SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 5, 2001
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR l5 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 0-28784
HOT TOPIC, INC.
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(Exact name of Registrant as specified in Its Charter)
CALIFORNIA 77-0198182
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(State of Incorporation) (IRS Employer Identification No.)
18305 EAST SAN JOSE AVE., CITY OF INDUSTRY, CA 91748
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(address of principal executive offices) (Zip Code)
(Telephone number of registrant) (626) 839-4681
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of the issuer's common stock as of the latest practicable date: June 7, 2001 -
20,542,162 shares, no par value. --------------
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HOT TOPIC, INC.
INDEX TO FORM 10-Q
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets - May 5, 2001 and February 3, 2001 3
Consolidated Statements of Income for the 13 weeks ended May 5,
2001 and April 29, 2000 4
Consolidated Statements of Cash Flows for the 13 weeks ended
May 5, 2001 and April 29, 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7-9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
PART II. OTHER INFORMATION 9-10
SIGNATURE PAGE 10
2
HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
May 5, 2001 February 3, 2001 (a)
ASSETS
Current Assets
Cash and cash equivalents $ 44,687,000 $ 51,288,000
Inventory 26,243,000 21,336,000
Prepaid expenses and other 7,079,000 5,552,000
Deferred tax asset 944,000 944,000
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Total current assets 78,953,000 79,120,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 35,207,000 31,300,000
Leasehold improvements 33,698,000 29,135,000
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68,905,000 60,435,000
Less accumulated depreciation 23,226,000 21,270,000
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Net leaseholds, fixtures and equipment 45,679,000 39,165,000
Deposits and other assets 104,000 101,000
Long term: Deferred tax asset 260,000 260,000
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Total Assets $124,996,000 $118,646,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 8,864,000 $ 6,632,000
Accrued payroll and related expenses 7,673,000 10,093,000
Accrued sales and other taxes payable 1,122,000 1,103,000
Income taxes payable 1,966,000 --
Current portion of capital lease obligations 23,000 38,000
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Total current liabilities 19,648,000 17,866,000
Deferred rent 1,477,000 1,404,000
Capital lease obligations, less current portion 130,000 85,000
Shareholders' equity
Common shares, no par value;
50,000,000 shares authorized; 20,501,092 and
20,293,855 issued and outstanding at
May 5, 2001 and February 3, 2001, respectively 50,532,000 49,429,000
Retained earnings 53,209,000 49,862,000
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Total shareholders' equity 103,741,000 99,291,000
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Total liabilities and shareholders' equity $124,996,000 $118,646,000
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(a) - The balance sheet at Feb. 3, 2001 is derived from the audited financial
statements at that date.
See accompanying notes to consolidated financial statements.
3
HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter
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(13 weeks ended)
May 5, 2001 April 29, 2000
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Net Sales $62,927,000 $44,839,000
Cost of goods sold, including buying,
distribution and occupancy costs 39,449,000 28,070,000
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Gross Margin 23,478,000 16,769,000
Selling, general, and administrative expenses 18,735,000 13,312,000
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Operating Income 4,743,000 3,457,000
Interest income-net 570,000 421,000
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Income before income taxes 5,313,000 3,878,000
Provision for income taxes 1,966,000 1,435,000
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Net income $ 3,347,000 $ 2,443,000
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Net income per share
Basic $ 0.16 $ 0.13
Diluted $ 0.15 $ 0.12
Weighted average shares outstanding
Basic 20,407,000 19,441,000
Diluted 22,246,000 21,016,000
See accompanying notes to consolidated financial statements.
4
HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Year-to-date (13 weeks) ended
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May 5, 2001 April 29, 2000
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Operating activities:
Net income $ 3,347,000 $ 2,443,000
Adjustments to reconcile net
income to net cash flows provided by
(used in) operating activities:
Depreciation and amortization 2,361,000 1,772,000
Deferred rent 74,000 77,000
Deferred compensation -- 7,000
Loss on disposal of fixed assets 53,000 14,000
Changes in operating assets and liabilities:
Inventory (4,908,000) (4,653,000)
Prepaid expenses and other (1,527,000) (1,755,000)
Accounts payable 2,232,000 2,026,000
Accrued payroll and related expenses (2,420,000) (2,482,000)
Accrued sales and other taxes payable 19,000 213,000
Income taxes payable 1,966,000 (4,126,000)
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Net cash provided by (used in) operating activities 1,197,000 (6,464,000)
Investing Activities:
Purchases of property and equipment (8,954,000) (3,286,000)
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Net cash used in investing activities (8,954,000) (3,286,000)
Financing Activities:
Payments on capital lease obligations 54,000 (8,000)
Proceeds from exercise of stock options 1,102,000 1,633,000
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Net cash provided by financing activities 1,156,000 1,625,000
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Decrease in cash and cash equivalents (6,601,000) (8,125,000)
Cash and cash equivalents at the beginning of period 51,288,000 39,550,000
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Cash and cash equivalents at the end of period $ 44,687,000 $ 31,425,000
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Supplemental Information:
Cash paid during the period for interest $ 5,000 $ 7,000
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Cash paid during the period for income taxes $ 604,000 $ 5,816,000
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See accompanying notes to consolidated financial statements.
5
HOT TOPIC, INC. and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. Organization and Basis of Presentation:
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Hot Topic, Inc. (the "Company") is a mall-based specialty retailer of
music-licensed and music-influenced apparel, accessories and gift items for
young men and women principally between the ages of 12 and 22. In the first
quarter of fiscal 2001 (the fiscal year ending February 2, 2002) the Company
also launched a second retail concept with the opening of three stores under the
trade name Torrid(TM). Torrid offers a selection of apparel, lingerie, shoes and
accessories centered around various lifestyles for plus-size women between the
ages of 15 and 30. At the end of the first quarter (May 5, 2001), the Company
operated 293 Hot Topic stores and three Torrid stores in 45 states throughout
the United States.
The information set forth in these financial statements is unaudited
except for the February 3, 2001 Balance Sheet. These statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information, the instructions to Form 10-Q, and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation have been included.
The results of operations for the 13 weeks ended May 5, 2001 are not necessarily
indicative of the results that may be expected for the year ending February 2,
2002. For further information, refer to the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
February 3, 2001.
NOTE 2. Net Income Per Share:
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The Company computes net income per share pursuant to Statement of
Financial Accounting Standards Board No. 128 "Earnings Per Share" (Statement No.
128). Basic net income per share is computed based on the weighted average
number of shares outstanding for the period. Diluted net income per share is
computed based on the weighted average number of common and potentially dilutive
common stock equivalents outstanding for the period. A two-for-one stock split
became effective December 27, 2000. All share and per share amounts have been
restated to reflect the split.
6
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis should be read in conjunction with the
Company's Consolidated Financial Statements and the Notes related thereto.
RESULTS OF OPERATIONS
13 Weeks Ended May 5, 2001 (First Quarter of Fiscal 2001) Compared to 13 Weeks
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Ended April 29, 2000 (First Quarter of Fiscal 2000)
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Net sales increased $18,088,000, or 40.3%, to $62,927,000 during the
first quarter of fiscal 2001 from $44,839,000 during the first quarter of fiscal
2000. The increased net sales in the first quarter of fiscal 2001 were
attributable to an increase in the number of stores, and to an 8.0% increase in
comparable store sales as compared to the corresponding 13 weeks last year. Net
sales for the 89 stores not yet qualifying as comparable stores contributed
approximately $14,700,000 of the increase in net sales. The comparable store
sales increase of 8.0% contributed approximately $3,400,000 of the increase in
net sales. In the first quarter of fiscal 2000, comparable store sales increased
by 24.1%. Sales of apparel category merchandise, as a percentage of total net
sales, were 51% in the first quarter of fiscal 2001 compared to 50% in the first
quarter of fiscal 2000.
Gross margin increased approximately $6,709,000 to $23,478,000 during
the first quarter of fiscal 2001 from $16,769,000 during the first quarter of
fiscal 2000. As a percentage of net sales, gross margin decreased to 37.3%
during the first quarter of fiscal 2001 from 37.4% in the first quarter of
fiscal 2000. The decrease in gross margin as a percentage of net sales reflects
a slight increase in occupancy expenses related to higher common area
maintenance charges partially offset by higher merchandise margins. The
Company's merchandise margins, as a percentage of sales, were approximately ten
basis points higher in the first quarter of 2001 compared to the first quarter
of 2000, principally from lower markdowns as a percentage of sales.
Selling, general and administrative expenses increased approximately
$5,423,000 to $18,735,000 during the first quarter of fiscal 2001 from
$13,312,000 during the first quarter of fiscal 2000, and increased as a
percentage of net sales to 29.8% in the first quarter of fiscal 2001 from 29.7%
in the first quarter of fiscal 2000. The increase as a percentage of net sales
was primarily attributable to an increase in store payroll, pre-opening expenses
from opening up 20 new Hot Topic stores in the first quarter of fiscal 2001
versus twelve new Hot Topic stores in the first quarter of fiscal 2000, and
development and pre-opening expenses related to the opening of three Torrid
stores in the first quarter of fiscal 2001. These expenses were offset in part
by a reduction in other store expenses as a percentage of net sales due to the
operating leverage achieved through the higher comp store sales for the quarter
as well as these expenses being down on an average per store basis in the first
quarter of fiscal 2001 compared to the first quarter of fiscal 2000.
Operating income increased approximately $1,286,000 to $4,743,000
during the first quarter of fiscal 2001 from $3,457,000 during the first quarter
of fiscal 2000. As a percentage of net sales, the operating income was 7.5% in
the first quarter of fiscal 2001 compared to 7.7% in the first quarter of fiscal
2000.
Interest income, net, increased approximately $149,000 to $570,000 in
the first quarter of fiscal 2001 from $421,000 in the first quarter of fiscal
2000, principally due to higher average cash balances.
7
LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the first quarter of fiscal 2001, the
Company's primary uses of cash have been to finance store openings and purchase
merchandise inventories. The Company has historically satisfied its cash
requirements principally from cash flows from operations, and, in earlier years,
also from proceeds from the sale of equity securities.
Cash flows provided by (used in) operating activities were $1,198,000
and ($6,464,000) in the first quarters of fiscal 2001 and 2000, respectively.
The increase in cash flows provided by operating activities in the first quarter
of fiscal 2001 was primarily due to an increase in income taxes payable related
to the timing of income tax payments, as well as an increase in net income in
the first quarter of fiscal 2001 compared to the first quarter of fiscal 2000.
The changes in other items of working capital for the first quarter of fiscal
2001 were consistent with the fiscal 2000 quarter.
Cash flows used in investing activities were ($8,953,000) and
($3,286,000) in the first quarters of fiscal 2001 and 2000, respectively. Cash
flows used in investing activities relate primarily to store openings and the
purchase of computer hardware and software. The higher capital expenditures over
the first quarter of fiscal 2000 relate primarily to the opening of eleven more
new stores (including three Torrid stores) in the first quarter of fiscal 2001
compared to the first quarter of fiscal 2000 as well as expenditures related to
new store openings in early second quarter fiscal 2001 (eight May 2001 new Hot
Topic store openings and three new Torrid store openings versus eight May 2000
new Hot Topic store openings), and expenditures made for the new point of sale
equipment being rolled out to all existing stores between March 2001 and October
2001.
Cash flows provided by financing activities were $1,156,000 and
$1,625,000 in the first quarter of fiscal 2001 and 2000, respectively. This
decrease was primarily due to lower proceeds received from the exercise of stock
options in the first quarter of fiscal 2001 versus the first quarter of fiscal
2000.
The Company believes that its current cash balances and cash generated
from operations will be sufficient to fund its operations and planned expansion
through at least the next 12 months.
QUARTERLY RESULTS AND SEASONALITY
The Company's quarterly results of operations may fluctuate materially
depending on, among other things, the timing of store openings and related
pre-opening and other startup expenses, net sales contributed by new stores,
increases or decreases in comparable store sales, releases of new music and
music-related products, shifts in timing of certain holidays, changes in the
Company's merchandise mix and overall economic conditions.
The Company's business is also subject to seasonal influences, with
heavier concentrations of sales during the Christmas, back-to-school and
Halloween seasons, and other periods when schools are not in session. The
Christmas holiday season remains the Company's single most important selling
season. The Company believes, however, that the importance of the summer
vacation and back-to-school seasons (which affect operating results in the
second and third quarters, respectively) and to a lesser extent, the spring
break season (which affects operating results in the first quarter) as well as
Halloween, (which affects operating results in the third quarter) all reduce the
Company's dependence on the Christmas holiday selling season. Furthermore,
summer vacation, spring break and the back-to-school seasons take place at
somewhat different times in different parts of the country, spreading the impact
8
of these events on the Company's sales over a longer period. As is the case with
many retailers of apparel, accessories and related merchandise, the Company
typically experiences lower first fiscal quarter net sales relative to other
quarters.
STATEMENT REGARDING FORWARD LOOKING DISCLOSURE
Certain sections of this Quarterly Report on Form 10-Q, including the
preceding "Management's Discussion and Analysis of Financial Condition and
Results of Operations," contain various forward looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, which represent the
Company's expectations or beliefs concerning future events. These forward
looking statements involve risks and uncertainties, and the Company cautions
that these statements are further qualified by important factors that could
cause actual results to differ materially from those in the forward looking
statements, including, without limitation, the sufficiency of the Company's
working capital and cash flows from operating activities, the implementation and
management of the Company's growth strategy - (including the Company's new
retail concept Torrid), the demand for the merchandise offered by the Company,
the ability of the Company to obtain adequate merchandise supply, the ability of
the Company to gauge the fashion tastes of its customers and provide merchandise
that satisfies customer demand, the effect of economic conditions, the effect of
severe weather or natural disasters, and the effect of competitive pressures
from other retailers as well as other risks detailed from time to time in the
Company's SEC reports, including the Company's Annual Report on Form 10-K for
the fiscal year ended February 3, 2001.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. - OTHER INFORMATION
Items 1 - 5 are not applicable.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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3.1 Amended and Restated Articles of Incorporation. (1)
3.2 Amended and Restated Bylaws. (3)
4.1 Reference is made to Exhibits 3.1 and 3.2.
4.2 Specimen stock certificate. (1)
10.13 Form of Restricted Stock Bonus Agreement entered
into between the Company and each of its
non-employee directors as of March 7, 2001 (with
Robert Jaffe for 1,270 shares, and with each of
Bruce Quinnell, Edgar Berner, Andrew Schuon and
Corrado Federico for 1,058 shares).
(1) Filed as an exhibit to Registrant's Registration Statement on Form
SB-2 (No. 333-5054-LA) and incorporated herein by reference.
(2) Filed as an exhibit to Registrant's Annual Report on Form 10-K for
the year ended January 30, 1999 and incorporated herein by
reference.
9
(3) Filed as an exhibit to Registrant's Annual Report on Form 10-K for
the year ended February 3, 2001 and incorporated herein by
reference.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the period.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hot Topic, Inc.
(Registrant)
Date: 6/15/2001 /s/ Elizabeth M. McLaughlin
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Elizabeth M. McLaughlin
Chief Executive Officer, President and Director
(Principal Executive Officer)
Date: 6/15/2001 /s/ Jim McGinty
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Jim McGinty
Chief Financial Officer
(Principal Financial and Accounting Officer)
10