Updated from 8:23 a.m. EDT

Shares of specialty retail chain Hot Topic ( HOTT) surged Thursday as investors breathed relief that the company did not once again lower its forward earnings forecasts after reporting a drop in second-quarter profits Wednesday night.

Analysts say the upbeat tone of the company's post-earnings conference call, management's realistic view on the back half of 2004 and the overall credibility of the company's management team are also boosting the stock's price. The gain comes despite Hot Topic's just-reported quarterly results that only matched analysts' somewhat subdued expectations as well as the company's own reduced estimate.

The shares were recently up $1.39, or 9.6%, to $15.88. In Wednesday trading, the shares lost 4.1% to close the session at $14.49.

"Someone out there yesterday basically intimated that the forward estimates have to come down in the back half of the year, and that put some pressure the stock Wednesday," said Liz Pierce, an analyst at Sanders Morris Harris. "What you're seeing today is a getting back to neutral."

Hot Topic said Wednesday that second-quarter earnings tumbled more than 20% to $4.6 million, or 10 cents a share, from $5.9 million, or 12 cents a share, last year. Sales jumped 18% to $136.3 million. Analysts surveyed by Thomson First Call were forecasting earnings of 10 cents a share on sales of $136.4 million in the 2004 quarter.

The company's subsequent conference call, however, was "a little more positive than negative," said Pierce. (She does not hold shares of the company and Sanders Morris Harris does not do investment banking for Hot Topic.)

Pamela Nagler, an analyst Fulcrum Global Partners, agreed with Pierce about the call's positive tone. For her, the fact that Hot Topic's second-quarter results were in-line with guidance and that the company specifically reiterated its forward guidance are all the more reason to be optimistic. (Nagler does not hold shares of Hot Topic and her firm does not do investment banking for the company.)

The company expects to earn 30 cents to 33 cents a share in the third quarter and 49 cents to 52 cents a share in the fourth quarter. The Wall Street consensus is for 30 cents a share in the third quarter and 48 cents a share in the fourth.

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."

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