For Hot Topic Inc., it’s been more like lukewarm lately.
Stock of the City of Industry-based teen apparel retailer’s shares dropped to a 52-week low last week following a “sell” rating by A.G. Edwards analyst Robert F. Buchanan. As of late last week, the stock had fallen 19 percent since July 19.
Buchanan said he based his decision on Hot Topic’s negative performance momentum and lack of back-to-school prospects. Hot Topic has seen several straight quarters of negative same-store sales.
The company risks an inability to affect its turnaround, wrote analyst Adrienne Tennant of Friedman Billings Ramsey & Co. in a report released shortly before Hot Topic hit its low point.
“Although it appears that current fashion trends favor Hot Topic and that the company has focused on improved product costing during the past year, there can be no assurance that the company can attain sustainable positive comps or improve its margins,” Tennant wrote.
Tennant also warned investors that the competition in Hot Topic’s market sector is fierce, with little brand loyalty and low barriers to entry.
Hot Topic executives declined to comment.
Hot Topic reached a peak in the late ’90s with its Gothic-themed stores and apparel. Since the popularity of that style died out, the company has been trying to reinvent itself.
Earlier this year, Hot Topic remodeled about 80 of its nearly 700 stores to incorporate a brighter atmosphere and lighter colors. The redesigned stores are outperforming their counterparts, said analyst Sharon Zackfia of William Blair & Co., who has the stock rated to perform with the market.
Goth was good
Still, the store needs to set itself apart from other retailers in order to enjoy a turnaround, said Ilse Metchek, director of the California Fashion Association.
“Hot Topic used to be cutting edge. Yes, they were Goth, but it was cutting edge,” she said. “When they lost that, they didn’t go anywhere. Not toward surf, or grunge, or Paris Hilton trends. Hot Topic has the same things everyone else has. They have the same things Abercrombie has, but Abercrombie has a cache with teenagers. Hot Topic should be displaying the fashion topic de jour but they are trying to be too safe.”
Whether Hot Topic can put together a decent back-to-school season will be telling for the company, said Metchek. Back-to-school is one of the two most critical seasons in retail for the teenage demographic that Hot Topic markets to.
The chain has the merchandise, but has not done an effective job of marketing it as back-to-school merchandise. So far in the back-to-school season, “Hot Topic missed the boat,” said Metchek.
Though some analysts see more trouble ahead for the company, Zackfia said it still has time.
“I don’t think this is the end for Hot Topic. That’s pretty harsh. They generate a lot of cash flow,” she said. “But it surely has been a trying time for investors.”
