On March 7, 2011, specialty retailer Hot Topic Inc. (HOTT) announced its financial results for the fourth-quarter and year-end 2010.
Street analysts had more than a week to ponder on the news. In the paragraphs that follow, we cover the recent earnings announcement, subsequent analysts’ estimate revisions as well as the Zacks Rank and long-term recommendation for the stock.
Earnings Review
Hot Topic reported fourth quarter fiscal 2010 earnings of 12 cents a share, in line with the Zacks Consensus Estimate. However, it dropped substantially from the prior-year earnings of 18 cents a share.
Total revenue declined 0.8% year over year to $212.4 million, marginally beating the Zacks Consensus Estimate of $210.0 million. The company reported same-store sales decline of 2.1%, narrowing the gap from a fall of 11.5% in the year-ago period. Hot Topic reported same-store sales decline of 2.5% while Torrid registered a decrease of 0.4%.
(Read our full coverage on this earnings report: Hot Topic Reports In Line)
Agreement of Estimate Revisions
Despite the company’s underperformance in the reported quarter, the analyst community has remained more or less unperturbed with static estimate revisions for the two upcoming quarters as well as fiscal years 2011 and 2012 over the past one week.
Magnitude of Estimate Revisions
As a result of no movement in estimates seen over the past one week, the Zacks Consensus Estimates, for fiscal 2011 and 2012, have remained at 14 cents and 22 cents a share, respectively. Similarly, for the first and second quarters of fiscal 2011, the estimates have remained stagnant at corresponding losses of 3 cents and 10 cents a share.
Our Recommendation
Hot Topic’s niche market position, strong brand recall, ability to tweak merchandise in line with rapidly changing trends and a debt-free balance sheet augur well for operating performance. However, macroeconomic headwinds, intense competition from other specialty retailers and the seasonal nature of the business severely undermine the company’s future growth prospects.
Until we see business trends improving, the Neutral rating is being maintained. The company has a Zacks #5 Rank (Strong Sell) implying downward pressure on the stock over the near term.
Hot Topic is a shopping mall-based specialty retailer operating the Hot Topic and Torrid store concepts across the U.S. as well as the e-space music discovery concept, ShockHound. The company’s business strategy is based on the foundation of pop culture and its appeal to teen customers, its target audience.
Hot Topic operates in a unique market niche by focusing on music and music/pop culture-oriented merchandise, offering products that are typically not there at other retailers.
The company operates in a highly fragmented specialty retail sector and faces intense competition from larger teenage-focused retailers such as Abercrombie & Fitch Co. (ANF).
About Earnings Estimate Scorecard
Len Zacks, PhD in mathematics from MIT, proved over 30 years ago that earnings estimate revisions are the most powerful force impacting stock prices. He turned this ground breaking discovery into two of the most celebrating stock rating systems in use today. The Zacks Rank for stock trading in a 1 to 3 month time horizon and the Zacks Recommendation for long-term investing (6+ months). These “Earnings Estimate Scorecard” articles help analyze the important aspects of estimate revisions for each stock after their quarterly earnings announcements. Learn more about earnings estimates and our proven stock ratings at: http://www.zacks.com/education/
ABERCROMBIE (ANF): Free Stock Analysis Report
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