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Hot Topic Profits Rise 35.6%

NEW YORK — Music-loving teens helped Hot Topic turn its T-shirt stocks without having to resort to deep discounts in the second quarter, prompting a 35.6 percent increase in profits for the period.<br><br>The City of Industry, Calif.-based...

NEW YORK — Music-loving teens helped Hot Topic turn its T-shirt stocks without having to resort to deep discounts in the second quarter, prompting a 35.6 percent increase in profits for the period.

The City of Industry, Calif.-based specialty retailer said net income soared to $5.9 million, or 18 cents a diluted share, 1 cent above its expectations as well as those of Wall Street analysts, for the three months ended Aug. 2. That compares with earnings of $4.3 million, or 13 cents, in the corresponding period last year. Sales for the quarter rose 25.1 percent to $115.7 million from $92.5 million and grew 5.2 percent on a comparable-store basis.

Apparel accounted for 52 percent of sales during the quarter, 1 percent higher than in the year-ago period.

Betsy McLaughlin, president and chief executive, said on an afternoon conference call that the music-license, CD and accessories businesses continued to trend strongly, collectively comping up 9 percent in the quarter. In June, the company boosted its T-shirt inventory, enabling it to gain momentum for back-to-school, she said.

Based on results for the first half of the month, August comps should land in the midsingle-digit range, she noted.

Women’s comps gained 1 percent, driven by sales in bottoms, but offset by weakness in dress sales.

McLaughlin didn’t break out results from its 42-unit Torrid plus-sized division, but said she is pleased with its selling of regularly priced merchandise. She also said the firm is making product adjustments, improving its in-store marketing to create store-aspiration brand awareness and expanding its sizing. Its newer wear-to-work category is receiving a positive response, the ceo said, noting the challenge has been carrying sufficient inventory.

The company expects to end the year with 498 Hot Topic stores, 35 more than are currently in operation and 10 more than originally planned. Ten Torrid units will open before yearend.

Based on business trends, chief financial officer James McGinty guided investors to expect 2003 earnings of $43 million, or $1.30, above the current consensus estimate of $1.28 and the $1.05 it reported in 2002. In addition, he said he is anticipating sales for the year to reach $550 million, including a low-single-digit comp increase for both the third and fourth quarters, when earnings are expected to hit 37 cents and 61 cents, respectively.

This story first appeared in the August 21, 2003 issue of WWD.  Subscribe Today.

McLaughlin said she was very pleased with the women’s business across the board and said she is looking forward to Halloween. “We plan for October to do what we do best — ‘boutiquing out’ and providing great ideas for parties,” she said, noting there will be an additional day of selling for Halloween this year.

As reported, Hot Topic earlier this month reported an 8.7 percent improvement in July comps, and McLaughlin raised guidance to 17 cents from the 16 cents predicted at the beginning of the quarter.

Lauren Levitan, a retail analyst with SG Cowen, wrote in research notes, “Hot Topic’s continued solid trends amidst a still-shaky retail environment — which we note have been achieved in the absence of meaningful promotional activity compared to most other teen mall retailers — attest to HT’s differentiation and potential for continued outperformance.”

For the first half, income rose 28.3 percent to $10.3 million, or 32 cents a diluted share, versus income of $8 million, or 24 cents. Sales for the six months rose 25.5 percent to $216.4 million from $172.4 million and jumped 4 percent on a comp basis.