Harry Potter couldn’t work his magic. The Transformers didn’t change anything. And the “Twilight” effect looks like it’s fading
But can the late King of Pop reheat Hot Topic?
While Michael Jackson was preparing for his comeback concerts in London, Target, JC Penny and Hot Topic all secured deals to sell a new line of Jackson merchandise.
But what was an iffy prospect with an aging pop star back then is now appearing to be more of a windfall. Since his death, Jackson has sold 9 million CDs, and Michaelmania has consumed all media for two weeks.
Investors seem to have taken notice. Hot Topic reported mediocre same store sales July 8, yet since then about the same time the merchandise deal was reported in BusinessWeek the chain’s stock price has gained 8 percent, to close at $7.44 on July 16.
However, not all analysts are convinced the Jackson deal will amount to much, given how the chain hasn’t had a big, sustained hit since its signature Goth style was pushed into the back of teen closets years ago.
“We will have to wait and see the demand for the product. If the demand is there, Hot Topic will get their fair share of the market,” said Holly Guthrie with the Philadelphia investment firm Boenning & Scattergood Inc. She believes the sales boost should only be “incremental.”
Guthrie said Target will get low-cost customers for Jackson merchandise, but Hot Topic has the inside track on the singer’s fan base because of the store’s connection to all things music.
“When the teen consumer thinks of music, Hot Topic comes to mind,” she said.
The store already sold three styles of Michael Jackson T-shirts, and those flew off the shelves in the weeks after his death.
Guthrie rates the stock as “outperform” with a target price of $12 per share.
The chain has lowered its guidance, however, and expects a loss for the second quarter and same-store sales decline “in the high single-digit range for the quarter.”
Slowing sales
For June, the City of Industry company reported a 7.2 percent drop of same-store sales compared with last year. While the new “Transformers” movie came out at the end of June and the latest “Harry Potter” film opened last week, the chain’s movie-related merchandise was on the shelves weeks ahead of time and would have shored up the numbers if they had been selling.
About half of Hot Topic’s inventory is based on licenses with musicians or movie studios. The release of “Twilight” in November helped the company through the worst holiday retail season in decades, and a series of music concerts sustained the momentum through April.
The Hot Topic merchandise licensed from summer movies “Transformers: Revenge of the Fallen” and “Harry Potter and the Half-Blood Prince” hasn’t sold well because the clothing hasn’t appealed to girls.
Analysts said that explains why Hot Topic’s June numbers show a 5 percent increase for men’s products and an 11 percent plunge for women’s merchandise.
“While it appears that the release of ‘Transformers’ in late June and ‘Harry Potter’ in mid-July helped drive men’s, not too surprisingly, it did not help women’s,” Elizabeth Pierce, an analyst with Roth Capital Partners in Newport Beach, wrote in a report. “We believe traffic at the core is suffering from the lack of a meaningful amount of newness, especially with respect to ‘Twilight’ merchandise.”
Amy Noblin, an analyst with Pali Capital Inc. in Greenbrae, also noted the merchandise hasn’t been moving.
“While there has been a pickup in sales of Harry Potter merchandise in the last couple days, we don’t expect this license to single-handedly move the needle,” Noblin wrote in a blog for investors. “Box office strength doesn’t always translate into strong merchandise sales.”
Pierce maintains a hold rating and a $9 price target on Hot Topic stock. Noblin gives a neutral rating with an $8.75 target. The stock last week traded for less than $7.50.
Both analysts don’t see any relief until merchandise for “New Moon,” the sequel to “Twilight,” arrives at stores preceding the movie’s release in late November. Their recent reports didn’t mention the prospects for the Jackson merchandise.
Guthrie of Boenning & Scattergood believes the pop culture strategy has helped Hot Topic perform better than its peers during a sustained retail recession.
“Hot Topic performed a little better than average,” Guthrie said. “Abercrombie & Fitch had sales fall 32 percent, Wet Seal was off 11 percent and Gap was down 10 percent all double-digit declines.”
But some investors aren’t interested in trying to predict the buying habits of fickle teens.
“We remain concerned about Hot Topic’s ability to maintain stability in their business given its dependence on licenses and mall traffic,” Noblin wrote in her blog. “We expect comparable sales to remain under pressure in the near term absent any significant, incremental driver such as ‘New Moon.'”
Guthrie concurs that the next few months will be tough as sales dwindle until “New Moon” merchandise arrives, but she sees the constant stream of concert tours and movie releases as a solid basis for Hot Topic going forward.
“There will be waves of strong demand and weaker demand, but year in and year out, teens will go to the movies,” she said. “The strategy is refreshing and unique, and it provides something no other retailer offers.”
