By  on June 22, 2005

LOS ANGELES — Hot Topic, the teen retailer that created a niche for darker, Goth-inspired fashion and music tastes, is confronting the challenges of a business that rises and falls with voracious yet fickle young consumers, analysts said.

The company on Monday said it was cutting its outlook for second-quarter earnings after same-store sales through June 20 fell 4 percent. Hot Topic forecast income of 7 cents to 9 cents a diluted share on sales of $155 to $158 million.

Eighteen months ago, the retailer was sizzling with double-digit same-store sales gains. Profits had increased 35.6 percent in the second-quarter of 2003 compared with the same period in the previous year.

Since last June, however, Hot Topic, based in City of Industry, Calif., has been on a roller coaster of sales dips and rises. It has been buffeted by the trend toward more feminine fashions such as bohemian looks, preppy fashions, embellishment and cheery colors that have propelled sales for teen market retailers such as American Eagle Outfitters and Abercrombie & Fitch.

Though trying to cater to its core customer while weathering a trend has weakened sales, analysts on Tuesday characterized the difficulties as growing pains rather than deeper management-related and conceptual flaws.

"There's nothing that changes my opinion at this time," said Liz Pierce, senior analyst with the investment firm of Sanders Morris Harris. "I feel that this is a stage that they're going through and if they evolve the mix and try to find the right mix between fashion apparel and music, they will be OK. My long-standing belief is teen angst and music go hand in hand."

Shares of Hot Topic, which has almost 600 mall-based stores, closed at $20 in Nasdaq trading on Tuesday, down 40 cents. The stock's 52-week high is $23.49 and the low is $13.85.

"I continue to see enough diversity of customer to support the concept, and at the end of the day, no one does what they do," Pierce said. "But the burden is on them to move very fast to leverage the trends and work things like'' music-inspired T-shirts, which have been so popular.

Indeed, music — particularly rock and punk — has been at the core of the Hot Topic concept and a draw for its 12- to 22-year-old customer since it was founded by Orv Madden in 1988. Hot-selling music-inspired merchandise has included a range from shirts, Ts and tanks to incense holders with logos from bands such as Green Day, The Doors, Korn, Yeah Yeah Yeahs, AC/DC and others.

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