10-Q 1 0001.txt HOT TOPIC, INC. 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 ------------- ------------- COMMISSION FILE NUMBER: 0-28784 HOT TOPIC, INC. --------------- (Exact name of Registrant as Specified in Its Charter) CALIFORNIA 77-0198182 ---------- ---------- (State of Incorporation) (IRS Employer Identification No.) 18305 EAST SAN JOSE AVE., CITY OF INDUSTRY, CA 91748 ---------------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (Telephone Number of Registrant) (626) 839-4681 -------------- 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)
HOT TOPIC, INC. INDEX TO FORM 10-Q 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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HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) Oct. 28, 2000 Jan 29, 2000(a) ------------- ------------- 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 ------------- ------------- 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 ------------- ------------- 59,695,000 46,815,000 Less accumulated depreciation 20,788,000 15,094,000 ------------- ------------- Net leaseholds, fixtures and equipment 38,907,000 31,721,000 Deposits and other assets 101,000 83,000 ------------- ------------- Total Assets $112,410,000 $ 89,023,000 ============= ============= 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 ------------- ------------- 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 ------------- ------------- Total shareholders' equity 82,265,000 67,278,000 ------------- ------------- Total liabilities and Shareholders' equity $112,410,000 $ 89,023,000 ============= =============
-------- (a) The balance sheet at Jan. 29, 2000 is derived from the audited financial statements at that date. See accompanying notes. 3 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Third Quarter (13 weeks ended) --------------------------- Oct. 28, 2000 Oct.30, 1999 Net sales $72,203,000 $47,964,000 Cost of goods sold, including buying, distribution and occupancy costs 42,993,000 28,945,000 ------------ ------------ Gross margin 29,210,000 19,019,000 Selling, general and administrative expenses 18,045,000 12,443,000 ------------ ------------ Operating income 11,165,000 6,576,000 Interest income-net 449,000 205,000 ------------ ------------ Income before income taxes 11,614,000 6,781,000 Provision for income taxes 4,297,000 2,475,000 ------------ ------------ 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.
4 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Nine Months (39 weeks ended) --------------------------------- Oct. 28, 2000 Oct. 30, 1999 Net sales $168,759,000 $109,029,000 Cost of goods sold, including buying, distribution and occupancy costs 103,494,000 68,851,000 ------------- ------------- Gross margin 65,265,000 40,178,000 Selling, general and administrative expenses 46,066,000 31,183,000 ------------- ------------- Operating income 19,199,000 8,995,000 Interest income-net 1,247,000 601,000 ------------- ------------- Income before income taxes 20,446,000 9,596,000 Provision for income taxes 7,565,000 3,503,000 ------------- ------------- Net income $ 12,881,000 $ 6,093,000 ============= ============= 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.
5 HOT TOPIC, INC. and SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
Year-to-date (39 weeks) ended ----------------------------- Operating Activities: Oct. 28, 2000 Oct. 30, 1999 ------------- ------------- 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 ------------- ------------- 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) ------------- ------------- 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 ------------- ------------- Net cash provided by (used in) financing activities 2,072,000 (551,000) ------------- ------------- 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 ------------- ------------- Cash and cash equivalents at the end of period $ 41,362,000 $ 22,324,000 ============= ============= 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.
6 HOT TOPIC, INC. and SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. Organization and Basis of Presentation: --------------------------------------- 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: --------------------- 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 ----------- ------------ ------------ 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 ------------ ------------ Total $ 7,480,000 $ 1,581,000 ============ ============ NOTE 4. Subsequent Event ---------------- 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 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) --------------------------------------------------------------- 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 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 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 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 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 ---------- --------------------------- Elizabeth M. McLaughlin President and Chief Executive Officer (principal executive officer) Date: 12/12/2000 /S/ Jay A. Johnson ---------- ------------------ Jay A. Johnson Chief Financial Officer (principal financial and accounting officer) 12