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EDGY HOT TOPIC ON A HOT STREAK

By Kimberly Pfaff

It wasn’t too long ago that teens looking for alternative clothing relied on thrift shops and underground stores to express their own individual style. Now they simply shop at Hot Topic.

Based in City of Industry, Calif., the 12-year-old retailer has brought cutting-edge apparel, accessories and novelty items — all inspired by alternative music — into mainstream regional malls. And it’s rocked the industry with numbers that are nothing short of stunning. Total sales for 2000 surged 52% to $257 million, with stores averaging $665 per square foot. Same-store sales for the year were up 16.7%. And the firm’s Web site, launched in 1997, has been profitable since its inception.

Not bad, especially considering that Hot Topic has achieved all this with no advertising and a mark-down rate of about 10%. “We don’t run a promotional business; we’re a regular-price store,” said CEO Betsy McLaughlin. “And every one of our stores makes money.”

Currently, there are 274 Hot Topic stores in 45 states nationwide; plans call for 60 new locations in 2001. This month, the company also unveils a brand-new concept, Torrid, at six locations. No doubt, Hot Topic is on a roll.

“This concept is quite frankly a dream for mall developers,” said Kimberly Greenberger, an equity research analyst with Credit Suisse First Boston. “If you look at the business model, their sales per square foot are unprecedented among apparel retailers, and their sales productivity is really quite phenomenal. They’ve been able to identify a truly underserved customer, and carry what we believe is a unique assortment in the mall.”

“Hot Topic is one of the real success stories,” said Robert Michaels, president and COO of Chicago-based General Growth Properties. “The apparel is unique, different — it’s items that nobody else sells. And it’s a niche that appeals to a certain teen faction that’s very loyal. We probably have 40 stores in the portfolio, and they seem to transcend all geographic areas very well. They’re at the top of the sales-per-square-foot in most of our centers, and we’ve got a very aggressive expansion going with them.”

The company was founded in 1989 by Orval Madden, who early on saw the correlation between music videos, alternative artists and teen fashions — and created a lifestyle store to capitalize on it. But although Hot Topic’s slogan is “Everything about the music,” don’t expect to find the latest looks from Britney Spears or Christina Aguilera here. “That’s pop,” dismissed McLaughlin. “We’re about goth, alternative, punk, rave, new metal — bands like Limp Bizkit, Korn, industrial music. It’s the cutting-edge side of music.”

The stores, which cater equally to girls and guys, range from 1,500 to 2,200 square feet. Inside are 26 different product categories, ranging from apparel (band T-shirts, loungewear and all things vinyl are strong sellers) to gifts and accessories. Novelty items include eyebrow rings, glitter makeup and Day-Glo hair dye. Music-influenced and music-licensed items account for about half the mix, with the rest split between trendy teen brands and the firm’s own private-label line, Morbid Threads.

As for teens’ much-touted fickleness, that’s simply not a problem here, because the store is constantly revamping its assortment and adding cutting-edge items weekly. By the time a trend becomes popular, Hot Topic is already on to something new. “When it goes mainstream, we move onto the next item,” related McLaughlin. “Our whole idea is to be first in the market.”

Affirmed Greenberger of Credit Suisse First Boston, “The only thing that’s constant at Hot Topic is the storefront, because everything else is subject to change.”

So, how does the company stay current with the fast-changing tastes of alternative teens? By following an age-old retail credo: Know thy customer. “Our entire culture and business is based on direct feedback from the consumer,” explained McLaughlin.

At the firm's headquarters (complete with Gothic-themed conference rooms and sofas upholstered in skull-and-crossbones fabric), staffers stay plugged in through nonstop video monitors tuned to MTV and MTV2. And everyone, from McLaughlin on down, is constantly out at concerts and clubs, observing what both the bands and their fans are wearing. Sales associates (average age, 17) get reimbursed for concert tickets, if they come back and file a fashion trend report.

At Hot Topic’s corporate headquarters, complete with Gothic-themed conference rooms, staffers stay plugged into youth culture by monitoring MTV.

Teens also make suggestions, through in-store report cards and a talk-back feature on Hot Topic’s Web site. “Some of our best ideas come from customers,” said McLaughlin. Noted Greenberger, “They have the best intelligence that I’ve seen, in terms of staying in touch with the trends.”

Of course, a store specializing in edgy, counter-culture trends can sometimes go a little too far for mainstream tastes.

About three years ago, parents at several of Indianapolis-based Simon Property Group’s Midwest centers complained that Hot Topic stores were carrying offensive T-shirts as well as occult products. (McLaughlin recalls that the latter actually included novelty items like a dream dictionary and a book of love spells.)

Eventually, after discussions between Simon and the retailer, Hot Topic dropped the merchandise from all of its stores.

“We had an interesting beginning with Hot Topic; they were very controversial,” recalled Jim Napoli, executive vice president of leasing for Simon. “We had people threatening to boycott the centers. But we’re very pleased we were able to work it out, that they were willing to compromise. Since that time, we’ve added about another 45 stores.”

“There were a couple of brands and a couple of products that the Simon organization did not feel were appropriate,” said McLaughlin. “We agreed that those brands could be interpreted as offensive, and we elected to discontinue carrying them.”

As analysts see it, such a conflict was perhaps inevitable. “Parents have always hated their kids listening to rock ‘n’ roll; it’s been the mantra of parents for decades,” noted Greenberger. “At the end of the day, this is a store that caters to teens’ taste in music. And Hot Topic does a very good job of balancing being on the cutting edge and drawing in mainstream kids.”

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