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Hot Topic cuts forecast; stock declines 12%

The music-related apparel chain lowers its fiscal fourth-quarter earnings estimate by more than a third.

January 04, 2007|Alana Semuels | Times Staff Writer

It's been a cold winter for City of Industry-based retailer Hot Topic Inc., whose shares tumbled nearly 12% in extended trading Wednesday after the company lowered its fiscal fourth-quarter earnings estimates by more than a third.

Hot Topic said it expected earnings per share of about 20 cents to 22 cents, down from previous estimates of 33 cents to 38 cents. Analysts had been expecting earnings of 34 cents a share.

The stock closed at $13.54, up 20 cents for the day, and then fell $1.59 to $11.95 after the announcement.

The music-related apparel chain said holiday sales were slow in women's apparel, accessories and music, despite changes the company instituted for the back-to-school season.

Hot Topic had planned to be more aggressive in promoting its novelty T-shirt business, rolling out designs more quickly and tailoring its women's fashion component to national trends, said Liz Pierce, a retail analyst with Roth Capital Partners.

"I'm scratching my head," Pierce said of customers' perceived ambivalence to the changes. "I'm surprised that the business still continues to have pockets of weakness."

In a recorded message, Chief Financial Officer Jim McGinty said one of the company's biggest disappointments was in the fashion category, as sales of women's apparel at established stores fell 5% from a year earlier. McGinty did not immediately return phone calls seeking comment.

So-called same-store sales, measuring Hot Topic's results at locations open at least a year, are projected to fall 5.1% in the quarter that ends Jan. 29.

The company operates 695 Hot Topic stores throughout the country and 131 stores under the Torrid brand.

Although the holiday season was slower than expected for many retailers, other chains that target teens, such as American Eagle Outfitters Inc. and Zumiez Inc., reported sales that exceeded expectations.

Despite Hot Topic's slumping status, Wall Street remained confident that the management team would be able to turn the company around, said Pacific Growth Equities analyst Christine Chen, who owns shares in Hot Topic.

Part of this turnaround will depend on the company shedding its reputation as a "goth" retailer by renovating 60 to 80 stores this year, she said.

The renovations give the stores a brighter format, which might appeal to a wider demographic.

"Clearly, the old format is not working," Chen said.

alana.semuels@latimes.com

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