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HOTT AT A GLANCE

P/E ► 15.6 AVG EV/EBITDA ► 5.45 LOW ROA ► 5% AVG ROE ► 7.1% AVG Debt to Equity ► 0.376 LOW Current Ratio ► 3.24 HIGH

 

 

 

 

 

 

Hot Topic, Inc. (NASDAQ: HOTT) is a music-enthused apparel store that targets 15-25 year olds.

Business Overview

Business Financials

Hot Topic has seen net income growth in the past three fiscal years, rebounding from a 39% net income decline from FY 2005 to FY 2006 due to unsuccessful store openings and relocations of 54 stores.^[1] From FY 2007 to FY 2008, HOTT had a $15.5 million sales increase from new Torrid stores opened and a $13.4 million increase in online sales. Apparel is HOTT's main source of revenue, as it accounts for 55% of the Hot Topic brand's net sales, and 78% of the Torrid brand's net sales. The holiday season (Q4 of fiscal year) is also important to HOTT, as it has accounted for over 30% of net sales in the past two fiscal years.

Business Segments

Hot Topic operates two different brands: Hot Topic, and Torrid. Each store type also has an online presence.

Hot Topic (81.4% of FY 2008 sales)

The Hot Topic brand sells clothing, memorabilia, and electronics (such as CDs) tailored to music. It's rock-inspired products target the 13 - 25 year-old age group. In Q3 FY 2008, the Hot Topic business launched a music platform ShockHound, which includes MP3s, band merchandise and editorial content. From FY 2007 to FY 2008, Hot Topic segment sales decreased 1%.

Torrid (18.6% of FY 2008 sales)

Torrid provides plus-sized clothing to females between the ages of 15 and 29. Unlike the Hot Topic brand, Torrid focuses on modern women's clothing styles, not music-inspired apparel. Launched in 2001, there are now 156 Torrid stores, with another planned to open in fiscal 2009. From FY 2007 to FY 2008, Torrid sales decreased 9.4%.

Trends and Forces

Recession

HOTT Depends on Niche Market

Hot Topic's rock-inspired products target a select crowd: 13-25 year-olds.

Similarly, HOTT's Torrid brand targets a select crowd: 15-29 year-old plus-sized women. Torrid benefits from two fashion trends: the average woman's dress size is getting larger and mainstream designers are refusing to create plus-sized lines.

E-Commerce

Hot Topic internet sales increased 32% from $22.8 million in fiscal 2007 to $30.1 million in fiscal 2008. Similarly, Torrid internet sales increased 34.7% from $17.6 million in fiscal 2007 to $23.7 million in fiscal 2008.

Competition

Competition for Hot Topic stores is very diverse. Local competitors include street alternative and vintage clothing stores, particularly in metropolitan areas. Mall-based, national retailers and chains in competition with Hot Topic include privately-owned Forever 21, H&M, Old Navy (a division of Gap (GPS), Buckle (BKE) , Wet Seal (WTSLA), Urban Outfitters (URBN), and Zumiez (ZUMZ). Because of their music paraphernalia offerings, additionally, smaller competition comes from chains selling music products such as Best Buy (BBY) and Borders Group (BGP).

Torrid has fewer competitors, as it caters to an even smaller niche market. Although there are retailers targeting the plus-size female demographic, including Lane Bryant, none specifically target the younger female age group in this demographic; most cater to more mature women and/or focus on career clothing. Department stores and discount stores such as Target also provide competition, as well as plus-size catalogs and web-based stores which carry plus-size junior's clothing.

References

1. ↑ ^{1.0 1.1 1.2} HOTT FY2009 10-k, Item 6: Selected Financial Data, page 29
2. ↑ BKE FY2009, Item 6: Selected Financial Data, page 18
3. ↑ WTSLA FY2009 10-k, Item 6: Selected Financial Data, page 24
4. ↑ URBN FY2009 10-k, Item 6: Selected Financial Data, page 22
5. ↑ ZUMZ FY2009 10-k, Item 6: Selected Financial Data, page 26