10-Q 1 hottopic_10q-0501.txt 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 ------------- ------------- 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: June 7, 2001 - 20,542,162 shares, no par value. -------------- -------------------------------- 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 ------------- ------------- 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 ------------- ------------- 68,905,000 60,435,000 Less accumulated depreciation 23,226,000 21,270,000 ------------- ------------- 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 ------------- ------------- Total Assets $124,996,000 $118,646,000 ============= ============= 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 ------------- ------------- 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 ------------- ------------- Total shareholders' equity 103,741,000 99,291,000 ------------- ------------- Total liabilities and shareholders' equity $124,996,000 $118,646,000 ============= =============
(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 ------------- (13 weeks ended) May 5, 2001 April 29, 2000 ------------------------------ Net Sales $62,927,000 $44,839,000 Cost of goods sold, including buying, distribution and occupancy costs 39,449,000 28,070,000 ------------ ------------ Gross Margin 23,478,000 16,769,000 Selling, general, and administrative expenses 18,735,000 13,312,000 ------------ ------------ Operating Income 4,743,000 3,457,000 Interest income-net 570,000 421,000 ------------ ------------ Income before income taxes 5,313,000 3,878,000 Provision for income taxes 1,966,000 1,435,000 ------------ ------------ Net income $ 3,347,000 $ 2,443,000 ============ ============ 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 ------------------------------ May 5, 2001 April 29, 2000 ------------------------------ 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) ------------- ------------- 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) ------------- ------------- 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 ------------- ------------- Net cash provided by financing activities 1,156,000 1,625,000 ------------- ------------- 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 ------------- ------------- Cash and cash equivalents at the end of period $ 44,687,000 $ 31,425,000 ============= ============= Supplemental Information: Cash paid during the period for interest $ 5,000 $ 7,000 ============= ============= Cash paid during the period for income taxes $ 604,000 $ 5,816,000 ============= =============
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: --------------------------------------- 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: --------------------- 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 ------------------------------------------------------------------------------ Ended April 29, 2000 (First Quarter of Fiscal 2000) --------------------------------------------------- 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 ------ ----------------------- 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 --------- --------------------------- Elizabeth M. McLaughlin Chief Executive Officer, President and Director (Principal Executive Officer) Date: 6/15/2001 /s/ Jim McGinty --------- --------------------------- Jim McGinty Chief Financial Officer (Principal Financial and Accounting Officer) 10