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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 April 29, 2000
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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 2, 2000 - 9,868,883 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 - April 29, 2000 and January 29, 2000 3
Consolidated Statements of Income for the
13 weeks ended April 29, 2000 and May 1, 1999 4
Consolidated Statements of Cash Flows for the 13
weeks ended April 29, 2000 and May 1, 1999 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 Disclosure about Market Risk 9
PART II. OTHER INFORMATION 9
SIGNATURE PAGE 9
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<TABLE>
HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
April 29, 2000 Jan 29, 2000(a)
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 31,425,000 $ 39,550,000
Inventory 20,020,000 15,367,000
Prepaid expenses and other 3,336,000 1,580,000
Deferred tax asset 721,000 721,000
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Total current assets 55,502,000 57,218,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 26,816,000 25,396,000
Leasehold improvements 23,138,000 21,419,000
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49,954,000 46,815,000
Less accumulated depreciation 16,733,000 15,094,000
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Net leaseholds, fixtures and equipment 33,221,000 31,721,000
Deposits and other assets 82,000 83,000
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Total Assets $ 88,805,000 $ 89,022,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $8,241,000 $6,215,000
Accrued payroll and related expenses 5,970,000 8,452,000
Accrued sales and other taxes payable 851,000 638,000
Income taxes payable 163,000 4,289,000
Current portion of capital
lease obligations 59,000 60,000
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Total current liabilities 15,284,000 19,654,000
Deferred rent 1,181,000 1,104,000
Capital lease obligations, less
current portion 164,000 171,000
Deferred tax liability 816,000 816,000
Shareholders' equity
Common shares, no par value; 50,000,000
shares authorized; 9,834,791 and
9,660,844 issued and outstanding at
April 29, 2000 and January 29, 2000,
respectively 42,301,000 40,668,000
Deferred compensation - (7,000)
Retained earnings 29,059,000 26,616,000
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Total shareholders' equity 71,360,000 67,277,000
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Total liabilities and
shareholders' equity $ 88,805,000 $ 89,022,000
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</TABLE>
(a) - The balance sheet at Jan. 29, 2000 is derived from the audited financial
statements at that date. See accompanying notes.
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
First Quarter
(13 weeks ended)
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April 29, 2000 May 1, 1999
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Net sales $ 44,839,000 $ 28,286,000
Cost of goods sold, including
buying, distribution and
occupancy costs 28,070,000 18,540,000
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Gross margin 16,769,000 9,746,000
Selling, general and
administrative expenses 13,312,000 8,965,000
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Operating income 3,457,000 781,000
Interest income-net 421,000 219,000
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Income before income taxes 3,878,000 1,000,000
Provision for income taxes 1,435,000 365,000
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Net income $ 2,443,000 $ 635,000
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Net income per share
Basic $ 0.25 $ 0.07
Diluted $ 0.23 $ 0.07
Weighted average shares outstanding
Basic 9,721,000 9,242,000
Diluted 10,508,000 9,424,000
See accompanying notes.
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<TABLE>
HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
<CAPTION>
Year-to-date
(13 weeks) ended
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April 29, 2000 May 1, 1999
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<S> <C> <C>
Net income $ 2,443,000 $ 635,000
Adjustments to reconcile net
income to net cash flows
used in operating activities:
Depreciation and amortization 1,772,000 1,211,000
Deferred rent 77,000 144,000
Deferred compensation 7,000 9,000
Loss on disposal of fixed assets 14,000 3,000
Changes in operating assets and liabilities:
Inventory (4,653,000) (2,527,000)
Prepaid expenses and other (1,755,000) (865,000)
Accounts payable 2,026,000 2,268,000
Accrued payroll and related expenses (2,482,000) (363,000)
Accrued sales and other taxes payable 213,000 205,000
Income taxes payable (4,126,000) (1,654,000)
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Net cash used
in operating activities (6,464,000) (934,000)
Investing Activities:
Purchases of property and equipment (3,286,000) (4,319,000)
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Net cash used in investing activities (3,286,000) (4,319,000)
Financing Activities:
Payments on capital lease
obligations (8,000) (7,000)
Repurchase common shares - (1,065,000)
Proceeds from exercise of stock options 1,633,000 1,000
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Net cash provided
by (used in) financing activities 1,625,000 (1,071,000)
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Decrease in cash and cash equivalents (8,125,000) (6,324,000)
Cash and cash equivalents
at the beginning of period 39,550,000 24,574,000
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Cash and cash equivalents
at the end of period $ 31,425,000 $ 18,250,000
============== ==============
Supplemental Information:
Cash paid during the period
for interest $ 7,000 $ 4,000
Cash paid during the period
for income taxes $ 5,816,000 $ 2,018,000
</TABLE>
See accompanying notes.
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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. At the end of the
quarter (April 29, 2000), the Company operated 224 stores in 43 states
throughout the United States.
The information set forth in these financial statements is unaudited
except for the January 29, 2000 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 April 29, 2000 are not
necessarily indicative of the results that may be expected for the year ending
February 3, 2001. 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 January 29, 2000.
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.
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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 April 29, 2000 (First Quarter of Fiscal 2000)
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Compared to 13 Weeks Ended May 1, 1999 (First Quarter of Fiscal 1999)
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Net sales increased $16,553,000, or 58.5%, to $44,839,000 during the
first quarter of fiscal 2000 from $28,286,000 during the first quarter of fiscal
1999. The increased net sales in the first quarter of fiscal 2000 were
attributable to an increase in the number of stores, and to a 24.1% increase in
comparable store sales as compared to the first quarter of fiscal 1999. Net
sales for the 67 stores not yet qualifying as comparable stores contributed
approximately $10,150,000 of the increase in net sales. The comparable store
sales increase of 24.1% contributed approximately $6,400,000 of the increase in
net sales. In the first quarter of fiscal 1999, comparable store sales increased
by 15.3%. Sales of apparel category merchandise, as a percentage of total net
sales, were 50% in the first quarter of 2000 compared to 47% in the first
quarter of 1999.
Gross margin increased approximately $7,023,000 to $16,769,000 during
the first quarter of fiscal 2000 from $9,746,000 during the first quarter of
fiscal 1999. As a percentage of net sales, gross margin increased to 37.4%
during the first quarter of fiscal 2000 from 34.5% in the first quarter of
fiscal 1999. The increase in gross margin as a percentage of net sales reflects
an increase in merchandise margins and the leveraging of occupancy expenses by
the higher average net sales per store, both offset in part by higher
distribution costs. The Company's merchandise margins, as a percentage of sales,
were approximately 1.2% higher in the first quarter of 2000 compared to the
first quarter of 1999, principally from an average higher initial mark up and
lower shrinkage. As a percentage of sales, distribution costs increased in the
first quarter of fiscal 2000 compared to the first quarter of fiscal 1999,
principally from higher rent expense for the new distribution center that the
Company moved into during the second quarter of fiscal 1999.
Selling, general and administrative expenses increased approximately
$4,347,000 to $13,312,000 during the first quarter of fiscal 2000 from
$8,965,000 during the first quarter of fiscal 1999, but decreased as a
percentage of net sales to 29.7% in the first quarter of fiscal 2000 from 31.7%
in the first quarter of fiscal 1999. The decrease as a percentage of net sales
was primarily attributable to a reduction of general and administrative expense
as a percentage of net sales due to the operating leverage achieved through the
higher average sales per store.
Operating income increased approximately $2,676,000 to $3,457,000
during the first quarter of fiscal 2000 from $781,000 during the first quarter
of fiscal 1999. As a percentage of net sales, the operating income was 7.7% in
the first quarter of fiscal 2000 compared to 2.8% in the first quarter of fiscal
1999.
Interest income, net, increased approximately $202,000 to $421,000 in
the first quarter of fiscal 2000 from $219,000 in the first quarter of fiscal
1999, principally due to higher average cash balances.
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LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the first quarter of fiscal 2000, 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 used in operating activities were ($6,464,000) and
($934,000) in the first quarter of fiscal 2000 and 1999, respectively. The
increase in cash flows used in operating activities in the first quarter of
fiscal 2000 was primarily due to the increase in inventories, payments of
bonuses earned in fiscal 1999 and payment of income taxes, all net of an
increase in net income.
Cash flows used in investing activities were ($3,286,000) and
($4,319,000) in the first quarter of fiscal 2000 and 1999, respectively. Cash
flows used in investing activities relate primarily to store openings, computer
hardware and software and, in 1999, also to the construction, equipment,
fixtures and furniture for the Company's new headquarters and merchandise
distribution facility. The Company opened 12 and 10 stores in the first quarter
of fiscal 2000 and 1999, respectively.
Cash flows provided by (used in) financing activities were $1,625,000
and ($1,071,000) in the first quarter of fiscal 2000 and 1999, respectively. In
the first quarter of fiscal 1999, the company used $1,065,000 to repurchase
69,000 shares of its Common Stock. In addition, $1,633,000 was received on the
exercise of stock options in the first quarter of fiscal 2000 compared to $1,000
in the first quarter of fiscal 1999.
The Company believes that its current cash balances and cash generated
from operations will be sufficient to fund its operations and planned expansion
through fiscal 2000.
SEASONALITY
The Company's business is subject to seasonal influences, with heavier
concentrations of sales during the Christmas holiday, back-to-school season, the
Halloween holiday and other periods when schools are not in session. The
Christmas holiday season remains the Company's single most important selling
season. As is the case with many retailers of apparel, accessories and related
merchandise, the Company typically experiences lower net sales during the first
fiscal quarter. The Company does not believe that inflation has had a material
adverse effect on its net sales or results of operations. The Company has
generally been able to pass on increased costs related to inflation through
increases in selling prices.
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 (the
"Securities Act"), and Section 21E of the Exchange Act, 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
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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, 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 January 29, 2000.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE 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
27.1 Financial Data Schedule
(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: 6/5/2000 /s/ Orval D. Madden
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Orval D. Madden
Chief Executive Officer (principal
executive officer)
Date: 6/5/2000 /s/ Jay A. Johnson
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Jay A. Johnson
Chief Financial Officer
(principal financial and accounting
officer)
9
