Selling clothing to teenagers, whose tastes seem to always turn on a dime, can be tough sledding. But Hot Topic Inc. has a few compelling numbers on its side.
Like the fact that the average teen spends about $3,000 a year much of it on rock ‘n’ roll T-shirts, earrings, body jewelry, nail polish, hats, hosiery and sunglasses.
The Pomona-based retailer is going after that three grand.
“I think they’ve done something pretty unique that you don’t see at a lot of other retailers,” said Tony Cherbak, a partner at the Orange County retail group of Deloitte & Touche. “I think they have created an environment where Generation Y 13- to 18-year-olds can come into a very comfortable store setting and be treated like other retailers treat adult customers.”
While stores like The Gap cater to a broad market of teenagers and adults, Hot Topic focuses almost exclusively on teenagers who closely follow the music scene and the fashions associated with it.
It’s done by playing rock music in stores, hiring youngsters who wear the clothes being sold, and monitoring MTV for the coolest trends.
Jay Johnson, Hot Topic’s chief financial officer, notes that each store sells about 12,000 products in 22 different categories, and those products are rotated often to encourage repeat visits.
So far, the strategy appears to be working. Hot Topic went from a net income of $2.6 million (66 cents diluted earnings per share) in 1996, the year it went public, to $4.5 million in net income (92 cents per share) last year an increase of nearly 77 percent.
In the latest reported quarter, which ended Jan. 31, net income was $3.3 million, compared with $2 million for the like period a year ago.
Perhaps even more impressive is that the average Hot Topic store had sales of $565 per square foot in 1997. “That’s about double the average sales per square foot for the malls we’re in,” Johnson said.
Yet its stock was trading last week at about the same price it was a year ago around $27, down from $29 a year earlier. In between, it took a dip below $16 last summer on concerns that third-quarter results would be weak for new stores.
The stock recovered when stronger-than-expected results came out, said Lauren Cooks Levitan, an analyst at BancAmerica Robertson Stephens in San Francisco.
Levitan said Hot Topic’s stock price remains out of line with the company’s income growth because of its small market capitalization, a general lack of awareness about the teen market, and the company’s age.
“It isn’t as well-known or as well-followed,” she said.
Levitan’s enthusiasm for the company also stems from the size of the teenage market.
In 1995, there were 25 million teenagers in the nation, and that number is expected to reach 30 million by 2006 representing a growth rate almost twice that of the overall U.S. population.
Levitan said Hot Topic, which her firm rates a “strong buy,” also does well because its stores are small and densely packed with merchandise.
“These stores in their first year do about $700,000 in 1,400 square feet, which is pretty outstanding,” she said. “They’ve targeted a segment of the market that is very much under-served. But they’ve focused on a niche within that market, which is really serving the music-loving teenagers.”
Founded by company President and Chief Executive Orval D. Madden and his wife LeeAnn in 1989, the chain has 123 stores nationwide up from only 68 stores at the end of 1996. By year’s end, Hot Topic expects to have 150 stores in 38 states.
“At this point we think we’ll continue to open 40 stores a year,” said Johnson. “We’ve identified 300 to 400 malls in the country that we believe our concept will work well in.”
