Hot topic cools down after pink becomes the new black.

HOT Topic Inc., seller of gothic and punk clothes for teens, has turned ice cold on Wall Street.

Shares of the retailer have fallen 51 percent since late January, after doubling last year. The stock is now trending below $20, and a handful of analysts have upgraded shares of the City of Industry-based retailer on the belief it could stage a rebound.

"I don't expect you're going to see a huge lift in the shares in July, but they could come back in August," said Elizabeth Pierce, a retail analyst at Sanders Morris Harris in Los Angeles. "They have a very flexible operating model and limited competition."

Hot Topic caters to the angst-ridden youth culture heavily inspired by rock groups such as Him and Velvet Revolver, Led Zeppelin and Linkin Park, and music festivals such as Ozzfest. The stores evoke dungeons and sell an assortment of Bob Marley T-shirts, ripped blue jeans, cargo pants and shirts with sayings like "You Suck and That's Sad."

The company operates more than 581 Hot Topic stores and has high hopes for its 52-store chain Torrid, which caters to plus-sized women aged 15 to 29.

Sales hilling wall

Even though Hot Topic has churned out four consecutive quarters of double-digit earnings increases, it ran aground in March, when executives forecast slower same-store sales growth, a key indicator of retail performance. Several analysts downgraded the stock, citing its high valuation at around $34 a share. Since then, the stock has fallen by more than 40 percent.

After a speedy sales pace last year, same-store sales rose only 0.7 percent in April, then began falling--by 0.5 percent in May and 0.4 percent in June.

Compounding the problems, management said last month that it had trouble implementing a new distribution center software system. That problem interrupted the flow of goods to stores, depressing sales slightly.

Through the second half of the year, Hot Topic faces more tough times because of difficult sales comparisons. Meanwhile, other retailers that struggled last year are stealing its thunder, including Aeropostale Inc., American Eagle Outfitters Inc. and Abercrombie & Fitch.

Pink not pretty

Jim McGinty, Hot Topic's chief financial officer, admitted that strong women's fashion and trends toward preppy looks and bright colors, primarily pink, are hurting the company's sales.

"It's a fashion cycle and all we can do is add a few colors," McGinty said. "We understand that that customer is probably going to shift to those brights, just like when the Bohemian peasant look was in, then they came back to us in force."

The company has pulled back on some poor-performing categories, mostly women's casual streetwear, and has increased its inventory of novelty T-shirts (which have much higher margins anyway).

It expects to make a big splash for the back-to-school season with denim, which could turn out to be either a dicey proposition or a major hit.

"If the business starts to gain more traction, there's considerable upside in the stock price," said Jeffrey van Sinderen, a retail analyst at B. Riley in Los Angeles. "They're trying to find what the next big hit is to drive their business."

Hot Topic reported a 22 percent jump in net income to $5.4 million in the first quarter ended May 1, compared with $4.4 million in the like year-earlier period. Sales in the first quarter rose 27 percent to $128.1 million.

Hot Topic Inc.

Stock Prices

July 7, 2003    $18.40
July 7, 2004    $21.10

Note: Table made from line graph.

YEAR (Jan.-31)                 2004     2003

Revenue (millions)             $572   $443.3

Total Expenses (millions)     495.5    388.8

Operating Income (millions)    76.5     54.5

Net Income (millions)            48     34.6

Earnings Per Share            $0.97    $0.70

[GRAPHIC OMITTED]

SUMMARY

Business: Mall-based teen retailer
Headquarters: City of Industry
CEO: Elizabeth McLaughlin
Market Cap: $920.2 million Dividend Yield: None
Total Liabilities: $53.9 million P/E Ration: 20.1
Long-Term Debt: $0

Staff reporter Kate Berry can be reached at [phone], ext. 228, or at [e-mail].