Hot Topic Inc. (HOTT) is a mall-based specialty retailer with a share price that has shot up 47.9% since the beginning of the year. The company looks to have a promising future given its history of consistent performance, solid niche market position, strong brand portfolio, ongoing cost cutting initiatives, ability to tweak merchandise in line with rapidly changing trends and debt-free balance sheet. Strong estimate revisions combined with a robust long-term earnings growth projection of 26.7% made Hot Topic a Zacks #1 Rank (Strong Buy) on July 11.
Margins Drive Fiscal First Quarter 2012
On May 16, Hot Topic reported fiscal first-quarter 2012 earnings per share of 9 cents, beating the Zacks Consensus Estimate by a penny and the prior-year break-even earnings. The upside was mainly driven by solid top-line growth and improved margins, resulting from the company’s cost reduction initiatives. The reported earnings also beat its guidance range of 7 cents to 8 cents.
Net sales increased 6.4% year over year to $171.5 million, attributable to robust sales in both the namesake (up 7%) and Torrid concepts (up 5%). Moreover, quarterly sales were almost in line with the Zacks Consensus Estimate of $172 million. Comparable store sales (comps) were up 7.5% compared with 1.2% reported in the year-ago period, driven by a 9.5% rise in namesake comps and a 2.5% spike in Torrid store comps.
As a percentage of revenue, cost of goods sold decreased 140 basis points to 64%. Additionally, selling, general & administrative expenses dropped 0.25% to $55.6 million, while it contracted 220 basis points to 32.4% on the basis of revenue.
Consequently, operating income came in at $6.1 million compared with an operating income of $0.04 million in the year-ago quarter, while operating margin surged 348 basis points to 3.5%.
Estimates Move Higher
The Zacks Consensus Estimate for fiscal 2012 has climbed 2.7% in the last 60 days to 38 cents per share, indicating an estimated annualized growth of roughly 90.0%. For fiscal 2013, the Zacks Consensus Estimate rose by 2.2% over the same timeframe to 47 cents per share, reflecting a year-over-year growth of nearly 24.2%.
Valuation Premium Justified
Hot Topic currently trades at a forward P/E of 25.5x, implying a 77.1% premium to the peer group average of 14.4x. On a price to book basis, the company is at premium of 27.9% with a 2.20 multiple compared with the peer group multiple of 1.72. We believe that the premium is warranted given a higher long-term earnings growth rate (26.7%) compared with the industry average (15.3%). Moreover, the company currently has a PEG ratio of 1.0, on par with the benchmark for a value stock.
Chart Looks Muscular
The chart below shows a consistent upsurge in prices since January 2012, barring some minor pullbacks. Shares of Hot Topic have continually outperformed the 50 and 200-day moving averages for most of this year. The stock has been trading above the 50 day average since January 10 and the 200-day average since February 1. The widening gap between the stock price line and that of the 50 and 200-days moving averages show the growth potential of Hot Topic. Continued...