NOTE 2. Recent Business Events

Strategic Business Changes In March 2011, our Board of Directors, or the Board, approved certain strategic business changes to better position the company for growth. The business changes involved discontinuing the operations of ShockHound; writing down inventory due to a change in management’s inventory strategy; writing down property and equipment that are no longer critical to our strategic direction; and implementing other strategic business and operational initiatives. As of the end of the second quarter of fiscal 2011, we had recorded all charges related to the strategic business changes.

Cost Reduction Plan In November 2010, our Board approved a cost reduction plan, designed to meet the challenges of the environment at that time, which involved closing approximately 50 underperforming stores, a majority of which closed by the end of the first quarter of fiscal 2011. These closures occurred as a result of natural lease expirations, exercising lease kick out clauses and other negotiations. The cost reduction plan also included reducing our home office and field management positions, reducing planned capital expenditures in fiscal 2011 relative to fiscal 2010 and implementing other non-payroll overhead expense reduction initiatives. As of the end of the second quarter of fiscal 2011, we had recorded all charges related to the cost reduction plan, completed the announced reduction of our home office and field management positions, and completed the implementation of non-payroll overhead expense reduction initiatives as part of the cost reduction plan. As of the end of the third quarter of fiscal 2011, we closed 35 Hot Topic stores and six Torrid stores.

The following table details charges related to the strategic business changes and cost reduction plan recorded since their implementation in the first quarter of fiscal 2011 and the fourth quarter of fiscal 2010, respectively, (in thousands).

				Non-Store Related
				Severance and			Inventory and
	Store Related			Outplacement			Asset-Related			Consulting			Stock Option
	Closure Costs 1			Costs			Costs 2			Fees			Expense			Total
Balance at October 30, 2010	$	-		$	-		$	-		$	-		$	-		$	-
Cost Reduction Plan charges		(7,077	)		(1,850	)		(830	)		-			-			(9,757	)
Cash payments		93			985			-			-			-			1,078
Non-cash adjustments		6,497			-			830			-			-			7,327
Balance at January 29, 2011	$	(487	)	$	(865	)	$	-		$	-		$	-		$	(1,352	)
Cost Reduction Plan recovery		365			-			-			-			-			365
Strategic Business Changes charges		-			(1,583	)		(9,605	)		(1,606	)		-			(12,794	)
Cash payments		699			889			-			1,645			-			3,233
Non-cash adjustments		(659	)		-			4,891			-			-			4,232
Balance at April 30, 2011	$	(82	)	$	(1,559	)	$	(4,714	)	$	39		$	-		$	(6,316	)
Cost Reduction Plan recovery		174			-			-			-			-			174
Strategic Business Changes charges		-			(1,330	)		(532	)		(1,383	)		(1,072	)		(4,317	)
Cash payments		144			812			182			753			-			1,891
Non-cash adjustments		(455	)		-			4,866			-			1,072			5,483
Balance at July 30, 2011	$	(219	)	$	(2,077	)	$	(198	)	$	(591	)	$	-		$	(3,085	)
Cash payments		197			464			-			473			-			1,134
Non-cash adjustments		22			(43	)		18			20			-			17
Balance at October 29, 2011	$	-		$	(1,656	)	$	(180	)	$	(98	)	$	-		$	(1,934	)

1 Store related closure costs represent charges for the closure of approximately 50 underperforming stores. Such charges include the write down and accelerated depreciation of store assets, the write down of inventory, early lease terminations and store severance, partially offset by certain credits and allowances.

2 Inventory and asset-related costs represent charges related to the write down and impairment of inventory and non-critical property and equipment.

We recorded charges related to store closures, write down of assets; store severance; non-store related severance and outplacement; consulting fees; and stock option expense in selling, general and administrative expenses in our consolidated statements of operations. Charges related to the write down of store inventory; accelerated depreciation of store assets; and early lease terminations were recorded in cost of goods sold in our consolidated statements of operations.

Third Quarter Fiscal 2010 Non-Cash Impairment Charge and Fiscal 2011 Discontinued Operations

During the third quarter of fiscal 2010, we concluded that ShockHound’s assets had become impaired due to its slower than expected revenue growth. Revenues from partnerships entered into in the earlier part of fiscal 2010, as well as other revenues, did not build as much as we had anticipated. In the third quarter of fiscal 2010, we recorded an impairment charge of $3 million to selling, general and administrative expenses in our consolidated statements of operations. The assessment of our long-lived assets for impairment is discussed in more detail in “NOTE 11 – Valuation of Long-Lived Assets”. In addition, as part of the business changes approved by the Board in March 2011 to better position the company for growth, ShockHound’s operations were discontinued during the second quarter of fiscal 2011.