Is Hot Topic Still Hot?

I vividly remember what my Hot Topic HOTT shopping experience used to be like. I'd walk in, head straight for the pop culture tees, then move onto the band tees, and typically find at least one item worth buying. During a visit when I was not compelled to buy anything, I often found that the selection was varied (and original) enough to inspire another visit in the near future. That was Hot Topic – an inspiring shopping experience. Whether looking for Nintendo (NTDOY) branded merchandise or a shirt featuring Blink-182, Hot Topic was the place to be. Nowadays, I am not sure how to define Hot Topic. The gothic-looking retail chain is still covered in band t-shirts and pop culture merchandise. But this year, I can barely recognize the place. Amidst the occasionally intriguing shirt or hoodie, Hot Topic is slowly being overrun with a haphazard collection of hazardous waste. I can accept the stockpiles of movie merchandise (for better or worse, Twilight is very popular – why shouldn't retailers cash in?), and can look the other way when I see a cheap Halloween costume (the Super Mario hat, mustache and gloves combo was downright laughable). But the Hot Topic shopping experience just isn't the same. Maybe it's because I'm getting older (the store's target market seems to be teens and very young adults). Or maybe I've finally reached my limit on band tees. I've never purchased a pair of jeans from Hot Topic; for that, I go to the Gap GPS or the Gap-owned Old Navy. I've only purchased one CD from Hot Topic. I haven't purchased any of their over-priced, $45 hoodies in at least four years. But am I the only one? Is Hot Topic still hot with its primary demographic? Over the past day, HOTT began trading at $6.80, jumped to $7.14, then tapered off and closed at $6.68. While that degree of fluctuation is normal, the stock has been on a downward trend since October 24. At that time, Hot Topic was trading at $8.55. Over the past three months, we've seen the company hover between the low $7s and mid $8s before dropping to a three-month low of $6.52 on November 16. But that is actually an improvement over its six-month low of $6.33, which occurred back on August 8. This isn't unprecedented for the retailer. Despite having soared to $9.58 on April 13, 2010, Hot Topic has been unable to maintain any level of of substantial success. In fact, after a five-year run of steady gains (and a handful of minor, if not expected, declines) from 1999 to January 2004 – in which the stock peaked at $30.47 – Hot Topic has been on its way down. To be fair, Hot Topic isn't the only clothing store that's struggling right now. Just a few years ago, American Eagle AEO was soaring at $32.38. Now it's struggling to maintain a share price in the mid teens. Last year, Aeropostale ARO reached an all-time high of $31.88; yesterday, it closed at $16.60. Urban Outfitters URBN, once considered a shining star of modern apparel, reached an all-time high of $38.38 this past February. Not anymore. At yesterday's close, Urban Outfitters was trading at $26.18 – still a respectable trade, but considerably less than its high. With so much competition (and an economy that's still struggling), Hot Topic doesn't have an easy road ahead. But its biggest obstacle could be its own strategy. While this company was once known for selling unique items, the lack of original offerings – coupled with the growth of online retailers – is making it difficult for Hot Topic to thrive. ACTION ITEMS: Bullish: Can Hot Topic overcome this period of apparel angst? If you think so, consider these trades:

• Disney DIS and other film studios already rely on Hot Topic to sell some of their merchandise. In the coming year, Lionsgate LGF will likely do the same to bolster profit from The Hunger Games.
• Microsoft MSFT relies on Hot Topic as a primary retailer for selling merchandise that's based on its Halo, Gears of War and other game properties. Nintendo (NTDOY) does the same for Super Mario and The Legend of Zelda.

Bearish: If you think Hot Topic is on its way out, consider these alternatives:

• Urban Outfitters seems to have a strong future.
• Target TGT and JC Penney Company JCP have beefed up their pop culture (games, comics, movies, etc.) apparel selection for teens and adults, while Wal-Mart WMT has become a staple for those items in children's sizes.
• The Gap and Old Navy have attempted to move into the realm of pop culture, but most of those shirts wound up on the clearance rack.

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