Hot Topic Management Discusses Q2 2012 Results - Earnings Call Transcript

Hot Topic (HOTT)

Q2 2012 Earnings Call

August 15, 2012 4:30 pm ET

Executives

James J. McGinty - Chief Financial Officer, Principal Accounting Officer and Secretary

George Wehlitz - Vice President of Finance

Lisa M. Harper - Chairman and Chief Executive Officer

Mark Mizicko - Senior Vice President of Planning and Allocation

Analysts

Thomas A. Filandro - Susquehanna Financial Group, LLLP, Research Division

Janet Kloppenburg

Jeffrey Wallin Van Sinderen - B. Riley & Co., LLC, Research Division

Adrienne Tennant - Janney Montgomery Scott LLC, Research Division

Stephanie S. Wissink - Piper Jaffray Companies, Research Division

Elizabeth O. Pierce - Roth Capital Partners, LLC, Research Division

Marni Shapiro - The Retail Tracker

Linda Yu Tsai - ITG Market Research

Joseph J. Yurman - 1221 Partners, LLC

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the Hot Topic Second Quarter 2012 Earnings Conference Call. [Operator Instructions] Before we begin, I would like to remind you that during the course of this conference call, the company will be making certain forward-looking statements, such as statements relating to financial results, guidance and future financial performance, merchandise assortment, new initiatives and related matters and statements relating to key personnel and operational issues.

These statements, as well as related information posted on the Hot Topic Investor Relations website, involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties are discussed from time to time by the company and are more fully set forth in the periodic reports that Hot Topic files with the Securities and Exchange Commission, including the most recent annual report on Form 10-K and quarterly report on Form 10-Q.

All forward-looking statements made on this call speak only as of the time they are made, and Hot Topic undertakes no obligation to update these statements to reflect subsequent events or circumstances.

To more effectively disseminate the information discussed this afternoon, this call is being webcast on the company's Investor Relations website at http://investorrelations.hottopic.com, and a replay will be available on that site. A replay will also be available at (888) 286-8010, passcode 73585505, for approximately 2 weeks.

Now I'll turn the call over to Hot Topic's Chief Financial Officer, Jim McGinty.

James J. McGinty

Hi, this is Jim, and welcome to the call. While on hold, you've been listening to Smells Like Teen Spirit by Nirvana. My partners on the call today are Lisa Harper, Jerry Cook, George Wehlitz and Mark Mizicko. For competitive reasons, we will not be discussing any specific forward-looking product information during this call. George will begin by reviewing the second quarter results and making a few comments on the balance sheet. Following the Q2 details, Lisa will provide you with the thoughts on the second quarter performance and the outlook going forward. Lastly, we will discuss the guidance. Now I'll turn it over to George.

George Wehlitz

Thanks, Jim. All comparisons discussed are to the same period from a year ago unless otherwise noted. Overall, the net sales during the quarter increased $6.9 million. The components of this increase are as follows: $4.7 million sales increase, primarily from new and noncomparable Hot Topic and Torrid stores; $3.7 million sales gain from Hot Topic comparable stores increase at 3.9%, $1.6 million sales gain from Torrid comparable sales increase of 4%; and lastly, $3.1 million sales decrease from closed stores.

For the second quarter, Hot Topic Division had an average transaction value increase of 13%, but the number of comparable transactions were down 8% from last year. Torrid had a 3% increase in the average dollar sale with a 1% increase in the average number of transactions.

At Hot Topic, apparel was 56% of total sales for the quarter, compared to 51% last year. At Torrid, apparel was 83% of total sales for the quarter compared to 81% last year.

Gross margin was 34.1% of sales, compared to 32.2% last year. The 190 basis point increase breaks down into the following categories: 120 basis points increase in merchandise margin as a result of higher realized markup and lower markdowns; 40% basis point decrease in the store depreciation expense due to leverage on higher sales and store closures; 40 basis points decrease in distribution expenses, primarily a result of lower freight, depreciation, supply and leverage on higher sales, partially offset by higher payroll and consulting costs; 20 basis points decrease in store occupancy percentage due to leverage on higher sales, partially offset by deferred rent credits recognized in the prior year as part of our cost-reduction plan; and lastly, 30% -- 30 basis points increase in our buying payroll expenses.

In the second quarter, selling, general and administration expenses were 34.9% of sales compared to 38.9% last year. Last year's SG&A expenses included approximately $4.1 million related to the strategic business changes and cost-reduction plan.

Excluding these costs, SG&A expenses for last year were 36.2% of sales. The 130 basis point improvement breaks down into the following categories: Store and Internet payroll expenses decreased 130 basis points, as a result of leverage on higher comp sales, improved productivity and lower store performance-based bonuses; the other store expenses decreased 80 basis points, primarily due to lower debit and credit card processing costs, utility costs, supplies and freight costs. These are partially offset by higher inventory service fees.

Other general and administrative expenses decreased 50 basis points as a result of lower relocation and asset impairment charges, partially offset by an increase in computer maintenance costs, a 20 basis point decrease due to lower depreciation expense and leverage on higher sales.

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