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Hot Topic (NASDAQ:HOTT)

Q2 2012 Earnings Call

August 15, 2012 4:30 pm ET

Executives

James J. McGinty - Chief Financial Officer, Principal Accounting Officer and Secretary

George Wehlitz - Vice President of Finance

Lisa M. Harper - Chairman and Chief Executive Officer

Mark Mizicko - Senior Vice President of Planning and Allocation

Analysts

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Janet Kloppenburg

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

Marni Shapiro - The Retail Tracker

Linda Yu Tsai - ITG Market Research

Joseph J. Yurman - 1221 Partners, LLC

Operator

Good afternoon, ladies and gentlemen. Welcome to the Hot Topic Second Quarter 2012 Earnings 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 relating to financial results, guidance and future financial performance, merchandise assortment, new initiatives and related matters and statements relating to key personnel and operational issues.

These statements, as well as related information posted on the Hot Topic Investor Relations website, involve risks and uncertainties that may cause actual results to differ materially from those projected in the 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 the most recent annual report on Form 10-K and quarterly report on Form 10-Q.

All forward-looking statements made on this call speak only as of 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 be available at (888) 286-8010, passcode 73585505, for approximately 2 weeks.

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

James J. McGinty

Hi, this is Jim, and welcome to the call. While on hold, you've been listening to Smells Like Teen Spirit by Nirvana. My partners on the call today are Lisa Harper, Jerry Cook, George Wehlitz and Mark Mizicko. For competitive reasons, we will not be discussing any specific forward-looking product information during this call. George will begin by reviewing the second quarter results and making a few comments on the balance sheet. Following the Q2 details, Lisa will provide you with the thoughts on the second quarter performance and the outlook going forward. Lastly, we will discuss the guidance. Now I'll turn it over to George.

George Wehlitz

Thanks, Jim. All comparisons discussed are to the same period from a year ago unless otherwise noted. Overall, the net sales during the quarter increased $6.9 million. The components of this increase are as follows: $4.7 million sales increase, primarily from new and noncomparable Hot Topic and Torrid stores; $3.7 million sales gain from Hot Topic comparable stores increase at 3.9%, $1.6 million sales gain from Torrid comparable sales increase of 4%; and lastly, $3.1 million sales decrease from closed stores.

For the second quarter, Hot Topic Division had an average transaction value increase of 13%, but the number of comparable transactions were down 8% from last year. Torrid had a 3% increase in the average dollar sale with a 1% increase in the average number of transactions.

At Hot Topic, apparel was 56% of total sales for the quarter, compared to 51% last year. At Torrid, apparel was 83% of total sales for the quarter compared to 81% last year.

Gross margin was 34.1% of sales, compared to 32.2% last year. The 190 basis point increase breaks down into the following categories: 120 basis points increase in merchandise margin as a result of higher realized markup and lower markdowns; 40% basis point decrease in the store depreciation expense due to leverage on higher sales and store closures; 40 basis points decrease in distribution expenses, primarily a result of lower freight, depreciation, supply and leverage on higher sales, partially offset by higher payroll and consulting costs; 20 basis points decrease in store occupancy percentage due to leverage on higher sales, partially offset by deferred rent credits recognized in the prior year as part of our cost-reduction plan; and lastly, 30% -- 30 basis points increase in our buying payroll expenses.

In the second quarter, selling, general and administration expenses were 34.9% of sales compared to 38.9% last year. Last year's SG&A expenses included approximately $4.1 million related to the strategic business changes and cost-reduction plan.

Excluding these costs, SG&A expenses for last year were 36.2% of sales. The 130 basis point improvement breaks down into the following categories: Store and Internet payroll expenses decreased 130 basis points, as a result of leverage on higher comp sales, improved productivity and lower store performance-based bonuses; the other store expenses decreased 80 basis points, primarily due to lower debit and credit card processing costs, utility costs, supplies and freight costs. These are partially offset by higher inventory service fees.

Other general and administrative expenses decreased 50 basis points as a result of lower relocation and asset impairment charges, partially offset by an increase in computer maintenance costs, a 20 basis point decrease due to lower depreciation expense and leverage on higher sales.

Marketing expenses increased 20 basis points as a result of increases in payroll, marketing events and media placement costs. These were partially offset by a decrease in store signage expenses.

Our pre-opening expenses increased 20 basis points, due to a greater number of new, relocated and remodeled stores open in the second quarter of 2012. Our performance-based bonuses increased 110 basis points for the quarter.

Our results ended in a net loss of $800,000, or $0.02 per share, versus a net loss of $3.6 million or $0.08 per share last year, excluding the $4.1 million of expenses related to the strategic business changes and cost-reduction plan.

During the quarter, we opened 1 Hot Topic store and 10 Torrid stores, closed 5 Hot Topic stores and 3 Torrid stores. We also remodeled or relocated 20 Hot Topic stores and 4 Torrid stores. Our cash position remains strong. Our cash, cash equivalents and investments, both short and long-term, were $65 million compared to $74 million last year. Our total inventory cost was $80 million. On a per-square-foot basis, our inventory was 7% higher at the end of the second quarter compared to last year. And on a 2-year basis, our inventory decreased 6% on a per-square-foot basis.

Year-to-date, our capital expenditures were $19 million, primarily related to store construction projects and IT projects. Our cash flows from operating activities, year-to-date, as of July, increased $10 million compared to last year. Now I'll turn the call over to Lisa.

Lisa M. Harper

Thanks, George, good afternoon, everyone, and thanks for joining us today. We are pleased with the continued improvement in our overall business. On a consolidated basis, we delivered a 3.9% comp and generated solid bottom line results to improve gross margins and SG&A expense leverage.

At Hot Topic, we again delivered solid results with a 3.9% comp. This was true in the first quarter, our fashion apparel assortment made the largest contribution to the positive comps, contributing 16% of sales versus less than 10% a year ago.

Consistent with the strong trend established in the first quarter, the fashion apparel category comped up 67%. Denim, both fashion and core, performed well. Women's comped up 192% in the second quarter, and men's comped up 41%. Both numbers are consistent with the strong trend established in Q1.

These results are promising indicators that we can achieve our goal to return the fashion apparel to 20% of the business. We continue to expect that we will achieve that level next year.

Fashion accessories made up 32% of the business versus 34% last year, the result of a 2% comp decline and the increase in penetration in the fashion apparel and licensing to the total. We have had a few challenges in fashion accessories, most notably, shoes comped down 70%. You'll remember that we made a decision last year to exit the athletic shoe business. At this time last year, we were selling Converse and Vans at prices below $20. As the year goes on, this negative impact diminishes.

Hats and costume jewelry also negatively impacted the comp this quarter as they did in first quarter. We've adjusted inventory to more appropriate levels until we've identified the right balance and the assortment.

In beauty, over the course of the quarter, our focus was on working through the balance of the old and unproductive product that was committed to in early 2011. Sales of the new Blackheart Beauty product were challenged because of the competition with the Warpaint product that was deeply discounted and on clearance. We expect this to change in Q3 now that we worked through most of the unproductive inventory.

Overall, we're very focused on turning our fashion accessory category to positive comps in the back half of 2012 and expect it to help drive comps in 2013. License product contributed 29% to the business versus 28% last year. You'll recall that during the second quarter last year, we had very strong license sales, primarily driven by Harry Potter. We're pleased that this year, we were able to deliver a 7% comp in this category. Thanks to a strong overall assortment led by the superhero releases.

Our performance in the license product category is a testament to the success of our strategy to better manage movie-related license properties, to maximize gross margin dollars and chase the business instead of our traditional method of building inventory levels early.

This strategy applies to all areas of the company. But this year, it has made a significant impact in the license area, where we have historically suffered from a feast or famine approach particularly in the movie properties.

Music contributed 22% of the business versus 27% last year, and comps were down 14%. We've reduced our assortment of CD's in the stores, as this is the area of the company with the lowest GMROI. And as we discussed during the call last quarter, we knew music would be somewhat soft in the second quarter as a result of a slow release schedule.

For the back half of 2012, we're facing a much better release schedule and therefore, expect an uptick in the music category. We anticipate releases from Deadmau5, Machine Gun Kelly, Wiz Khalifa, Lil Wayne and Green Day, which has 3 releases scheduled. We've played Nirvana for the whole music today as a nod to our strong and growing classic business in the music area.

From a promotional standpoint, we ran our Hot Cash promotion in July, which helped drive customers back into the stores during a historically lower traffic period. This was the first time we ran Hot Cash in the second quarter, and we are happy with the results.

In Q2, sales at hottopic.com were up 1%. This is -- sales of regular-priced merchandise were up substantially and sales of clearance were down double-digits. We're pleased with our progress in balancing the mix here.

Moving on to Torrid. In the second quarter, the comp increased by 4%, an improvement over the 2.5% increase generated in the first quarter. Apparel generated a 6% comp increase and represented 83% of the business, as compared to 81% last year. Within Apparel, the bottoms category, was up in the high-teens, primarily as a result of our strong denim business. We were up 2% in Tops and other apparel categories.

We continue to be disappointed with Torrid accessories, where comps declined 5% due to declines in leather, jewelry and shoes. However, we are pleased that we delivered strong double-digit positive comps in intimate apparel, which is substantial go-forward opportunity at Torrid. You'll see an increase in intimate apparel inventory and assortment throughout the fall, which will continue to offset some of the declines in the traditional accessory business.

As you know, we've been testing styles and fits over the last year and gathering feedback from our customers. As a result, we've developed a new merchandising approached and introduced updated apparel collections to which our customers are responding very positively.

For example, our new stiletto skinny denim is performing well and has gotten a great deal of buzz in the marketplace, particularly for its fit. Overall, we are pleased with the improvement in the Torrid business and believe it's a very strong growth opportunity for the company. Our new apparel offering that dropped July 30, coupled with our revamped vertical merchandising approach, are already helping to drive improved sales and margin.

A few weeks ago, we unveiled a completely new brand, look and message that's reflected in-store and online, as well as a new integrated marketing campaign that includes national print, digital and social media marketing with local marketing -- local marketing programs. The campaign was shot by fashion photographer, Ellen von Unwerth, and we believe the photos are a great reflection of the image we want to portray, that Torrid is about fashion and sex appeal, not just about size. We anticipate expanding our marketing campaigns in 2013, as we continue to grow the Torrid business. In the second quarter, we opened 10 new stores for Torrid, 8 of which were in strip centers, our predominant go-forward real estate strategy. This brings the total number of Torrid stores and strip center locations to 17. We continue to expect our stores and strips to payback in less than 18 months on a cash basis. We also expect strip center stores to generate a higher store contribution in the long run, as we leverage lower occupancy costs.

Our experience so far indicates that while traffic is lower in strip center stores, conversion and average transactions are higher than the mall counterparts. We believe that the high ROI and relatively fast payback makes Torrid a very compelling growth opportunity.

For the balance of 2012, we anticipate opening 18 new Torrid stores in Q3 and 3 in Q4. In addition, we expect to relocate approximately 8 Torrid mall locations to strip centers in the back half of 2012.

By the end of 2012, we expect that approximately 20% of our stores will be in strip centers. Torrid.com was up 9% in the quarter and comprised over 20% of the total division sales. Regular price selling improved dramatically in this channel, well ahead of the 9% gain. We continue to actively pursue various customer acquisition strategies to further improve our traffic and broaden our customer base.

As we discussed on the last call, we continue to anticipate strong gross margin improvement in Torrid at the back half of 2012, specifically related to our product sourcing model, as we move from a primarily market-driven purchases to a vertically integrated model where we design and contract manufacture our own product. I continue to feel strongly that the new processes and product focus will dramatically improve Torrid's performance over the next several years. We will continue to evaluate the ultimate potential of the business, as we benchmark our progress on these fronts.

Looking ahead to Q3, for the first couple of weeks of the third quarter, traffic and sales were slower than we had anticipated. We think this was due to a shift in the start of schools in major markets like Texas; the oppressive heat; and the Olympics, which drew the largest viewing audiences ever. However, this week, we've seen substantial improvement in both businesses and are very encouraged by the rebound.

We are happy with our inventory levels that we're up 7% on a square foot basis to a year ago, well under our original plan. Overall, we're pleased with our progress as we continue to develop and improve our internal processes and our teams across all aspects of the business.

Our improved processes are being supported by revamp systems, including a new core merchandising system that we're adding at the beginning of fiscal 2013. Recently, we've implemented a product life cycle system to support our new product sourcing, product and sourcing strategies. The investment in people, processes and systems are showing traction. And I anticipate continued improvement in the back half of 2012.

Now I'd like to turn the call over to Jim, who will provide color on guidance.

James J. McGinty

Thanks, Lisa. We expect to see continuing improvement in our operating results compared to last year. This improvement is reflected in our previously announced Q3 earnings guidance in the range of $0.08 to $0.10 per share, compared to last year's $0.07 per share. Now a few more details on the third quarter.

For the third quarter of fiscal 2012, we expect sales to be in the range of $181 million to $185 million based on quarterly comp sales increase in the low single-digit percentage range.

Gross margin is anticipated to improve substantially over last year. SG&A expenses are anticipated to deleverage as they include investments in store preopening costs, Torrid brand marketing, as well as an increase in performance based bonus accrual. We are expecting inventory at the end of the third quarter to be up in the low single-digit percentage range on a per-square-foot basis, which compares to last year's flat per square foot.

We expect depreciation and amortization to be approximately $9 million for the quarter. For the third quarter, we expect to open approximately 18 new Torrid stores. We also expect to remodel approximately 16 Hot Topic stores and 1 Torrid store, as well as relocate 2 Torrid stores to strip center locations from malls. We also expect to close approximately 3 Torrid stores in the quarter.

Our guidance assumes approximately 43 million shares outstanding for the third quarter. We expect our fiscal 2012 capital expenditures for store projects to be approximately $25 million, and approximately $12 million for new IT systems. We may make additional capital expenditures in fiscal 2012 for other strategic and operational purposes. Depreciation and amortization is expected to be approximately $35 million for the full year of 2012.

At this time, we will take questions related to the results and outlook. Please hold while we contact the conference operator, who will give you further instructions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question today comes from the line of Tom Filandro.

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

I guess the first question I'd like to ask is, Lisa, can you give us a little more clarity on the Hot Cash performance? What did you see in the results that made you happy, I think you said? And tell us too, what you expect in terms of redemption? Because I think there's a little bit of a change this year versus last year. What impact that might have on the business? And I just want to make sure I understand the comments on the first couple of weeks being a little bit softer and then seeing a substantial improvement. Was the improvement tied directly to the BOGO events. And were those events -- I guess, the way to ask it is, were they planned "A" [ph] events? And then I have one more follow-up on Torrid.

Lisa M. Harper

Okay. Thanks, Tom. The Hot Cash, when I say I'm pleased with Hot Cash, what we do with that is we distribute during high traffic periods and we redeem during low traffic periods to drive additional traffic in the store. And we did that in second quarter for the first time this year, and we're happy with that. We're planning that to be generally a quarterly event. And so we'll be anniversary-ing that event, third quarter this year versus third quarter last year. My comment about the soft first 2 weeks of third quarter, it doesn't relate to the start of the BOGO event in the store. We definitely saw a softening in the business when the Olympics started, and we saw a strength in the business when the Olympics finished. So we -- it was very much timed to that event rather than to the promotional events in the store. And what we did is we moved around promotional events to take advantage of the lower traffic levels, so that we will drive -- have promotions in place that drive average tran versus promotions that are timed to capitalize on high levels of traffic. We are seeing, in the last couple of days, a substantial increase in traffic and in transactions from trends. So I'm very pleased with the impact, the positive impact that we're seeing right now, post-Olympics, in just the beginning of this week. It's a dramatic shift.

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Excellent. And just quickly, Lisa, just on Torrid. Are you experiencing an acceleration in transactions there since the new marketing has occurred? Or are you initially seeing average transaction value the primary driver or possibly both?

Lisa M. Harper

It's both. We're seeing higher average tran, as well as a higher number of transactions.

Operator

Your next question is from the line of Janet Kloppenburg.

Janet Kloppenburg

Lisa, I wanted to just ask and looking at Hot Topic. Obviously, the apparel and license businesses are performing very well. Should we be expecting in the low single-digit guidance that comps could turn positive in fashion accessories and music in the second half or in the third quarter? Or do you think that those assortments need more time and refinement and maybe that will come later in the year or even in the spring season? If you could just talk about how you want us to be thinking about trends there, I think that would help a lot. And then I had a couple of questions on Torrid.

Lisa M. Harper

Okay. I would expect the trend in fashion apparel and license to continue to lead the pack in terms of performance. I think that we'll get closer to breakeven in terms of the comp and accessories, as we go up to the back half of the year. And I look at accessories as an opportunity in comp next year. And I think music will improve in the back half of the year as the release schedule improves. I would say that the high -- the super high numbers that we've seen in fashion apparel will be mitigated as we start anniversary-ing that in the back half of year. So it won't be driven so much by fashion apparel while that will still be positive, licensing will contribute and will be less of a negative pull in music and more like a breakeven in accessories. I mean, accessories was only down 2%. So it is getting closer to a breakeven situation there. So it won't be a drag. I would expect a slight drag in music and a less of a positive in fashion apparel. So more of an evening out of the categories.

Janet Kloppenburg

And just staying on Hot Topic for a second, there have been some pretty aggressive denim promotions from the mall. And I know denim has been positive for your fashion apparel business. Do you guys feel like you're appropriately positioned with the product and promotions to be able to compete against what's going on in the mall today?

Lisa M. Harper

We do feel like we're positioned well with product inventory with the assortment, as well as our pricing strategy. So, so far, we're happy with that.

Janet Kloppenburg

Okay. And then as far as Torrid goes. I was happy to a that the new product was selling very well. Can you give us an idea of the level of penetration that the private label vertically sourced product is right now? And where we should see that move to as we go through the rest of the year and into next year?

Lisa M. Harper

Yes. So with apparel being about 82% to 83% of the total, right now, only one rotation is the new product. So it's just the product that we delivered 7/30. So only about, I would say, 30% of the apparel relates to that new strategy, it will improve. And so that at the end of -- as we go into fourth quarter, I would say more than -- about 75% to 80% of the apparel would be private label product. And then, that will...

Janet Kloppenburg

And what should it move to? Is that where you want it to be, 75% to 80%?

Lisa M. Harper

I think with the results that we're seeing, we could ultimately have just 8% to 10%, that would be maybe even less that would be market-driven and the balance would be private label.

Janet Kloppenburg

Okay. Are you working with domestic vendors or the lead times extending out as you source internally?

Lisa M. Harper

We have sourcing relationships with quick turn factories, as well as more traditional timeline factories, so that we are able to react to sales and have product back in the store in 6 to 7 weeks in most of the categories in Torrid. So we place a large percentage of the line out on a traditional timeline, and then we leave open to buy so that we can react to sales trends and work on some fast turns.

Janet Kloppenburg

Okay. And just that -- well, for Jim on the marketing expense, it was up a bit in the second quarter. Should we be looking for a higher marketing spend in that second half of the year versus last?

James J. McGinty

Yes, we should be looking for that in the second half because we have more investment and some brand marketing and some of those types of things.

Janet Kloppenburg

Okay. And what about the Halloween shift, Jim. How is that supposed to affect the comp trend in the third quarter versus the fourth quarter?

James J. McGinty

Well, in terms of the third quarter and the total quarter, it's probably a percentage point or less. It will probably cause October to be a tough month to comp because of those days shifting into November. But we went back and look at the similar calendar on Halloween and actually had a second look at that, and felt that it was probably going to be a little less impactful than we originally thought.

Janet Kloppenburg

Okay. And just my last question is on the gross margin outlook. I assume you're getting some lower product cost because of what happened with cotton. And also, is it right to assume that gross margins at Torrid should benefit as we move through the year and into next year because of the vertical integration?

Lisa M. Harper

We do expect, specifically in Torrid, 300 to 400 basis point improvement related to going vertical. So in terms of IMU and how much of that rolls down to the bottom line is really on how well we manage our business. But we definitely -- and that's on the percentages that I referred to earlier on your question. So and...

Operator

Your next question is from the line of Jeff Van Sinderen.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Maybe you can delve a little bit more into how we should think about the transaction count at Hot Topic for the second half? Obviously, there's moving parts there. Just wondering how the accessories getting better in the second half can possibly move that metric or how we should think about transaction count?

Lisa M. Harper

Jeff, I would see that we would normalize on a year-over-year basis in terms of the number of transactions. We still are looking at driving our average transaction size higher. But second quarter was up against a very highly promotional, lots of clearance in second quarter of last year. So that's one of the reasons that we had some softer transactions and why we've been running softer transactions. But as you get back to the back half of 2012, you should see that normalize in Hot Topic.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay, good. And then also if you can just touch on, while we're on Hot Topic, anything worth noting relevant to the licensing lineup for Q3?

Lisa M. Harper

Q3, the move -- we have Frankenweenie. Of course, you're all going to run out and see that one. And then for Q3 and then Q4, of course, we have the last of the Twilight series and the Breaking Dawn Part II and The Hobbit releases. But it really is Breaking Dawn versus Breaking Dawn as our major power players there. We do have a nice game release, gamer release in the third quarter, and that is we're seeing some improvement or increase in that business with World of Warcraft and Resident Evil, Assassin's Creed, I know you guys play those in your spare time, too. So that's lots of new gamer releases in the back half of the year, which is something we don't really talked -- we haven't talked about that much with licensing, but it's a growing business for us.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. And then if we can shift to Torrid for a minute. Maybe you can just say a little more about how you're thinking about the accessories business there. I know you mentioned some offsetting factors or offsetting expectation.

Lisa M. Harper

Yes, I think that what we're doing is pulling back on some of the traditional areas and accessories, leather, jewelry. We have a different approach in shoes, a little less assorted, a bit more depth in that assortment. And we have some presentation challenges that we're working on in-store with shoes right now. And we're seeing increases in intimate apparel in the first half of the year and the teens, and we think that should increase in the back half of the year as we invest in inventory and new products. So we have a new bra release coming up in September for Torrid that we think is going to be a real winner, and we're adding fashion into our core fits in the bra and the foundation area. So we're investing in it and pulling back on our investment in some of the other categories -- in traditional categories and accessories. And until we see macro trends change in the accessory business, that's what we'll continue to do.

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Okay. And then in terms of Torrid off-mall, anything else you can share with the early results there versus kind of how your expected, how it's tracking and I guess, how you're thinking about Torrid off-mall metrics?

Lisa M. Harper

Well, our average weeks of open -- being open in these stores is 8 weeks, 8 or 9 weeks. And so we just have very initial information. So far, we're -- like the group is on pro forma, doing what we expect it to do. We're definitely learning about some regional issues and some calendarization issues that we're reacting to and feel really strongly that our strategy is sound and that we're excited about moving forward with it. So based on early results, we -- it makes us a bit more aggressive about the rollout.

Operator

Your next question is from the line of Janine Stichter [ph].

Unknown Analyst

I was just wondering if you could talk a little bit about -- I mean, I know you mentioned Halloween and it was kind of a weak holiday for you last year. Any way you're planning it differently, whether it's maybe buying it a little less steeply or changing the type of costumes you have, just to differentiate a little bit more from what else is being offered in the market?

Lisa M. Harper

Yes, we are having a very different approach to Halloween this year. It's very exciting. It's, what do I say, it's scary and bloody. I said it on the call. So it's very sexy and scary. And it's about DIY and not about package costumes. And so the assortment is very different, the approach is very different. And we feel like paying close attention to what the customers were looking for and spending lot of time in the stores last year during the Halloween time period, that we've been able to put together an assortment that's going to be very compelling and while investing in much lower inventory levels, primarily by exiting the package costume business, we feel like we can drive the same level of revenue on a much higher gross margin rate. So we're excited about it. I can't believe I said that word, I apologize.

Operator

Your next question is from the line of Adrienne Tennant.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

So, Lisa, my question for you is going back to the comment that you had made about the rebound. I guess how do you know that it's not necessarily macro? Do you think that there's any change in sort of the macro environment? And the upside that you're seeing since that time, is it more than -- so let me put it this way, if you were below plan in those first 2 weeks, are you meaningfully above plan in that post Olympic, that small post-Olympic period such that over the next couple of weeks, we'll sort of get back on plan or are we coming from behind? Does that make any sense?

Lisa M. Harper

Sure. But what we think is that with the softness that we saw in the beginning that, that we can make that up in the balance. And that has been reinforced by the type of consumer behavior we've seen in this very short amount of time. So the builds are bigger than we thought they were going to be. And so that's nice to see. That gives us confidence in terms of being able to kind of compensate for that miss in the beginning. And that, combined with some of the areas are going back much later. Now L.A. went back a little bit earlier, but Texas is going back 3 weeks later, I believe. And so there are a lot of shifts in the calendar and there's some macro conditions out there. And of course, as always something beyond our control. But I think -- we feel comforted, is the right word, by watching the rebound that we're seeing right now.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay, great. And then the categories, the fashion apparel was up 67%. The shoes were down 70%. Are there any other offsets to the strengths that you're seeing in fashion apparel, license business? Where is that-- where is the offset other than in shoes, categorically speaking?

Lisa M. Harper

In terms of -- in terms -- the only categories that we really exited are the shoe category. But I would say that just the softness in music is being compensated by the strength in licensing. So -- and the strength in licensing is beyond the big release strength. It's across all categories. I mentioned gamer a little earlier, private label, those types of things are really working in licensing. So this overall assortments working there, and that is helping to offset the short-term softness in music.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay, great. And then, Jim, on some of the metrics for Torrid. Can you remind us if you've given sort of the 4-wall economic, the store economics for the Torrid, either relationally in sales per square-foot or IMU comparison to Hot Topic? Any color there. I know you've talked about the 700 basis point spread in the 4-walls on mall to strip, but any other color there?

James J. McGinty

Well, in terms of -- I guess, just addressing your last one first. Our mall stores are performing quite well, we're in positive comps. We're narrowing the gap in that, and it's because we're seeing good performance from our strip centers and an improvement in some of our mall stores, not to mention our management of the fleet where we're closing our least profitable Torrid stores and by taking those out of the mix, that helps. In terms of other metrics, we've mentioned the IMU is higher relative to Hot Topic. We expect merchandise margins, particularly with the vertical sourcing, to enable us to run better merchandise margins, certainly, and higher gross margin. The store contribution, we've commented that it's in that 20% range, but it's been -- it's gotten there lately. So it's really improved. And in terms of sales per foot, I believe what we said in the 10-K last year was that we were to generate sales per foot around $330. And then, that's when it was just a complete mall base.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Right. And so it's gotten better since then, obviously. And then on the SG&A. So I'm just trying to take a look at the dollar gross. Had you given SG&A dollar gross guidance? Because it looks like -- you came to me, it looks like you came in better on the SG&A, and I don't think you have bonus accrual yet. Is that -- or didn't have it in the second quarter, the way that it's allocated?

James J. McGinty

We did have it, but it's not nearly as heavily allocated to the second quarter, a quarter you don't make money as it is to the third and fourth where you do make a substantial amount of your annual earnings. But it's much more impactful in Q3 and even that much more impactful in Q4. And we didn't provide SG&A guidance in terms of the pure dollar growth in Q1 or 2 because it was fairly flat at that point. Now we're opening more stores, so we've got a bigger store base. On top of that, we've got the extra week in Q4. We've got the additional performance space. And we're investing in brand marketing, et cetera.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

I mean, I don't want to try to throw -- put numbers in your mouth. But is it fair to say that -- I mean, it's going to go up meaningfully because there's sort of catch-up accrual from the prior 2 quarters. You make most of your money in the back half. I mean, should I be thinking about SG&A dollars maybe up high single-digit in third quarter and up low doubled-digit in the fourth?

James J. McGinty

Yes. I mean, I think, it's safe to say, at least, those numbers. And that's one of the reasons we wanted to point out that, overall the guidance reflects that. But the guidance reflects a better gross margin rate and a higher expense rate relative to what, I think, the way people are thinking about it in their models.

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Okay, great. And then, Mark, I have one for you, if you're still there. Mark, I know you're doing a lot of work on the inventory, the planning allocation, et cetera. Hot Topic has always turned its inventory very quickly, over 6x, 6.5x. Is there -- from all the work that you're doing, is there a half turn in the business on an annual basis that can be gotten from a lot of the initiatives that you're doing?

Mark Mizicko

Yes, I think that there is. I think the trick for us is not trying to do it all at once. So we're continually paring back and clearing through some of the unproductive inventory. And as we do, we're not buying back into those inventories as aggressively as we clear out. So I think over the long term, there is that half-turn improvement that you're asking about.

Operator

Your next question is from the line of Steph Wissink with Piper Jaffray.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Just a follow-up question on inventory. Looking into turns and also just looking at total inventory composition. Lisa, could you talk a bit about that low single-digit plan for Q3 and what the health of that inventory is relative to kind of what you're exiting with that at the end of Q2?

Lisa M. Harper

Well, in general, we're -- our inventory is much more current than it has been in previous years, dramatically improved. Primarily, that's driven through a completely different approach to how we manage our inventory. I've mentioned how we're buying into products and licensing specifically, so we have much of a chase mentality from that site. But also in terms of marketing, markdown optimization, how we're managing to price elasticity models on a much more current basis than the previous strategy of the organization. So we're very pleased with the age and the quality and the level of our inventory.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

And Lisa, could you talk just a little bit about your low single-digit rate of inventory what does that allow you to chase into, in terms of potential comp outperformance? Just looking at the delta between inventory and comp, the last 3 quarters or so, you've been able to drive some comp lift having that extra inventory, but now you're guiding to a comp in line with inventory, what does that imply about your ability to chase in the business, if it doesn't materialize?

Lisa M. Harper

I would say the area that has the most opportunity for chase are 2 areas between the 2 brands, in Hot Topic. It's license. And then in Torrid, we do have the ability to chase into specifically net categories. So we're also looking -- as Mark was talking about, to increase our turns a bit so that inventory is more productive. So we don't have to take of inventory level at the same level of the comp.

James J. McGinty

And Steph, I would add that inventory is a snapshot of a point in time being that our quarter ends a little bit differently, and we got 4 days in Halloween selling that occur into the fourth quarter. It's not a perfect apples-to-apples comparison. And as Lisa said, we do expect that we're going to turn faster in the third and fourth quarters. It's just we're trying to give you a single data point that falls with that, whatever it is, October 27.

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Okay, that's very helpful. I appreciate it, Jim. And then just the last question for me on Torrid. Lisa, if you could talk a little bit about your strip strategy. Who is an ideal cotenant in the strip? And then how do you think about that balance between you lower traffic but really driving transaction and basket value with that customer?

Lisa M. Harper

So there are -- we're very happy with cotenants like Ulta, like Kohl's, like any TJX property. Those all work well. We also look for cotenancies with other large-sized fashion retailers. And what we're finding there are lower -- somewhat lower traffic levels, double the conversion rate of a mall. And somewhat higher average transaction size. That's what we've seen on a consistent basis. And all of our customer acquisition strategies are based around learning how to best drive more customers to those locations. So we have a variety of tests out there from buying lists and direct mail to social media strategies to radio to bus and billboards. So that we are learning the return on each of those investments and are the most effective way to drive and introduce the brand to the new consumer. And we think the new branding effort that we're investing in, in the back of the year through national advertising, as well as those media market methods, will also help that. But right now, we're very happy with the level of transactions and values of those transactions that we're getting in the strips currently. Does that answer your question Steph?

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

It does, yes.

Operator

Your next question is from the line of Liz Pierce with Roth Capital Partners.

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

I think I just have one question left at this point. Lisa, you said on Torrid that you're learning some regional things. Remind me how many are in new areas, like new cities, new whatever that you're opening?

Lisa M. Harper

Of the strips?

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

Yes.

Lisa M. Harper

Specifically, we opened quite a few in the New York, New Jersey metropolitan area. And those have a somewhat different calendarization than we're finding in other parts of the country. We're lucky that we have some board members who have a lot of experience in the strip calendarization. So we're -- we have a lot of internal help in terms of deciding what that looks like. But specifically, I'm speaking to that area that's running a little differently than the bulk of the stores. But in general with strips, I'm trying to think if we've opened a new area. Columbus, Ohio opened with Polaris and that's -- it's -- we're very pleased with that market. So that would be the only market that was a brand-new market so far with the strips

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

When you say different calendarization, just in terms of like when they're shopping for, like, back to school or when...

Lisa M. Harper

Yes, just the percentage of sales in July and August are different in those stores than they are in other parts of the country. And then...

James J. McGinty

They don't follow the mall pattern.

Lisa M. Harper

They don't follow the mall pattern. But they don't follow really the traditional strip pattern either. That was just an example of the types of things that we're learning in the process. So I would guess the overarching comment would be, there's a lot of analytics that we're continually doing to make sure that we're staying on top of this strip expansion. And so far, doing those analytics and making the evaluations of the growth, we're very happy with our initial thesis on the growth opportunity for Torrid by expanding the strips.

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

Okay. So I'm still just not quite clear when you say they're not following the typical pattern. Maybe just refresh my memory what is the typical pattern that we're talking about?

Lisa M. Harper

Well, I'm just saying that July and August sales in strips in the New York and New Jersey metropolitan area have a lower penetration to the total sales than they do in the rest of the country. So it could be 1 to 2 percentage points difference in terms of how it's performing on a month-to-month basis to the rest of the chain and to the rest of the strip. And the 1% change to the total in a month, we're learning, it makes a difference. And so we're reallocating those sales. It's just really a planning and analysis process. We're really pleased with it. But I'm just -- my point being we have 17 strips open, and we're learning something new every day. But so far, everything that we're learning points to the fact that this could be a bigger chain with the expansion in the strips.

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

And so I presume when you said that in terms of cotenants, that having other plus-size retailers is going to really bring in more traffic for all of you.

Lisa M. Harper

So far, for us, with our limited number of locations, we've found that all of those cotenants that I mentioned have worked positively for us.

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

What else are you seeing in the plus-size landscape in terms of -- I mean the competitive aspect?

Lisa M. Harper

Well, I think I continue to go back to the thesis that this is a dramatically underserved marketplace. And that we're seeing that specifically in the younger, more fashion-driven area, that there's definitely -- we're seeing a growing demand and a growing interest in the type of product that we're offering. So I think we're well-differentiated from the balance of the major players here in terms of being a young fashion approach to the size range. And with our new branding and really capitalizing on I am Torrid theme and very sexy feeling for the photography and for the product moving forward that we're having a very nice response to that. And I think that approach clearly differentiates us out of the market.

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

Are you hearing any of your competitors also kind of going to kind on a more of direct mini movement in that versus market goods?

Lisa M. Harper

I think most of them pretty much were already direct.

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

They're already. So you're just kind of falling in line with them?

Lisa M. Harper

I think we're just going after a traditional specialty store model. I think that it was just -- Torrid, as I call it, publicly is a 10-year startup. And I think that we've come up with a strategy, we're executing the strategy and we're happy with the results.

Operator

Your next question is from the line of Marni Shapiro with The Retail Tracker.

Marni Shapiro - The Retail Tracker

Can I just say the new set in Torrid with the royal blue is perhaps one of the best I've seen in your stores ever.

Lisa M. Harper

Well, thank you.

Marni Shapiro - The Retail Tracker

I think it is fantastic and I think it is immensely respectful to the customer who shops the store who doesn't want to dress like she's large-sized. She just wants to dress just like everybody else, but for it to fit her.

Lisa M. Harper

That's the thesis, so far, so good.

Marni Shapiro - The Retail Tracker

So far, so good. And scary and slutty sounds perfect. Sexy is not right. Everyone is slutty in Halloween these days. Like hooker angels at these days.

Lisa M. Harper

Well, you said it.

Marni Shapiro - The Retail Tracker

I've said it, exactly, exactly. So a couple of quick Hot Topic questions. If you can just touch on any differences you're seeing in the junior side, or the girl side versus the guy side at Hot Topic. What I'm seeing in the store, I think, the girl side looks really, really fantastic. The guy side is getting there, but not as strong yet as the girl side. Maybe I'm seeing it wrong. Just curious what your take is. And then I'm curious if you're seeing any different trends online than you're seeing in stores at either of the brands.

Lisa M. Harper

Okay. I would say, all along, our girls have led the growth performance of what the guys performance at Hot Topic. But I do you think we have some great answers right now and some -- and great product in guys that is checking, and we're chasing and I'm not going to tell you what it is, but there are some really great products there. And then, so I think that continues, but I think we've got a better handle on guys substantially, better handle on guys right now than we have had over the -- since I've been at the company. I'm sorry, I forgot your other question. Oh, online versus...

Marni Shapiro - The Retail Tracker

Yes, online, at both of the brands as well.

Lisa M. Harper

I would say that in the second quarter specifically, the trend online is really to manage where we were so heavily clearance year-over-year. And last year and second quarter, the big shift this year was to really get the mix right in terms of regular price and not using the online channel as such a clearance driver, which it had been in the past. And so that we're telling -- specifically in Torrid, well, actually in both brands, a much more fashion story with highlights and lookbooks and those types of things. And those are getting good response better in Torrid, as more expected and growing in Hot Topic. But I think that's a fashion approach, the branded fashion approach, is working very well for us and the shift out of being a clearance driver into really a regular price fashion driver is we're seeing that happen more in Torrid, but somewhat in Hot Topic.

Marni Shapiro - The Retail Tracker

Do you see a difference in age online in Torrid than you do in stores? Or is it pretty similar?

Lisa M. Harper

It's pretty similar.

Marni Shapiro - The Retail Tracker

And then one last thing also online. I know you've moved away from some of the footwear at Hot Topic. But is there ultimately an opportunity at Torrid to do a nice footwear business online?

Lisa M. Harper

We think so, yes. And first of all, we really had to get our assortment in line in Torrid and really invest in core less, and it was over assorted program previously. And so we feel like step-by-step, we've got a point of view on that, but we think the wide-width fashion shoe could be a very strong opportunity for us in the future, particularly online.

Operator

The next question comes from the line of Linda Tsai with the Investment Technology Group.

Linda Yu Tsai - ITG Market Research

With the significant improvements in fashion apparel and apparel men in light of your remarks about making Halloween sexier and scarier, do you think you’re attracting -- or casting a wider net terms of attracting an older customer, particularly on the girls side?

Lisa M. Harper

At Hot Topic, in general, we've taken our customer to a core customer at 18 years old. At Halloween, we definitely have a lot of 35-year-olds shop in the store, women. So that's really kind of a moment in time and not a broader strategy. But we think by aiming at the 18-year-old customer, we get a broader customer in general. So we get a younger customer and we get -- some of our customers are in their 60s, let's be honest, at Hot Topic. So previously, we're very much more tween oriented. We were alienating that older customer. Now, I think, we do cast a broader net, yes.

Linda Yu Tsai - ITG Market Research

And then just generally speaking, and the industry is in the bottom cycle, it seems like you've capitalized on this trend very well, both brands. I mean, what do you think you offer your customers? Or what's the differentiation? I know you talked about this with respect to Torrid? But maybe as it relates to Hot Topic that they can't get elsewhere. And then just a follow-up to that. I mean, Lisa, you've been in the industry for a long time. How long do you think this bottom cycle can last? Do you think we're still on the early stages?

Lisa M. Harper

I think we are in the early -- the pre-peak stages of the bottom cycle, if that helps at all. But -- while I have been in this industry a long time. But the approach in Hot Topic for denim really is to be at the leading edge. And so where a lot of retailers have those 6 or 7 colors in the skinny right now. We kind of moved on to the panel, front to back, side to side, and then also pushing our finishes a little bit further in the color world. So I think that we try to be about a season or a couple of seasons ahead of the mass players. And I would, anybody who has 25% of their inventory in denim, the team players in that world. So -- and black skinny for us, of course, is our #1 silhouette and #1 color and that's -- we're just not a traditional indigo player in that sense. And that's actually helped us through this pattern and color trend that's been going on.

Operator

Our final question today comes from the line of Joe Yurman with 1221 Partners.

Joseph J. Yurman - 1221 Partners, LLC

Two questions. First one is on Hot Topic. And I expect this to kind of to be more qualitative than quantitative. But I wonder if you could speak to the investment that you made in some of the Summer Tours, the Warped Tour, the Mayhem Tour? And either quantitatively or qualitatively, if you can speak to the uptake in the product, kind of around those tours in the different regions? And is it more music? Is it more t-shirts, accessories, something like that? And then I'll ask a question about Torrid.

Lisa M. Harper

We really -- we just participated in the Mayhem tour and it was all focused around denim. So it was a whole Get In Our Pants. It wasn't really a music story. However, the music acts did come out and they were at our booth. They posed with our customers. They wear our products. They're in our marketing campaigns for back-to-school. And so it was all very integrated that way. And unfortunately, I really don't have a tracking of sales results yet based on those tours. But it primarily centered around our denim presentation. So that's -- we weren't participating in the Warped Tour this year, only Mayhem.

Joseph J. Yurman - 1221 Partners, LLC

Okay, got you. And the second question on Torrid and particularly, with the recent hiring of Kate. And I'm not sure if you can speak to this for competitive reasons. But given her background, how should we think of the Torrid store of the future in terms of the penetration of the intimates?

Lisa M. Harper

So Joe is referring to Kate Horton, who joined us a month ago as the VP, GMM in Torrid. And she was previously the VP, GMM at Soma for foundations. So obviously, hiring someone who had a background, not only in specialty apparel, which she does, but also in intimate area. I've spoken for, I don't know, many months on the growth of the opportunity and growth for intimates at Torrid. And I'm not really prepared to talk about the total end game penetration. But I would just tell you, I think it's substantially bigger than it is today. And -- but very little investment that we've made so far in fashion, as well as in inventory. We've seen really solid comps in the teens. And we, as I mentioned earlier, expect that to accelerate in the back half of this year and, again, next year.

Operator

This concludes the question-and-answer portion of our event today. I'd like to turn the call back over to management for some closing remarks.

James J. McGinty

Thank you for participating in our conference call and your continued investment in Hot Topic.

Operator

Ladies and gentlemen, thank you so much for your participation today. This concludes the presentation, and you may now disconnect. Have a great day.

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