New Season Will Test Hot Topic's Fire

(MoneyWatch)  Hot Topic isn't feeling the chill winds of recession, as its teenage customers have warmed to its edgy fashions, and in the span from December to January the company actually turned up the heat, which suggests the economy can't smother all of the other factors that drive retail.

Comparable store sales in January increased by six percent, an improvement on Hot Topic's stellar December results that included a 4.4 percent comp increase. So Hot Topic's momentum actually gained in January even as recession stalwarts such as Wal-Mart and Costco were issuing cautions about earnings estimates.

If Hot Topic's February sales hold up, it will signify that the retailer is heading for, if not an endless summer, then at least a much more pleasant season than most other retailers will experience. Still, Hot Topic's teenage customers may yet see their funds dry up in the economic downturn or they may simply start crushing on another retailer.

It's worth weighing the comparable store sales in the latest December and January time frames against comps posted for December 2007, down by 6.2 percent, and January 2008, down by 3.6 percent. Hot Topic competes in one of the volatile sectors in retailing, youth fashion. Teens are especially fickle consumers. Hot Topic has experienced periods of fading popularity as the year earlier comparable store sales indicate. In mid decade, its connection with the customer faltered, its comparable store sales turned negative, and its share price plummeted from $30 in late 2004 to under $5 in early 2008 before teens began to return.

So, Hot Topic has turned things around, but the strength of its momentum will be tested almost immediately. For one thing, the money and equivalents that teens received as gifts for the holidays will be running out soon. Hot Topic's CFO Jim McGinty, speaking in a conference call, reported that only 26 percent of Hot Topic gift cards issued in the holiday time frame had not been redeemed by January's end. For the other, spring fashions are preparing to roll out and actually will begin to trickle into stores by the middle of this month. So February will be a critical test for Hot Topic as customers pass judgment on the new looks arriving in stores. By March, its immediate destiny should be evident.