Hot Topic Inc.

1
Hot Topic Inc.

• Analyst
• Damian Mahaffey

2
Company Overview

• Hot Topic is a mall-based specialty retailer of
  music-licensed and music-influenced apparel,
  accessories, and gift items for young men and
  women between the ages of 12 and 22
• www.hottopic.com and www.torrid.com
• Headquartered in CA

3
Recent News

• November 17, Hot Topic Inc. reported an 18
  percent decline in profit for the latest quarter,
  blaming weak Halloween sales. The results matched
  the average forecast of analysts polled by
  Thomson First Call. Hot Topic said it still
  expects to open 115 stores in 2004 and
  anticipates ending the year with 76 Torrid stores
  and 592 Hot Topic stores.
• Monday, Nov. 29, Hot Topic Inc. said its sales
  came in below expectations in November, prompting
  the clothing retailer to cut its earnings
  forecast for the fourth quarter ending Jan. 31.

4
Major Products -Hot Topic Stores

• T-shirts
• Hats
• Posters
• Stickers
• Patches
• Books
• Shoes
• Intimate Apparel

• CDs
• Body Jewelry
• Sunglasses
• Leather Accessories
• Gift Items
• Novelty Accessories
• Morbid Threads
• Morbid Make-up

5
Major Products Torrid Stores

• Torrid apparel is sized 14-26
• Novelty T-shirts
• Fashion Tops
• Pants, Shorts, Skirts, Dresses, and Jackets
• Intimate Apparel
• Shoes
• Accessories
• Beauty Products

6
Top Competitors

• The Gap
• Claires Stores
• Pacific Sunwear of California
• Gadzooks Inc
• The Wet Seal
• Billabong International

7
Strengths

• Few Direct Competitors
• Most of its direct competitors are small online
  stores offering music related merchandise. Not
  many retail stores offer same type of goods in
  malls.
• Customer Loyalty
• Development of private label product lines
  including Morbid Threads and Morbid Metals keep
  customers coming back. These private labels make
  up 25 of net sales each year.
• Weaknesses
• Niche Market
• Offers a variety of products, but all are within
  same style category, therefore stores do not
  appeal to all young adults.

8
Opportunities

• Expansion
• Even after recent news of failing to meet analyst
  expectations, Hot Topic Inc. still plans to open
  more stores.
• Threats
• Increased Competition
• Online stores, which make up a large share of
  their competition, may be able to sell products
  at cheaper prices due to cheaper labor costs.

9
Risks to investing in Hot Topic

• Net sales and net income have grown significantly
  during the past several years, primarily as a
  result of the opening of new stores and, to a
  lesser extent, the introduction of new products.
  Hot Topic intends to continue to pursue an
  aggressive growth strategy for the foreseeable
  future, and future operating results will depend
  largely upon their ability to open and operate
  stores successfully and to profitably manage a
  larger business.
• Our aggressive growth strategy anticipates a
  significant number of new store openings which
  could create challenges we may not be able to
  adequately meet

10
1 Year Performance Chart
11
5 Day Price Performance Chart
12
Statistics

• Purchase Price 21.61
• Current Price 16.23
• Initial Cost 691.52
• Current Market Value 519.36
• Money Lost 172.16
• Shares Owned 32

13
Valuation

• Current Price 16.23
• SP Fair Value 19.30
• Yahoo! 1 Yr. Target Estimate 19.70
• ValuePro IV 19.76
• Intrinsic Value 19.44
• Growth rate 18

14
Conclusion

• Outperforms competitors in most areas
• Small Cap selling at about 85 of its IV
• Aggressive growth strategy may not be working out
• Recent news has been about Hot Topic failing to
  meet earnings estimations
• This could be a good time to purchase more shares
• Over-weighted in Consumer Discretionary Sector