Chilly Forecast for Hot Topic

NEW YORK — Hot Topic men’s wear sales have fizzled heading into the all-important back-to-school season, prompting the specialty retailer to warn Wednesday that it will not meet its profit and sales targets for the second and third...

NEW YORK — Hot Topic men’s wear sales have fizzled heading into the all-important back-to-school season, prompting the specialty retailer to warn Wednesday that it will not meet its profit and sales targets for the second and third quarters.

This story first appeared in the August 1, 2002 issue of WWD.  Subscribe Today.

Investors showed their low tolerance for unpleasant surprises by sending shares of HT down sharply, closing the day off $6.90, or 30.7 percent, at $15.55 in Nasdaq trading on volume that was more than 17 times the firm’s daily average. They also sold off shares in a number of teen specialty chains, contributing to a 0.8 percent drop in the Standard & Poor’s Retail Index, to 284.24, as both the Dow Jones Industrial Average and the S&P 500 advanced 0.7 and 1 percent, respectively.

The City of Industry, Calif.-based firm, which sells music-oriented apparel and accessories, said it now expects comparable-store sales in July to fall 3 to 4 percent, compared with the 3.8 percent gain in the corresponding period last year. While the company produced comps in May and June of 2.5 percent and 2.1 percent, respectively, by the end of the third week of July, the quarter-to-date comps turned negative, an important week that often determines sales for August, historically one of the strongest months for men’s wear.

As a result, HT said it is now anticipating second-quarter income to be 13 cents per diluted share, on par with year-ago earnings-per-share performance, but 2 cents short of Wall Street’s consensus estimates, on total monthly sales of $92 million. The company also said that, based on early b-t-s sales in July and difficult August sales comparisons from last year, sales in August 2002 may not meet previous expectations. Last year, comparable-store sales were up 9.7 percent in August.

Currently, HT estimates third-quarter income of 27 to 29 cents a diluted share, compared with analysts’ estimates of 32 cents and prior-year EPS of 26 cents.

Betsy McLaughlin, president and chief executive officer, said in a statement that while sales in women’s, rock T-shirts and accessories continue to comp positively, it is the men’s business — both tops and bottoms — which is proving to be the most troublesome. “In the absence of a clear men’s trend, coupled with the historically significant contribution of men’s during the b-t-s period, we are also revising our original earnings expectations for the third quarter.”

HT, a 400-unit chain, targets young men and women, between the ages of 12 and 22. It also operates 13 Torrid stores, a specialty retailer of plus-sized fashion-forward apparel and accessories that targets young women between the ages of 15 and 29.

Retail analysts said the men’s tops and bottoms businesses represent a material portion of the overall merchandise mix, so sluggish sell-throughs in these segments have an extreme impact.

Eric Beder, an analyst at Ladenburg, Thalmann & Co, blamed the lack of a clear overriding trend this b-t-s season for the sales shortfall at HT. “Right now, men’s wear isn’t cutting edge, but more back-to-basic, and Hot Topic has nothing differentiated or new to propel it forward.” He said last year there was a number of influences to help keep HT on top of trends, including Madonna’s tour, where she was heavy into plaids and HT was the only player that had that product. Another key item last year — loungewear — did not make a comeback, as men prefer more conservative basics this fall.

Although lowering the rating on its stock price to “hold” from “buy,” Jennifer Black at Wells Fargo Securities wrote, “HT’s relatively short lead times and the expertise of Betsy McLaughlin — in our opinion one of the strongest ceo’s in the industry — should enable the company to get back on track quickly.”

As reported, Gadzooks, the Dallas-based teen chain, on Tuesday lowered its second-quarter EPS estimates based on July comps trending down about 9 percent, leading to a 18.2 percent drop in its stock price.

Other teen retailers shared Hot Topic’s pain, if not necessarily its cautious guidance Wednesday. Among specialty issues declining in Wednesday’s session were: Aeropostale (off 18.2 percent to $15.80); Urban Outfitters (off 16.2 percent to $23.26); Wet Seal (off 14.3 percent to $15.71), and Delia’s (off 11.6 percent to $3.52).

The decline in July’s Consumer Confidence Index, reported Tuesday, contributed to lower prices among specialty retailers outside the teen sector, as well. Chico’s FAS dropped 10.8 percent to close at $15.79. Among department stores, Federated Department Stores declined 1.3 percent to close at $37.61, while The May Department Stores Co. advanced 0.2 percent to $30.72. Wal-Mart picked up 0.1 percent to $49.18.