Is HOTT Really Torrid? Earnings Preview

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

On November 14, teen retailer Hot Topic (NASDAQ: HOTT) reports earnings. Analysts will likely be listening closely as the company has some new initiatives in place and for the health of teen retail through the holidays and post-Sandy. Even if earnings disappoint there are still three good reasons to pick some up if it sells off. 

Torrid is sizzling

When Hot Topic recently reported same store sales the big story was their Torrid stores, where sales were up 10% year to date while the namesake teen/tween stores sales were flat. Torrid is the company's plus size chain of trendy fashions and they just opened 18 more this year for a total of 186 Torrid stores.

Plus size fashion is the hottest trend in fashion retail. Just how "big and beautiful" is this market? Almost 50% of women age 20 to 74 in the US are overweight. And the numbers are expected to grow by 2030.  Expect to hear good numbers from this division on the call.

She's No Angel

The day after they report Hot Topic is debuting a line of lingerie called "Blackheart" tagging the line as "Lingerie For Girls Who Rock & Roll" challenging Limited Brands (NYSE: LTD) on their Victoria's Secret stores and Pink collection for young women. For right now Blackheart will only be available online and at 5 stores in California and Texas.

Like Victoria's Secret, Blackheart will be offering accessories and beauty items. Looking at the website it seems to be decidedly more edgy than Victoria's Secret -- much more leather than lace. You can look up the link for yourself as it may be a little too hot for even Victoria's Secret catalog aficionados. This lingerie line looks like it will be a hit right off the mark.

With this new concept Hot Topic is adding the third leg to their stool for stability: teens, plus size, and intimates. These two legs of the stool, Torrid and Blackheart will eventually grow and reduce Hot Topic's reliance on the fickleness of teens. You should expect to hear much more about this new lingerie line going forward on the conference call. 

Sizzling yield

Hot Topic is interesting with its 3.90% yield (a payout ratio of 88%). Competitor Abercrombie & Fitch (NYSE: ANF)pays a 2.20% dividend at a payout ratio of 69%.

Since Hot Topic is a small cap name with a market cap of $351.46 million analysts will likely question the sustainability of the dividend at such a high payout ratio. especially it's only been paid since 2010. 

Risks To Earnings

As a teen trend retailer it has many competitors from Abercrombie & Fitch, delia’s, Wet Seal, Forever 21, Aeropostale, to Ascena Retail with its Justice stores. Abercrombie & Fitch has been in the news with Goldman Sachs coming on board as an advisor. This helped the shares jump 8% on November 1. The stock had not been performing well, down 44.94% in the last year.

The two stores do compete for teen shoppers but with vastly different demographics, Abercrombie is perceived as more expensive and prepster and Hot Topic as edgy and cheaper.

Hot Topic shouldn't have much to worry about from Wet Seal (NASDAQ: WTSL) which just reported their same store sales declined 7.6%. Wet Seal reports the day after but it will probably be hideous, to use the appropriate fashion adjective. Wet Seal has 558 stores in the US, 472 of them Wet Seal fashion for girls and Arden B, also mall based, fashions for women. It has just brought back Jr. Plus for larger girls, probably on the heels of Torrid's success. Another thing to note is that Hot Topic also attracts young male shoppers and Wet Seal is only for girls and women.

While it has negative earnings of $0.09 and its forward P/E is 96.67 to be fair it has no debt and is only down 8.87% this year. Other fundamentals such as return on equity and profit margin are all negative, -3.27% and -1.

What To Expect

Since Hot Topic only operates domestically and is geographically diverse across the US, European macroeconomic woes and Hurricane Sandy shouldn't affect numbers drastically. The more immediate concern is that the namesake Hot Topic stores haven't had nearly the sizzle that Torrid has. Currently, Hot Topic has a 23.61 P/E with a forward P/E of 16.62. Hot Topic’s P/E is larger than the industry average at 17.82 but less than Abercrombie & Fitch at 30.45.

At the last earnings report gross margin rose more than 10% and straight from their 10-Q they reported,"Income from operations increased $27.3 million to $4.8 million during fiscal year-to-date 2012 from loss from operations of $22.5 million during fiscal year-to-date 2011."

Analysts expect earnings of $0.09 per shares and margin expansion. In general, analysts are bullish on the name especially as it's managing these Torrid and Blackheart expansions conservatively without debt. Six brokers have a mean price target of $12.23.

If Hot Topic sells off, especially if it sells off on sympathy with other teen competitors, consider picking some up on weakness for the promise of Blackheart, the big yield, and for its hottest division, Torrid. 


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