Hot Topic Cools Down

It’s turning out to be another cold winter for Hot Topic. The music-related teen retailer, which hasn’t posted a monthly same-store gain since March 2005, slashed its fiscal fourth-quarter forecast by more than a third on the heels of disappointing holiday results.

Same-store sales fell in the key categories of women’s apparel (down 5% vs. last year), accessories (9%) and music (down 10%). The declines came even in the face of changes the chain had put into place for the back-to-school season.

“It was a disappointing holiday for us. We thought we were poised to turn around,” said chief executive Betsy McLaughlin in January at Cowen and Company’s Fifth Annual Consumer Conference in New York City.

McLaughlin, whose unpretentious, friendly manner and natural smarts make her one of those retailers you can’t help but root for, was characteristically blunt in her remarks.

“It’s hard for us to differentiate in fashion from other mall retailers now that kids aren’t wearing [their] music tastes on their bodies,” she said.

What McLaughlin was getting at is really the root cause of Hot Topic’s malaise: changing consumer behavior. In that, she has a tough row to hoe. The ability to download music from iTunes and other sites has transformed not only the music business, but also listening habits, especially among teens. Instead of being album-focused, they tend to pick and choose tunes at random, ending up with playlists that are typically far more diverse than those of just a couple of years ago.

“Customers today like all kinds of music,” McLaughlin said.

That’s a far cry from Hot Topic’s halcyon days, when teens tended to identify strongly with a certain type of music-Goth, punk or whatever-and dress accordingly. Today, however, they are far more likely to blend different items into one look. That puts Hot Topic in a tough spot.

The jury is still out on McLaughlin’s fix for the chain: an emphasis on music and music-licensed products (think T-shirts), with special attention to lower and mid-tier bands; a 10% to 15% reduction in inventory (with most of it coming out of fashion apparel); and a new store prototype with a wider appeal than Hot Topic’s signature dark dens of years past.

“It’s lighter and brighter…the slotwall is not black anymore,” McLaughlin explained. “There are mannequins and more space to move around. But it certainly doesn’t scream mall store. It looks worn and still has the feel of being in a hip, alternative space.”

Hot Topic is dancing as fast it can to adjust to the new music sensibility that technology has wrought. I’m hoping the chain gets its mojo back. But it will have to pull off a fine balancing act as its seeks to appeal to a wider, slightly more mainstream demographic and still maintain its cool, outsider vibe.

Hot Topic’s predicament just goes to show you that sometimes a chain can do everything right, and still stumble. Retailers are often at the mercy of forces outside their control. That’s what makes the business so challenging. And interesting.

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