications both accessories and apparel and looked at those items that we really believed in and said we’re going to make the inventory investment to never be out and so it involved a bit of a inventory uptick to do that but that is one of the primary reasons why we believe the accessory business has turned around combined with the fact that the buyers picked the right item to never be out of. So defiantly in fashion accessories we’ve seen that. We also have seen that in women’s and men’s bottoms, the denim presentation is also a never out item focused presentation so that has translated and then as other categories start to have opportunities to do that we certainly will broaden it a bit but in order to qualify for having that extra inventory and to earn the investment and have to be an item that will last for at least a year period of time.

Operator

(Operator Instructions) your next question comes from the line of Crystal Kallik of D.A. Davidson; please proceed.

Crystal Kallik - D.A. Davidson

Good afternoon everyone, Betsey could you talk a little bit about the as you look at your square foots allocation by division you touched on this looking at some of the listening stations but you’re business is certainly evolving in and you are certainly focused on some of the higher margin opportunities; how are the store layouts in the real-estate in the stores changing.

Betsy McLaughlin

Well I think music is getting a higher percentage, I mean when you look at properties and how it’s doing when you look at junior -- rock tees of juniors and men’s we certainly are appropriating more space to what’s happening with music and that’s in line with our strategy and certainly as a customer walks in the store for a evolving music experience we’ve got to have it up front and visible, so certainly there has been a bit of a shift there. In fashion accessories, we have down played for several years because we just haven’t had the trend behind us and now that I think we’ve sort it out the business and are starting to see momentum we will certainly see fashion accessories get a bit more exposure. On the other side the equation with license may not being troubled with the trend for licensing we certainly down scaling our license properties, so you’ll see that our cost men’s, women’s and accessories -- so I mean when you got an average store size of 1800 feet and you’ve got 20 different product classification you are constantly ebbing and flowing but I think that particularly right now because there is such a dramatic shift out of licensing that probably will be a bit more evident as you go into the stores for back-to-school .

Crystal Kallik - D.A. Davidson

And how nimble are you in the planning and execution process of that -- eventually we would hope licensing well be back and be a high commodity, so how quickly would it -- does it take you to typically when you see these trends start to reallocate your force basis.

Betsy McLaughlin

Well the great thing about many of our categories is that lead times are short and so with license accessories -- last time I didn’t have accessories that was license depend on novelty tees a pretty quick turnaround and certainly with music it’s a quick turnaround and fashion accessories for the most part is a quick turnaround as well, so think we remain pretty flexible with the six to eight week time line, we can execute not only the shift in flow but more importantly the shift in the receipts and the current inventory level.

Crystal Kallik - D.A. Davidson

Great thank you and then Jim I know you talked about this a little bit. As far as the lower distribution costs, it sounds like you have a fair -- about more to come as far as productivity investments.

James McGinty

That would be a true statement. We’ve seen significant gains over the course of the last several quarters and based on the assistance with the equipment in place and the measurements that they have been able to monitor each -- every week for every associates we are confident that they can continue throughout 2008.

Crystal Kallik - D.A. Davidson

And is it beyond 2008 or how big of an area of a focus is this for you over the next several quarters.

James McGinty

I mean it’s a significant area of focus. I mean distribution and logistics costs are one of our biggest P&L lines so we are focused on how we can leverage those costs both out of our California and or Tennessee distributions facility.

Operator

Thank does conclude the question-and-answer session. I’ll now turn it back to management for closing remarks.

James McGinty

Thank you for participating in our conference call and if you have any follow-up calls please get back to me. Thank you

Operator

Ladies and gentlemen thank you for your participation in today’s conference. This does conclude the presentation. We will now disconnect, have a good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Hot Topic Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts