After years of being a Wall Street darling,

Hot Topic

(HOTT)

has recently moved to the doghouse.

The mall-based specialty retailer, famed for connecting with elusive and rebellious teen spenders, last week posted an unexpected 3.8% drop in October same-store sales, or sales at stores open for at least a year. It also lowered its third-quarter earnings guidance and warned that fourth-quarter numbers would lean toward the low end of its range.

With its stock headed for its first annual loss since 1998 and its earnings heading for their only yearly decline in its 10-year life as a public company in 2005, Hot Topic's appeal with punk rockers and goth hobbyists looks to be getting cold.

Adrienne Tennant, an analyst with Wedbush Morgan Securities, still rates the retailer a buy on the basis of the track record of its management team, which is known for its uncanny ability to conform to the shifting tastes of young nonconformists. But the company's failure to meet estimates for its Halloween season has her tentative about its fourth-quarter prospects.

"Halloween is their biggest holiday in terms of driving traffic and sales," Tennant said. "The fact that they disappointed just makes everyone a bit more cautious going into the fourth quarter."

While comps fell in October, Hot Topic's overall sales were up 10% to $56.2 million. It now expects to report third-quarter earnings of 27 cents a share on Nov. 16, a decline from last year's 31 cents a share for the same quarter. In the fourth quarter, it's expected to post another year-over-year earnings drop from 48 cents to 44 cents a share, according to Thomson First Call.

For all of 2005, analysts estimate that Hot Topic's earnings will fall 4.5% after rising by an average 45.8% over the last five years. Because of the anticipated slowdown, the stock has lost about 33% in 2004 after adding 91% in 2001, 9.3% in 2002 and 93.1% in 2003.

The company strives to be a one-stop shop for the MTV generation, selling T-shirts from TV shows such as

SpongeBob SquarePants

and licensed concert clothing from counter-cultural icons like Marilyn Manson and Tool. It also carries CDs from lesser-known indie rock bands without national exposure, and accessories such as fishnet stockings, thongs and feather boas from the company's private label, Morbid-Brand Products.

Worshipped for their ability to keep their fingers on the pulse of the antipop culture crowd, Hot Topic executives are known for keeping their store managers glued to MTV all day, reading customer feedback notes on a weekly basis and showing up at the X-Games to stay in touch with their constituents. The store concept has developed a reliable core customer, but the latest fashion trends have lured away customers on the fringes in the past year.

"There's a trend towards the preppy, more pretty, feminine look on the girls' side this year that has permeated the fashions in teen retailers since the beginning of the year," Tennant said.

The trend is turning some teenage shoppers back toward the

Gap

(GPS) - Get Report

and

American Eagle

(AEOS)

, but Hot Topic has remained committed to its core and is generally unwilling to change its fashion strategy. While Wall Street tends to give the company the benefit of the doubt based on its track record, the latest sales figures are calling the strategy into question.

"The debate remains whether Hot Topic is a victim of its own success or rather is on the wrong side of the current color fashion cycle," wrote J.P. Morgan Securities analyst Brian Tunick in a recent research note. (J.P. Morgan makes a market in shares of Hot Topic and has an investment banking relationship with the company.) "Clearly, the market is giving the company credit for its past history of fast inventory turns and the ability to uncover and domestically source new licenses or brands before they become discovered by the masses."

Even with the stock's declines in 2004, and its 6% tumble since last Wednesday's sales report, it still trades at over 17 times its earnings estimates through 2005. That's a significant premium over its specialty and apparel retailing peers, such as Gap,

Pacific Sunwear

(PSUN)

and American Eagle, which all trade closer to 15 times next year's estimates.

The company said in a statement that its October shortfall was "related specifically to Halloween product

and does not represent a fundamental shift to our recent core business trend."

However, Dan Hess, the chief executive of Merchant Forecast LLC, said he thinks Hot Topic's ability to appear like an alternative to the mainstream for young spenders has turned it into a mainstream brand.

"It's quite possible that Hot Topic grew too popular and too big to be cool or fresh for their customer base," Hess said. "Their customer stands for being different, alternative and unique, and when you start to see their stores in a majority of the malls across the country, they lose that ability to be unique and alternative. They become mainstream by virtue of their expansion."

At 584 stores across the country, Hot Topic is approaching a critical, 600-store mass that often leads to a slower-growth existence for specialty retailing concepts that have all but saturated the market. The company's main growth driver now is a new concept for plus-size teens called Torrid stores. Despite its success, sales growth at Hot Topic is expected to slow to around 18% over the next three years, vs. its average 36% clip over the last four.

With that in mind, investors might want to consider that Hot Topic's glory days may be over and its premium may not be worth it, unless fashion trends should suddenly swing back in its direction.

"It could be a long fourth quarter," said Hess. "I don't see things improving, because what we see being delivered there is just more of the same."