Hot Topic goes beyond the pale: with sales swooning, retailer is phasing out 'goth' look.

Confirming what consumers had already figured out, the "goth" look popularized by Hot Topic Inc. is a goner.

Company executives aren't talking specifics, but in the wake of an extremely disappointing holiday sales season, the City of Industry-based retail clothing chain has indicated in a thing that it will remodel 60 to 80 of its nearly 700 stores.

The plan is to shed the trademark all-black fashions, which were derived from heavy metal and dark rockers, that have taken the company from rags to fiches, and nearly back.

The new-look stores will be brighter, featuring lighter colors and clothing. The stores will have accessory bins in the middle of the store and the most colorful apparel will be in the storefronts.

"I think the current format is intimidating to the average consumer," said Christine Chen, an analyst with Pacific Growth Equities LLC, who has a buy rating on the stock. "Music has changed a lot in the past few years, and they haven't changed the store format accordingly."

The plan to revamp represents a reversal of the firm's recent strategy. Executives maintained that incoming licenses on graphic tees or accessories would boost appeal to shoppers.

The music-based apparel chain has been among the worst performing retail stocks on the market since last summer. December was a particularly bad month when comparative store sales; a critical measure in the retail industry, were down more than 5 percent. The company slashed fourth quarter earnings projections earlier this month, from 33 cents to 38 cents per share to between 20 cents and 22 cents per share. The firm's stock tumbled 20 percent and has hovered around $11 since.

For a company that once traded above $30 a share and enjoyed some of the best margins in the industry, it's been a long way down.

"We are very disappointed by our consolidated December results and their implications for the quarter," Chief Executive Betsy McLaughlin said in a statement. "As a result, we are revising our earnings expectations for the fourth quarter to begin 2007 in a clean inventory position."

Accessories and music took the biggest dives, down 9 percent and 10 percent respectively from last year.

Haute turns cold

In the late 1990s, Hot Topic was one of the coolest stops in the mall.

The company was founded in 1988 by retail wunderkind Orv Madden, who latched on to the goth fad and branded his stores in that style. But as teenagers shelved their black lipstick and studded dog collars, they started passing up the Hot Topic stores as well. Madden eventually left the company.

The company has been trying to recast itself for more than a year, retaining its music and T-shirt focus, but moving to licenses of graphic tees with a retro look. But the company's shares haven't been near the $30 mark since early 2004, and haven't broken $20 since early 2005.

Falling profit margins have been a big problem. Adrienne Tennant, senior analyst at Friedman Billings Ramsey Group Inc., said that margins that ran as high as 14 percent back in 2000 were down to 3 percent in 2006.

"Everybody loves a comeback story, and this company is due for one," Tennant said. However, she isn't one of several analysts with a buy rating on the stock. "We're just sitting on the sidelines for now, until we see some signs of what's going to happen."

Tenant said Hot Topic might have been hurt by a weaker-than-usual music holiday release schedule, and noted that music releases look thin for early 2007 as well.

While the company licensed some popular brands for T-shirt sales in 2004, including Curious George and the Care Bears, recent offerings like Transformers haven't been as successful.

A critical component of a rebound, Tennant said, will be securing licenses that improve sales of accessories, which carry a higher profit margin. Hot Topic hired Maria Comfort as chief merchandising officer last year, but Tennant said it's too soon for her efforts to really pay off.

New clientele?

Ilse Metchek, director of the California Fashion Association, said it's important to remember that in fashion, everyone's combat boot slips from time to time.

"Hot Topic had a niche, a very clear focus, and that is over in this very fickle junior contemporary society," Metcheck said. "That whole goth look they have got tired. But I imagine that if they have the financial wherewithal and the stick-to-itiveness, they will be fine."

Metchek said Hot Topics' good retail locations give it a great chance to recover, by presenting fresh looks to the consumer. A key point, she said, may be in realizing that the customers who are gone may never come back.

For that reason, the company may look like a great takeover target, with prime retail space and a well-known brand.

Metchek said any company that is struggling becomes a takeover target, but she hasn't heard much talk regarding Hot Topic.

"Wet Seal, Talbots, Abercrombie, everybody went through a period where they lost their focus and gained a new focus," she said. "I'm not sure you can do it trying to reach the ones you lost. But you can go after a new customer."

By EMILY BRYSON YORK

Staff Reporter