Hot Growth Making Hot Topic a Teen-Store Heartthrob

Fred Durst? At the Robertson Stephens Consumer Conference?

Well, yes. The frontman for Limp Bizkit played a prominent role in the promotional video that executives from Hot Topic (HOTT) wheeled out Wednesday to give buttoned-up investors a taste of their very, very, very buttoned-down stores.

Hot Topic, which sells music-themed T-shirts and the latest trendy apparel and doo-dads to teens, has seen its sales surge at a time when other teen retailers have not. New CEO Betsy McLaughlin said Wednesday the company is capitalizing on its strengths by testing a new concept for malls. While she wouldn't give any details, she said the new project is in an area in which the company has already developed expertise.

For the last while, Hot Topic's expertise has been all about increasing same-store sales, those at stores open at least a year. Comps rose 20.1% in September on top of a 25.7% gain the previous year. Notably, McLaughlin said those sales gains were achieved without the kind of markdowns that plagued other teen specialty retailers, like Pacific Sunwear (PSUN), this summer. The secret? Selling the latest trends at full price, then getting out and moving on to the next big thing before the mass merchants pick up the craze. "We were the first to carry Beavis and Butthead," said McLaughlin proudly. "We were the first to carry South Park." (Now there's something to be proud of -- heh heh heh.)

Growth and earnings have been pretty stellar. Sales quadrupled from 1996 to 1999. The company's merchandise margin runs in the mid-50% range, according to McLaughlin. Sales per square foot are running about $640, nearly twice that of some competitors. Consensus estimates for the current fiscal year call for earnings of $21.6 million on $245 million in sales, with comp growth of 15%.

McLaughlin knows from teen retailing, though, and so she knows that this kind of sales surge can't last forever. Long term, she's projecting 5%-7% comps. Hence, the need for new concepts to extend the sales growth spree. One cannot live by Fred Durst T-shirts alone.

>To order reprints of this article, click here: Reprints