Teen Retailers' Shares Tumble After Hot Topic's Sales Cool

The disappointing July results for back to school set some rivals and investors on edge.

By Leslie Earnest
Times Staff Writer

August 2, 2006

Jittery investors sent teen retailers' stocks tumbling Tuesday, a day after Goth-inspired Hot Topic Inc. announced disappointing sales at the start of the important back-to-school selling season.

Youth apparel companies that saw their shares slip included Abercrombie & Fitch Co., Aeropostale Inc., Gap Inc., Volcom Inc. and Zumiez Inc.

City of Industry-based Hot Topic, which sells rock and alternative music-themed products, led the downturn. Its shares fell 17% to $12.22, down $2.48.

"I've got red ink across the board on the screen," said retail analyst Robert Buchanan, surveying the day's dropping stock prices on his computer at A.G. Edwards & Sons Inc.

Hot Topic said after the market closed Monday that sales at established stores were flat in the first couple of weeks of July and dropped significantly in the second half of the month. It also said it anticipated a second-quarter loss of 2 cents to 3 cents a share.

The disappointing news set investors, and some retailers, on edge.

Retailers are struggling to get a read on consumers as the back-to-school season heats up, said Britt Beemer, chairman of America's Research Group, a market research firm in Charleston, S.C. And figuring it's never too soon to worry about the holidays, some of them have leaped ahead to question "whether this back-to-school thing is a precursor to Christmas," he said.

"None of them are seeing the kind of traffic in the stores that they thought they would see at this point," Beemer said.

Americans have plenty to fret over, including soaring gasoline prices, a softening housing market, higher food prices and heightened international turmoil, he said.

"You can't do without groceries or gas," said Beemer, who polls consumers. "I'm trying to analyze, will the consumer come back into the stores in late August if the retailers give them big discounts? And I'm not sure whether they will or not."

It's too soon to know how the back-to-school season — which peaks in August and stretches into September — ultimately will play out. But investors will get a clearer look at how it began when many of the nation's largest retail chains release same-store sales for July on Thursday. Sales at stores open at least a year are a key gauge of a retailer's health.

The International Council of Shopping Centers, which releases those numbers, said Tuesday that same-store sales growth probably slowed to 2.5% last month, largely because of sweltering temperatures in much of the nation. That compares with a 3.6% gain in July 2005 and an average monthly gain so far this year of 3.8%.

"I think the bottom line is a lot of the seasonal, or back-to-school, demand just wasn't there," said Michael Niemira, the group's chief economist. "I think it's simply because of the hot weather."

Tuesday's reaction by the market came despite the fact that July is a relatively unimportant month to apparel retailers because it is largely when stores are marking down summer clothing to make way for fall merchandise. Typically, it is the third-weakest sales month of the year.

The shopping center group has predicted that back-to-school spending will rise 3% to 4% over last year and prompt sales of $24.3 billion to $24.5 billion.

In a survey the group conducted with Citigroup Investment Research, it determined that 50.6% of back-to-school shoppers would make their purchases in August. Almost 31% of those surveyed said they expected to shop in September, compared with about 26% last year.

But analyst Buchanan said he was not encouraged about the season, given that parents do much of the spending for teens.

"I am not optimistic about back-to-school for teen retailers, given the weakness in the housing market," he said.

Neither was Buchanan surprised about Hot Topic's announcement Monday that its same-store sales sank 7.2% in July. He thinks the retailer has begun to alienate its core customer by shifting closer to the mainstream in its merchandise as it tries to boost sagging sales. Hot Topic hasn't logged a monthly same-store sales gain since March 2005.

"There are only so many kids in the mosh pit watching the Ozzfest in Mountain View, Calif., and Hot Topic has already taken care of those customers, so they've had to broaden the appeal," said Buchanan, who has a "sell" rating on the retailer's stock. "A lot of those kids I've talked to are not cool with the mainstream being in their store."

Other analysts, however, were more upbeat about Hot Topic, if cautiously so.

"I personally believe that Hot Topic's assortment is significantly better than it was," said Jeff Van Sinderen of B. Riley & Co. in Los Angeles, who rates the stock "buy." "I think it's really too early to know how the assortment is going to resonate for back-to-school for Hot Topic."