Hot Topic: A Hot Ticket?

By Glenn Curtis | August 10, 2009 AAA

Retailers seem to be in better shape than they were a half a year ago, but that doesn't mean I'm a full-fledged bull on all stocks in the sector. I actually think that many stocks in the space are way ahead of themselves. Take one-time high flying retailer Hot Topic (Nasdaq:HOTT) for example.

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Cool on Hot Topic

At one point, shares of Hot Topic seemed to defy gravity, and, some might argue, for good reason. The company's comp store sales had been in positive territory earlier this year. The company also managed to turn a solid fourth quarter in spite of the generally unimpressive retail environment.

But times have changed. The stock is now well off its highs and its comp store sales were in negative territory in July. In fact, earlier this week HOTT reported that its July comps were down 8.5%.

Now some may find the recent results to be good news - after all, Wall Street analysts had expected a deeper decline of 8.9%. But I remain unimpressed for the simple reason that an 8.5% decline is, in my opinion, nothing to be proud of. It shows that the company is not immune from the economic sluggishness and that it's facing some headwinds. (For more on analyst expectations, be sure to read Analyst Forecasts Spell Disaster For Some Stocks.)

Trading Too High
But even beyond the recent comp stores results, I think it's important to look at what Wall Street is expecting on the earnings front for the full year, and for next year. At present, analysts are calling for the company to earn a mere 44 cents a share this year and 51 cents a share next year. Running the numbers, that means the company trades at right around 17.8 times this year's estimate and at about 15.3 times next year's estimate. In a more normalized economic environment I might be more willing to step up to the plate, but given a wary consumer base and the fits and starts we might see in this space, I just can't justify warming to the HOTT story at this point.

That's not all. Remember that there are a lot of people that bought this stock in the upper single digits and the low double digits. I think that if the market gives back some of its recent gains, the shares could come down further and some of those existing shareholders may become disenchanted, head for the exits and book a tax loss. Of course tax-loss selling season isn't upon us yet, and anything can happen between now and then, but it is something that investors should keep in mind.

A Look at Other Retailers
I don't mean to pick on Hot Topic, as it's not the only chain that looks a bit rich. For example, even though Macy's (NYSE:M) recently issued upbeat guidance for the second quarter, it's still too expensive at more than 21 times this year's estimate.

I also believe that J.C. Penney (NYSE:JCP), which reported a more than 12.3% same-store decline in the month of July, and which trades at 39 times this year's estimate, is looking a bit on the expensive side.

As I've stated in the past, and I stand by it, right now I'd much rather be in on Minnesota-based Target (NYSE:TGT), which trades at about 14.6 times this year's estimate.

Bottom Line
I don't mean to bash Hot Topic, but considering that it trades at a high multiple of expected earnings, and has had recent comp store declines, I plan on steering clear. (Read Analyzing Retail Stocks to learn about the most important metrics to look at when analyzing retail stocks.)

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