LOS ANGELES — The Hot Topic Inc. initiation ritual includes braving the crowds at Lollapalooza and mingling with the superfans at Comic Con.
It’s not the tranquil retirement Lisa Harper imagined for herself in 2006, when she left Gymboree Corp. after spending five years as its chief executive officer and sought refuge in Mexico to open and operate the Rancho Pescadero hotel in Baja California Sur. But it is necessary research for her new post atop Hot Topic, where she succeeded Betsy McLaughlin as ceo in March and is striving to make the retailer that was stuck in a Goth and punk rut relevant to today’s music-obsessed teens, while turning stores into efficient retail machines to power a turnaround.
“I’m totally into Eminem, which is crazy. Don’t tell my mother,” said 51-year-old Harper during an interview at Hot Topic’s City of Industry, Calif.-based headquarters, where the alternative office culture nurtured by McLaughlin remains on full display. The dress code could be described as weekend concert appropriate, posters are everywhere, employees work an unorthodox 9/80 schedule, black appears to be an interior design mandate, the open floor plan promotes discussion, and every other Friday is bring-your-pet-to-work day.
The place may look the same, but much has already changed during Harper’s seven months at the helm. She’s closed Hot Topic’s music download foray Shockhound; built upon her strength as a long-time merchandiser at Levi’s, Mervyn’s, Gap and Gymboree to begin to sharpen the point of view of products in the stores, and brought in a slew of new people. Some of the hires are BCBG Max Azria vet Lisa Stanley as vice president of brand marketing; former Guess divisional merchandise manager of accessories Stephanie Zoccoli as accessories dmm; Ruben Baerga, previously chief operating officer of Comcast Interactive Media, as vice president of e-commerce; Don Hendricks, a recruit from Gymboree, as chief information officer, and Mark Mizicko, another Gymboree alum who Harper recruited as senior vice president of planning and allocation.
Harper is familiar with turnarounds. At Gymboree, she became ceo after tumult in the executive offices and two years of annual losses. In fiscal year 2001, the first under Harper’s leadership, Gymboree had 580 stores, nearly $505.4 million in sales and net income of $4.6 million. Five years later, in Harper’s final year with Gymboree, the company had 698 retail stores, nearly $781.2 million in sales and net income of $60.3 million. Although Harper had missteps along the way — a retail format aimed at mothers named Janeville bit the dust in 2006 — she won plaudits for refocusing the assortment and instilling discipline down the store level.
While Hot Topic recorded an $8.2 million loss in the last fiscal year, its only annual loss since going public in 1996, Harper believes its situation is better from when she took over at Gymboree. “The difference here is that, from a balance sheet perspective and from an operational perspective, there were some things that were working here. It wasn’t like we were starting with ground zero with no money, which is kind of the way we felt at Gymboree. Also, I was a first time ceo at Gymboree and a little naïve, which I think served me well at that point because I didn’t know how dire the situation was. I’ve had this experience before, so I’m able to apply what I’ve learned. Being retired for five years and living on a beach in Mexico helps reset your priorities and how you approach things, and I think coming from that helps a lot as well.”
Before taking over as Hot Topic’s ceo, Harper said, “The objectives were all over the place. I came in and simplified the process, and said it is about sales and about productivity, and if what we are doing isn’t geared toward sales and productivity, then it is not a priority and we take it off the docket.” Speaking specifically about Shockhound, she said, “If you are going to build on your core talents, then going into the digital music business is not the way to go. The music business can’t figure out the music business. I don’t know that we are going to be a lot smarter.”
Harper is zeroing in on Hot Topic’s positioning as a music lifestyle destination to broaden the customer base beyond the Goth and punk niche to a wider population of 12- to 22-year-olds that embrace musical genres as diverse as screamo, hip-hop and classic rock. Still, a feeling that the rest of the mall stores aren’t for them unites Hot Topic customers, not typically the varsity squad types. “There are all sorts of action sports folks and fast-fashion people and preppy, and there isn’t a huge drive for pop culture and music that this kid is completely engaged in. They live it and breathe it. We have a connection with the labels. We have a connection with the studios. We have a history of representing that, but we weren’t really using it,” said Harper.
But Hot Topic, which had 636 stores at the end of the second quarter compared with the 145 of the company’s plus-size concept Torrid, had been taking stabs at broadening its reach beyond Goth and punk for years, mostly with poor results. Hot Topic’s comparable-store sales dipped 6.5 percent in 2010, following a 5.6 percent drop in 2009. In 2008, comps inched up 1.8 percent, buoyed by a successful tie-in with the “Twilight” movie, but comps were negative in 2007, falling 5.7 percent, and in 2006, when they were off 8 percent. Hot Topic Inc.’s shares, which closed at $7.93 on Monday, traded as high as $30 in 2004.
Harper believes Hot Topic’s problem was that the merchandise and messaging didn’t match the music lifestyle that resonates with customers. “We needed to get the edge back,” she said. “Hot Topic, I think, had gone very tween. I call it chirpy.” On the merchandising side, a key test was the back-to-school denim program. While teen retailers across the board dove into denim for b-t-s, Hot Topic’s jeans stood out from the pack by being heavy into skinny styles in colors and washes for an edgier fashion sensibility: black, gray and acid wash, for example. “Denim seems to be working for us,” said Harper during the b-t-s season. “The customers love the fit and they like the styles, and they like the finishes, and we are chasing inventory.”
Denim’s progress is an important component of Hot Topic boosting its fashion apparel sales. Fashion apparel constituted 12 percent of the company’s business in 2010, down from 14 percent in 2009. Among other categories in 2010, fashion accessories accounted for 33 percent, licensed goods 27 percent and music 26 percent. Fashion apparel “should be about 20 percent of the business and historically, prior to 2008, had been about 20 percent of the business,” said Harper.
She added licensing shouldn’t go up or down much, but that merchandise linked with “The Twilight Saga: Breaking Dawn - Part 1” will be a “solid business.” “We think it is going to be strong. Last year in fourth quarter, we had the first [part] of the last ‘Harry Potter’ [movie.] We think it is going to be bigger than that,” she said.
The trick for licensed properties, according to Christine Chen, a specialty retail and apparel analyst at Needham & Co., at Hot Topic is not to rely too much on the big hits. “It is really about getting a better balance,” she said.
As Hot Topic went tween, Harper said it scared off male customers, who constitute roughly half the shopper base, and she’s set on reversing course by bringing in the right male-oriented licensed products — wrestling and video games are areas of interest — and merchandise such as caps to appeal to guys.
“The early signs of what they are doing in fashion apparel are certainly promising,” said Adrienne Tennant, a retail analyst at Janney Capital Markets. “They turned comp positive in that fashion apparel category when others were very much struggling.”
“She [Harper] is a really good merchant. I view a lot of Hot Topic’s woes as stemming from merchandise,” said Chen. “Even though they are supposed to be all about the music, they were really only about a certain type of music. They didn’t really move with the trends.”
Hot Topic has been trying to get its markdowns sorted out as well. Harper explained that the retailer’s markdown process used to be rudimentary: products would stay at regular price for about six months, then they would be marked down 50 percent and “basically not paid attention to for another six months or so.” Markdowns are now starting much earlier and are less steep. A 25 percent markdown might occur after six weeks, for instance.
Retooled marketing messages are driving home the point that Hot Topic is an edgy, music lifestyle destination. Harper said the company’s imagery got too bright and cheery, resembling “a bad day at a catalogue.” The retailer’s marketing messages are headed in the opposite direction, taking a realistic, occasionally risky approach. For the b-t-s campaign revolving around denim, “Get In Our Pants,” Hot Topic relied on black-and-white or lightly color-washed photos of bands and music artists, including Suicide Silence and Skylar Grey. The “Join the Party” campaign for Halloween centers upon a party where young people holding red Solo cups — apparently without alcohol — are decked out in Angry Birds and Batman costumes, among other get-ups.
The changes Harper has instituted aren’t to propel store expansion, at least not yet. Instead, Harper asserted her goal for Hot Topic is to make stores profitable and productive by improving operating margins and comps, which the retailer anticipates will be in the low-single digits for the company as whole for this fiscal year. Torrid, on the other hand, is readying for a rollout. Next fiscal year, Hot Topic expects to open 25 to 45 Torrid stores. In three to five years, Harper estimated Torrid would have 335 to 400 units. The stores are getting a tad bigger — from an average of around 2,500 square feet to 2,700 square feet — and half could be located outside of malls. “I’ve seen enough progress in the short time with Torrid that it has reached the inflection point from an economic model that I feel comfortable about going out with 45 stores,” said Harper.
In the growing plus-size market, Harper said Torrid’s message of “style has no size” is striking a chord with the target customer of 15- to 29-year-old girls and women sized 12 to 26. “This is really about fashion for this girl. It’s about curvy. It’s about sexy,” said Harper. “She wants to be current, and she wants to look great, and size has nothing to do with that.” Fit is of the utmost importance to the Torrid shopper, and a bra program being introduced in September will attempt to woo her with well-fitting bras. “Over the last year, we’ve really focused on denim, and we have great fit there,” said Harper. “So, once we capture the bra business, those are two pivotal points that are difficult to fit, and if you get the fashion right with the fit, you’ve won a lot of fans.”
At both Hot Topic and Torrid, the shaky economic environment could pose a significant challenge to improvement efforts, but Harper isn’t overly concerned. “Kids have much higher unemployment. A lot of our kids are spending their own money. So, it definitely has an effect,” she said. “The good/bad news is that we have so much growth to recapture the business at Hot Topic. While it impacts our business, it is not the critical factor it could be in a much more mature business.”
Tennant, who said Hot Topic’s average retail price is below $20, said its relative affordability insulates it somewhat from the economic pressures. “You can actually get something there and not spend a fortune,” she said.
Tennant doesn’t foresee Hot Topic slowing down. In a recent research note, she wrote, “We believe the Hot Topic and Torrid concepts have clearly defined niches with differentiated, hard-to-find product and believe that a multiyear turnaround is ahead for the company.”