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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 October 28, 2000
----------------
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: November 30,
2000 - 10,064,298 shares, no par value. - (See Note 4 - Subsequent Event, Stock
Split)
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<CAPTION>
HOT TOPIC, INC.
INDEX TO FORM 10-Q
<S> <C>
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets - October 28, 2000 and January 29, 2000 3
Consolidated Statements of Income for the:
13 and 39 weeks ended October 28, 2000 and October 30, 1999 4-5
Consolidated Statements of Cash Flows for the 39
weeks ended October 28, 2000 and October 30, 1999 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-11
Item 3. Quantitative and qualitative disclosure about market risk 12
PART II. OTHER INFORMATION 12
Item 6. Exhibits and Reports on form 8-K 12
SIGNATURE PAGE 12
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2
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<CAPTION>
HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
Oct. 28, 2000 Jan 29, 2000(a)
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<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 41,362,000 $ 39,550,000
Inventory 23,839,000 15,367,000
Prepaid expenses and other-Note 3 7,480,000 1,581,000
Deferred tax asset 721,000 721,000
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Total current assets 73,402,000 57,219,000
Leaseholds, fixtures and equipment:
Furniture, fixtures and equipment 31,639,000 25,396,000
Leasehold improvements 28,056,000 21,419,000
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59,695,000 46,815,000
Less accumulated depreciation 20,788,000 15,094,000
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Net leaseholds, fixtures and equipment 38,907,000 31,721,000
Deposits and other assets 101,000 83,000
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Total Assets $112,410,000 $ 89,023,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 9,749,000 $ 6,215,000
Accrued payroll and related expenses 9,462,000 8,452,000
Accrued sales and other taxes payable 1,702,000 638,000
Income taxes payable 6,885,000 4,289,000
Current portion of capital
lease obligations 72,000 60,000
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Total current liabilities 27,870,000 19,654,000
Deferred rent 1,327,000 1,104,000
Capital lease obligations, less current portion 132,000 171,000
Deferred tax liability 816,000 816,000
Shareholders' equity
Common shares, no par value; 50,000,000
shares authorized; 9,908,586 and
9,660,844 issued and outstanding at
October 28, 2000 and January 29, 2000,
respectively 42,767,000 40,668,000
Deferred compensation - (7,000)
Retained earnings 39,498,000 26,617,000
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Total shareholders' equity 82,265,000 67,278,000
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Total liabilities and
Shareholders' equity $112,410,000 $ 89,023,000
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(a) The balance sheet at Jan. 29, 2000 is derived from the audited
financial statements at that date.
See accompanying notes.
3
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Third Quarter
(13 weeks ended)
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Oct. 28, 2000 Oct.30, 1999
<S> <C> <C>
Net sales $72,203,000 $47,964,000
Cost of goods sold, including
buying, distribution and
occupancy costs 42,993,000 28,945,000
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Gross margin 29,210,000 19,019,000
Selling, general and
administrative expenses 18,045,000 12,443,000
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Operating income 11,165,000 6,576,000
Interest income-net 449,000 205,000
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Income before income taxes 11,614,000 6,781,000
Provision for income taxes 4,297,000 2,475,000
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Net income $ 7,317,000 $ 4,306,000
============ ============
Net income per share:
Basic $ 0.74 $ 0.47
Diluted $ 0.68 $ 0.44
Weighted average shares outstanding:
Basic 9,897,000 9,286,000
Diluted 10,713,000 9,839,000
See accompanying notes.
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4
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Nine Months
(39 weeks ended)
---------------------------------
Oct. 28, 2000 Oct. 30, 1999
<S> <C> <C>
Net sales $168,759,000 $109,029,000
Cost of goods sold, including
buying, distribution and
occupancy costs 103,494,000 68,851,000
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Gross margin 65,265,000 40,178,000
Selling, general and
administrative expenses 46,066,000 31,183,000
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Operating income 19,199,000 8,995,000
Interest income-net 1,247,000 601,000
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Income before
income taxes 20,446,000 9,596,000
Provision for
income taxes 7,565,000 3,503,000
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Net income $ 12,881,000 $ 6,093,000
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Net income per share:
Basic $ 1.31 $ 0.66
Diluted $ 1.21 $ 0.63
Weighted average shares outstanding:
Basic 9,828,000 9,256,000
Diluted 10,622,000 9,632,000
See accompanying notes.
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5
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HOT TOPIC, INC. and SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
<CAPTION>
Year-to-date (39 weeks) ended
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Operating Activities: Oct. 28, 2000 Oct. 30, 1999
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<S> <C> <C>
Net income $ 12,881,000 $ 6,093,000
Adjustments to reconcile net
income to net cash flows provided by
operating activities:
Depreciation and amortization 5,848,000 4,179,000
Deferred rent 223,000 281,000
Deferred compensation 7,000 27,000
Loss on disposal of fixed assets 70,000 192,000
Changes in operating assets and liabilities:
Inventory (8,472,000) (6,131,000)
Prepaid expenses and other (5,899,000) (1,655,000)
Deposits and other assets (18,000) 8,000
Accounts payable 3,534,000 4,665,000
Accrued payroll and related expenses 1,010,000 3,616,000
Accrued sales and other taxes payable 1,064,000 548,000
Income taxes payable 2,596,000 1,461,000
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Net cash provided by operating activities 12,844,000 13,284,000
Investing Activities:
Purchases of property and equipment (13,104,000) (14,983,000)
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Net cash used in investing activities (13,104,000) (14,983,000)
Financing Activities:
Payments on capital lease obligations (27,000) (25,000)
Repurchase of common shares -- (1,065,000)
Proceeds from exercise of stock options 2,099,000 539,000
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Net cash provided by (used in)
financing activities 2,072,000 (551,000)
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Increase/(Decrease)in cash
and cash equivalents 1,812,000 (2,250,000)
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 $ 41,362,000 $ 22,324,000
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Supplemental Information:
Cash paid during the period
for interest $ 24,000 $ 24,000
Cash paid during the period
for income taxes $ 9,772,000 $ 2,358,000
Capital lease obligations
entered into for equipment -- $ 112,000
See accompanying notes.
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6
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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 (October 28, 2000), the Company operated 267 stores in 45 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 and 39 weeks ended October 28, 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.
NOTE 3. Prepaid Expense and Other:
--------------------------
The components of prepaid expenses is as follows:
OCT. 28, 2000 JAN. 29, 2000
DESCRIPTION $ AMOUNT $ AMOUNT
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Accounts Receivable $ 1,788,000 $ 868,000
Prepaid Corporate Taxes 4,799,000 35,000
Supply Inventory 605,000 512,000
Miscellaneous other 288,000 166,000
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Total $ 7,480,000 $ 1,581,000
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NOTE 4. Subsequent Event
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On December 1, 2000, the Company's Board of Directors approved a
two-for-one stock split to be implemented as a 100% stock dividend. On the
effective date of December 27, 2000, each Hot Topic shareholder of record as of
December 14, 2000 will receive one additional share of Common Stock for each
share of Common Stock held. In addition, the number of shares of Common Stock
reserved for issuance or subject to outstanding options granted under Hot
Topic's stock plans will increase by 100%.
7
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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 October 28, 2000 (Third Quarter of Fiscal 2000) Compared to
13 Weeks Ended October 30, 1999 (Third Quarter of Fiscal 1999)
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Net sales increased $24,239,000 or 50.5%, to $72,203,000 during the
third quarter of fiscal 2000 from $47,964,000 during the third quarter of fiscal
1999. The increased sales in the third quarter of fiscal 2000 were attributable
to an increase in the number of stores and to a 15.3% increase in comparable
store sales as compared to the third quarter of fiscal 1999. The comparable
store sales increase of 15.3% contributed approximately $17,315,000 of the
increase in net sales. In the third quarter of fiscal 1999, comparable store
sales increased by 26.1% as compared to the third quarter of fiscal 1998. Net
sales for the 90 stores not yet qualifying as comparable stores contributed
approximately $6,924,000 of the increase in net sales. Average sales per store
increased by 12% to approximately $279,000 in the current quarter from $249,000
in last year's third quarter. T-shirt and apparel sales accounted for 54% of
sales in this year's quarter, compared to approximately 52% in last year's third
quarter.
Gross margin increased approximately $10,191,000 to $29,210,000 during
the third quarter of fiscal 2000 from $19,019,000 during the third quarter of
fiscal 1999. As a percentage of net sales, gross margin increased to 40.5%
during the third quarter of fiscal 2000 from 39.7% in the third quarter of
fiscal 1999. The increase in gross margin as a percentage of net sales reflects
primarily an increase in merchandise margins and the leveraging of store
occupancy expenses achieved from the significant increase in the average store
sales volume. The Company's merchandise margins, as a percentage of sales, were
approximately 0.5% higher in the third quarter of 2000 compared to the third
quarter of 1999, principally from lower markdowns as a percentage of sales.
Distribution and buying expenses were also slightly lower as a percentage of
sales in the current quarter compared to the last year's third quarter,
reflecting increased efficiencies.
Selling, general and administrative expenses increased approximately
$5,602,000 to $18,045,000 during the third quarter of fiscal 2000 from
$12,443,000 during the third quarter of fiscal 1999, but decreased as a
percentage of net sales to 25.0% in the third quarter of fiscal 2000 from 25.9%
in the third 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 $4,589,000 to $11,165,000
during the third quarter of fiscal 2000 from $6,576,000 during the third quarter
of fiscal 1999. As a percentage of net sales, the operating income was 15.5% in
the third quarter of fiscal 2000 compared to 13.7% in the third quarter of
fiscal 1999.
8
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Interest income, net, increased approximately $244,000 to $449,000 in
the third quarter of fiscal 2000 from $205,000 in the third quarter of fiscal
1999, principally due to higher average cash balances.
The Company's effective tax rate was 37.0% in the third quarter of
fiscal 2000 and 36.5% in the third quarter of fiscal 1999. The higher rate is
principally attributable to the tax-exempt interest income, which is a smaller
percentage of pre-tax income in the third quarter of fiscal 2000 compared to the
third quarter of fiscal 1999.
39 Weeks Ended October 28, 2000 (First Nine Months of Fiscal 2000) Compared to
39 Weeks Ended October 30, 1999 (First Nine Months of Fiscal 1999)
------------------------------------------------------------------
Net sales increased $59,730,000, or 54.8%, to $168,759,000 during the
first nine months of fiscal 2000 from $109,029,000 during the first nine months
of fiscal 1999. Comparable store sales increased 19.6% and contributed
approximately $47,147,000 of the increase in net sales for the first nine months
of fiscal 2000. In the first nine months of fiscal 1999, comparable store sales
increased by 20.4% as compared to the first nine months of fiscal 1998. Net
sales for the 90 stores not yet qualifying as comparable stores contributed
approximately $12,583,000 of the increase in net sales. The increased sales in
the first nine months of fiscal 2000 were primarily attributable to increases in
the sales of apparel category merchandise and greater efficiencies in the
allocation and distribution of merchandise to the stores.
Gross margin increased approximately $25,087,000 to $65,265,000 during
the first nine months of fiscal 2000 from $40,178,000 during the first nine
months of fiscal 1999. As a percentage of net sales, gross margin increased to
38.7% during the first nine months of fiscal 2000 from 36.9% in the first nine
months of fiscal 1999. The increase in gross margin as a percentage of net sales
reflects primarily an increase in merchandise margins and the leveraging of
occupancy expenses by the higher average net sales per store. The Company's
merchandise margins, as a percentage of sales, were approximately 0.6% higher in
the first nine months of fiscal 2000 compared to the first nine months of fiscal
1999, principally from an average higher initial mark up and lower shrinkage.
Selling, general and administrative expenses increased approximately
$14,883,000 to $46,066,000 during the first nine months of fiscal 2000 from
$31,183,000 during the first nine months of fiscal 1999, but decreased as a
percentage of net sales to 27.3% in the first nine months of fiscal 2000 from
28.6% in the first nine months 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 to $19,199,000 during the first nine months
of fiscal 2000 from $8,995,000 during the first nine months of fiscal 1999. As a
percentage of net sales, operating income was 11.4% for the first nine months of
fiscal 2000 compared to 8.3% for the first nine months of fiscal 1999.
Interest income, net, increased approximately $646,000 to $1,247,000 in
the first nine months of fiscal 2000 from $601,000 in the first nine months of
fiscal 1999, principally due to higher average cash balances.
The Company's effective tax rate was 37.0% in the first nine months of
fiscal 2000 and 36.5% in the first nine months of fiscal 1999. The higher rate
is principally attributable to the tax-exempt interest income, which is a
smaller percentage of pre-tax income in fiscal 2000 compared to fiscal 1999.
9
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LIQUIDITY AND CAPITAL RESOURCES
Historically, as well as during the third quarter and first nine months
of fiscal 2000, the Company's primary uses of cash have been to finance store
openings and to 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.
Working capital at October 28, 2000 was $45,531,000 compared to
$37,564,000 at January 29, 2000.
Cash flows provided by operating activities were $12,844,000 and
$13,204,000 in the first nine months of fiscal 2000 and 1999, respectively. The
decrease in cash flows provided by operating activities in the first nine months
of fiscal 2000 was primarily due to an increase in merchandise inventories, an
increase in prepaid and other assets and a decrease in accounts payable and
accrued payroll in the first nine months of fiscal 2000. These were offset by
increases in net income, depreciation, sales tax payable and an increase in
income taxes payable in the first nine months of fiscal 2000.
Cash flows used in investing activities were ($13,104,000) and
($14,983,000) in the first nine months of fiscal 2000 and 1999, respectively.
Cash flows used in investing activities relate primarily to store openings,
computer hardware and software and, in 1999, to the construction, equipment,
fixtures and furniture for the Company's new headquarters and merchandise
distribution facility. The Company opened 55 and 40 stores in the first nine
months of fiscal 2000 and 1999, respectively.
Cash flows provided by (used in) financing activities were $2,072,000
and ($551,000) in the first nine months of fiscal 2000 and 1999, respectively.
In the first nine months of 2000, $2,099,000 was received on the exercise of
stock options compared to $539,000 in the first nine months of fiscal 1999. In
the first nine months of fiscal 1999 the increase in cash flows used in
financing activities was primarily due to the Company's use of $1,065,000 to
repurchase 138,000 shares of its Common Stock.
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 2001.
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.
10
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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 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 store concepts and Internet store, 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.
11
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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
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: 12/12/2000 /S/ Elizabeth M. McLaughlin
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Elizabeth M. McLaughlin
President and Chief
Executive Officer (principal executive officer)
Date: 12/12/2000 /S/ Jay A. Johnson
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Jay A. Johnson
Chief Financial Officer
(principal financial and accounting officer)
12
