Hot Topic lures teens amid retail slump
BANGALORE (Reuters) - With the 'frugalista' all set to replace the 'fashionista,' fickle teenagers looking for affordable but stylish clothing are increasingly turning to a smaller California-based retailer to cater to their ever-changing fashion needs.
Hot Topic Inc, known for its Goth- and rock 'n' roll-inspired apparel and accessories, is proving to be an anomaly in today's market as it is gaining popularity just as the recession squeezes sales and margins at its peers.
After almost five years of posting negative comparable store sales, the company made a turnaround last October when its numbers turned positive. It has since beaten market expectations for every month, except April.
While some of that turnaround may be attributed to merchandise sales related to the teen vampire romance flick "Twilight," the company has also benefited from a shift in its focus.
"In 2008, we had the company shift its strategy to focus more on its heritage, which is rock-infused apparel (and away from the Goth look)," analyst Brian Sozzi of Wall Street Strategies Inc (wstreet.com) said.
The "Twilight" phenomenon proved just the platform to showcase the changes to new customers -- who may have been turned off by the Goth look -- and expand its base, he said.
Analyst Sharon Zackfia, of William Blair & Co, agreed.
"('Twilight') certainly gave the business a shot in the arm. It's the kind of license that probably comes around once every 10 years in terms of its impact on the business," she said, before quickly adding that even without "Twilight," the company has seen trends accelerate this year.
The strategic shift seems to have paid off in increased brand loyalty going by the testimonials of its young fans on popular social networking sites like Facebook and on YouTube, and an online petition demanding that Hot Topic expand its stores worldwide.
FRUGAL, FRIENDLY AND FUN
The 681-store retail chain, with its dimly lit shops stocked with colorful clothes and merchandise that promise fun without burning a hole in your pocket, has also benefited from its friendly customer service.
"I can't overemphasize the fact that its customers really feel cared for, and the personnel don't pre-judge them," said Britt Beemer, founder of America's Research Group, which polls consumers on spending behavior.
When people, especially teenagers, have limited cash to spend, they want to spend it at stores that treat them well, rather than at places that lag in customer care, he said.
Hot Topic's aggressive promotional activity and its trendy inventory have also helped the company, Beemer said.
"The discounts and promotional sales may affect margins, but (you) could be like Abercrombie and not discount and watch your sales go down, or you could lower margins and boost sales," he added.
SUMMER SLOWDOWN
Hot Topic's shares have jumped nearly 70 percent over the past year, but have fallen 30 percent since it said that sales of its "Twilight" merchandise had slipped a bit in April.
It also saw some trouble in its women's segment, which posted a 10 percent fall in comparable sales during the month.
"Hot Topic isn't a real primary teen destination for summer ware," analyst Sozzi said.
The market reaction post-April was a "healthy correction," he said, but the chain is well positioned from the merchandise and inventory standpoints to outperform its peers in comps and earnings during the back-to-school season.
Frugal spending in the teen market will continue well into the first half of 2010, said Marshal Cohen, chief industry analyst at the NPD Group. This, he said, makes Hot Topic's position as a market leader a near certainty.
ON THE CUTTING EDGE
However, others expect the retailer's numbers to settle down a bit even as it rides out the retail slump.
"If the question is, can they sustain high single or double digit comp sales after 'Twilight', maybe not, but I think they can probably sustain positive comps," analyst Zackfia said.
Most analysts agree there are no major risks to the company, which also sells CDs and DVDs along with other knick-knacks that build on the success of pop culture hits, as long as it manages to stay on top of its choosy clientele's changing needs.
"One has to remember that (the teen market) is the most fickle consumer -- they can love you today and forget about you tomorrow," NPD's Cohen said.
Beemer said Hot Topic will grow as long as it maintains its cutting edge.
"When you lose that, then you are back with everybody else -- in the doldrums again."
(Editing by Anne Pallivathuckal)
