Hot Topic's Relief Bounce

Hot Topic also raised the number of new Hot Topic stores it expects to open in 2004 by 10 to 90.

Both analysts stressed that Hot Topic's management team is well respected and liked, which adds to investor confidence that the company can weather its recent weak spot.

"They get tremendous marks for credibility," said Pierce. "They acknowledge ... it's been harder for them to find their edge and their niche. ... They get a lot of credibility for saying 'maybe it's not our time to shine.' "

Said Nagler: "They're taking a 'wait-and-see' approach, and that's what we need to prove that we have their trust."

Nagler, who has a buy rating on the stock, noted that Hot Topic has seen a turnaround in its women's business in the current quarter with accessories and colored tops doing well. Both Nagler and Pierce also noted the strength in denim, which has had a double-digit sell through.

Other analysts were still cautious on the company, however.

"Hot Topic is pulling out the stops to attempt a rescue of second-half earnings per share," said Pacific Growth Equities analyst Andy Graves in a Thursday research note. "We do not share management's optimism for a rebound in business to flattish comps in the remaining months of the third quarter."

Graves maintained his third-quarter EPS expectation of 27 cents but lowered his same-store sales expectation to a drop of 6% from a drop of 5%. In the fourth quarter, he expects a profit of 42 cents a share. (Pacific Growth makes a market in shares of Hot Topic and it does investment banking for the company.)

"While we think the company is well managed ... we believe the tough same-store sales comparisons and fashion headwinds the company faces in the next three quarters could lead to significant EPS shortfalls," Graves concluded.

Some of Graves' pessimism stems from the fact that Hot Topic had started to get a reputation for repeatedly lowering earnings guidance. On July 15, the company cut its second-quarter earnings outlook to 10 cents a share and below the then-consensus, saying its men's, women's and fashion accessories units have not shown the types of sales improvements it anticipated.

That had been the second time in a week the company had dropped its earnings guidance. On July 7, Hot Topic dropped its earnings forecast to 13 cents a share, also below the then-consensus, following news that its same-store sales in June fell 0.4%.

The once red-hot Hot Topic had been the king of positive same-store sales often in the upper single digits to lower double digits throughout most of 2003. Same-store sales appeared to start a drop off in May and June, and then plunged 5% most recently in July. Shares of the company have responded in turn and are down about 30% year over year.

For Pierce, though, the company's weakness should be short lived.

"The music side of their business is what I look to determine the strength of the brand," said Pierce, who has a hold rating on the stock. She noted that the core music business had an 11% jump in same-store sales in the just-completed quarter, which was on top of last year's 9% increase.

"That is why I keep saying it's a great brand."