Ska fans and Hott Fans,
Greetings - salutations - happy friday. Skafan is home from a day in NYC performing Sarbanes-Oxley related walkthrough procedures.
Fun fun fun.
I am headed away for the weekend - but have been working on a HOTT-related analysis. When I took the results from 92-03 - I wondered if there was a clear way to benchmarch Hot Topic's SG&A to other mall-based retailers without including the sales leverage? You see - Hot Topic gets a boost because their sales per square foot are so high - so - if you forget sales and look at SG&A per square foot - I wonder if that is a meaningful statistic. I want to know whether Hot Topic is good when it comes to operating costs - what do you folks think??? Has this board discussed this topic recently. I mean - Hot Topic could be a great merchandiser and still have a lousy cost structure. So - I am picking through SEC filings trying to find a way to generate SG&A per square foot and compare it to other mall-based retailers. I also want to do some executive compensation benchmarking analysis and management turnover stats. Yeah - I am playing with spreadsheets lately. Fun on the train to NYC - though I am in Chicago next week.
Rock on Team,
skafan, have at it! We haven't had a good discussion of operating metrics here in a long time. Who cares when the stock price does nothing but go up?
Margins are a keen interest of mine. You don't have to be a CPA to appreciate how seemingly small changes in margins/SG&A have large impacts on bottom line results. Another retail investment of mine has been driving major improvements in profitability by being a best in class performer on inventory turns and continual gross margin improvements. It's not glamorous stuff, but growing net margin by 1% in a low margin business can reflect huge growth in profitability on the same dollar of sales.
Thanks for starting your quest. If I can make a special request, I'd encourage you to look into Torrid's effect on profitability. Hot Topic stores have been famous as cash generators with their simple concept. Torrid would seem to be in a much more challenging field. There have been comments about lower gross margins, lower sales per sq. ft., etc., that suggest it's a drag on profitability. It's been hard to determine even basic data like Torrid's contribution to revenues and SSS comps. Some creative thought on HOTT's SSS and revenue growth versus Torrid's portion of overall square footage and store base may give some clues. Good luck.
A P.S. on Torrid: IF Torrid has been a material drag and IF management can tweak the concept and IF the store base is expanded all the while major efficiencies are implemented, we COULD see major improvement in our net margin in quick order. Lots of ifs, but Torrid could become a pleasant surprise.
I will let you know what I discover. I think I will pick apart SG&A first because it is easier and in the procss I will ponder a way to drill down on Torrid.
Thinking back to the Wall Street Journal piece about Torrid during the spring - the merchandise is more expensive than smaller sizes because it involves more fabric and production (sewing, etc). MAYBE - Hot Topic can't pass along those extra costs to the customer. I mean - you can have a great product - but if the customer isn't willing to pay for it - you are left with sub-par margins. That is my anecdotal and uneducated opinion. I will learn more in the coming weeks and have more to say at that point.
Best wishes to all,
btw - I am headed to Chicago for a Sarbanes-Oxley-related site visit. So - won't be posting until I get back this weekend. Skafan will be documenting internal controls for the next few days!
In my view, HOTT won't live or die by a few percentage points of SG&A efficiency, but since you're an accountant, well... that's what you do.
I'm still in India and I've been very, very busy. I'm working long hours every day of the week. I came here thinking these people would not be productive, knowledgeable, well capitalized, etc. I was totally wrong. There are an insane number of highly educated people here. But one thing is for sure, the cost of living in India is VERY cheap. And it's not because of poor quality or lousy service. I heard that some accounting work is starting to be outsourced to India. Hopefully, you'll be able to stay ahead of it.
Cheers from Connecticut. I hope you are doing well and enjoying your time in India. I agree - SG&A isn't the #1 most important factor - but you're right - I am an accountant and that's what I feel comfortable with. :)
I think I will pick apart Hot Topic's financials slowly in my free time as a little hobby.
So the folks in India are keeping you on your toes? :) How long are you gone for? I have heard how cheap things are in India - met some folks at work from India - we had some nice lunchtime conversations about life there.
Yes - I have heard of some large multinationals outsourcing AP and AR to India. In fact, when I witnessed the trend first-hand in my industry - I immediately became bearish on the US market. I think I posted back in February that the downward US wage pressure from outsourcing will probably limit topline growth for corporate America in the coming years - margins will expand - but how can you grow sales when jobs are constantly being eliminated and redirected to India, China and other developing countries. Why are there radiologists in the United States - why don't the X-rays just get scanned and sent to India. Why do we have AR and AP clerks in the United States -why dont invoices just get scanned and then sent to India for processing - and the same with cash receipts - let clerks in India fuss around with the remittance advices from Walmart paying one of their retailers with endless markups and markdowns. :) Instead of paying someone $50k in greater NY - why not have someone in India live like a kind and take home $15k - or probably less. :) Yeah - I guess in response to Jay Holmes question from before - there is not a lot I am buying right now - I picked up Tiffany right around the tip I bought Hot Topic - paid like 27.35 - but a smaller investment than my recent small investment in Hot Topic - so - not really too concerned. Before HOTT and Tiffany - I traded in and out of Microsoft earlier this year for a quick profit and then I picked up some Newell Rubbermaid last fall - treading water with that one - but I think it has life yet.
But overall - I have been a net seller of stocks this year - and will continue to do so for a while.
Rock on Deli - enjoy India!!!
Love your posts, you bring great enthusiasm to the board...wish I could help but I guess I'm a little ignorant. I'm not understanding what you mean by "Hot Topic gets a boost because their sales per square foot are so high." I mean, if you just do a SGA as percent of sales, how will S/SF factor in to that equation?
Quickie suggestion...just multiply your SGA % of sales to your S/SF number...don't know if I'm helping or just stating the obvious.
Out of curiosity, what else are you invested in, or investigating?
Thanks for your post. Hope all is well with you. Just got home from my weekend road-trip to Chapel Hill, NC. Drove my friend down for grad school - 1,300 miles in a short period of time - came home by way of Roanoke, VA - I spent the summer there as an FMP intern with GE about 4 years ago. Very very VERY nice to see the old sights again.
And my ears are ringing from blasting THE SLACKERS for much of the ride home!
Well - I SGA as a % of sales gives Hot Topic credit for their sales leverage when comparing to their competitors. If Hot Topic and Pacific Sunwear both spend 20 on SGA and Hot Topic's sales are 120 and PSUN has 100 - then Hot Topic gets credit for better sales volume. I want to level the playing field - and I was posting to see whether there was any knowledge on the board about what would be the best way to do that. I have been accumulating SEC filings for mall based retailers for the past week in preparation for my analysis - lots to download so I can't do it all at once.
Anyway - I think I will calculate SG&A per employee and SG&A per square foot - but I think the square footage disclosures are different - some do gross space - some do net selling space.
I am not a finance guy, but we do substantive analytics in the audit world to get limited comfort on balances. I have never audited a mall-based retailer - the only retailer I ever touched was a small chain of auto dealerships - and even then I just did a few quarterly reviews and a physical inventory observation.
I want to see if Hot Topic is as efficient from a finance perspective as they are talented with knowing their customer. In my opinion, the latter is much more difficult to accomplish than the former. Excellence in financial management shouldn't be too difficult.
The only tough thing with my forthcoming analysis is that I won't be able to post it on the board because (as far as I know) you cant attach spreadsheets in yahoo posts. I will translate my findings into little soundbites for the board.
Rock on team,