Hot Topic Inc.

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Hot Topic Inc.

18305 East San Jose Avenue
City of Industry, California 91748
U.S.A.
Telephone: (626) 839-4681
Fax: (626) 839-4686
Web site: http://www.hottopic.com

Public Company
Incorporated: 1989
Employees: 9,871
Sales: $725 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: HOTT
NAIC: 448150 Clothing Accessories Stores; 448110 Men’s Clothing Stores; 448190 Other Clothing Stores

Hot Topic, Inc., a retail chain operating more than 660 stores in malls nationwide, occupies a unique space within the apparel industry: it is the only large national chain that caters exclusively to the “alternative” lifestyle trends of teenagers and young adults. Specializing in such merchandise as body jewelry, artificial tattoos, multihued hair-dye, and unisex, music-themed apparel, Hot Topic proves that shock value can lead to stock value, with the company generating hundreds of millions of dollars in revenue. Founded by retail veteran Orv Madden, the company occupies and has helped to create a singular, rapidly expanding niche market in the retail industry, and makes no secret that its targeted market is one usually shunned by more traditional merchants. The retailer went public in 1996 and expanded rapidly for many years. In 2001 Hot Topic launched a related retail chain, Torrid, that provided fashionable apparel to plus-size teenagers and young women. With its “everything about the music” tagline, Hot Topic focuses on serving the needs of alternative music and pop culture-obsessed youth, a mission that has required the company to spot new trends well ahead of the curve.

THE FOUNDING OF HOT TOPIC: 1989–94

Hot Topic was founded by Orv Madden in 1989, after the executive became aware of the marketing opportunities that had been created by MTV and other popular forms of alternative youth culture. Prior to starting Hot Topic, Madden had spent the entirety of his working life in the retail industry. A native of Alton, Iowa, Madden earned his MBA from the prestigious University of Chicago and eventually secured a position as vice president of the Federated Department Stores’ Children’s Place and Accessory Place divisions, a title he held for six years. While Madden’s retail experience prepared him well to strike out on his own, it was his personal drive and lifelong devotion to contemporary music that allowed him to see the market niche Hot Topic would eventually fill.

During the 1980s, when MTV first made its presence felt in modern music and culture, Madden realized that there was a potentially huge consumer market for music-influenced apparel and accessories. This market, while served by regional, independent stores and venues, was largely overlooked by national chains and outlets. In a 1997 interview, Madden said that in starting Hot Topic he “saw an underserved market—music-related T-shirts and apparel—that traditional mall-based retailers were ignoring, and I decided to pursue it.”

And pursue it he did. At the end of the decade he and his wife put all of their savings into the opening of the first Hot Topic store, located in a mall in Montclair, California. The store sold T-shirts emblazoned with the logos of popular bands, music posters, and trendy costume jewelry. From the company’s outset, it was overtly devoted to the sort of contemporary, edgy merchandise that could be associated with what came to be known as alternative culture, with even the shop’s floor design and lighting being laid out more like a setting for a music video than for a department store. Due to Madden’s extensive experience in the industry, as well as his knack for keeping up with the whirlwind changes of teenage tastes, Hot Topic broke even in the 1980s, and the store’s initial success paved the way for expansion during the next decade.

Madden’s vision for Hot Topic was large in scope from the company’s outset: he wanted Hot Topic to be a multichain operation, with stores located in upscale malls. Though Madden had to start small, with only one location, he had a good deal of pull within the industry, and after his first year as an independent entrepreneur he found no shortage of outside investors willing to aid him in making the company’s growth a reality. In the next few years, Madden raised over $11 million for Hot Topic and began to open new stores at strategically located sites around the country. The stores all followed a pattern similar to the company’s flagship location: they were lit with low, Gothic-style lighting, and they carried inventory that shocked parents and delighted their kids. All the sites were approximately 1,500 square feet in space and, despite their indoor mall locations, were constructed to look like a mix between a nightclub and a teenage fun house, with music played loud enough to match both environments.

To some in the industry Madden’s company seemed a risky, perhaps flash-in-the-pan venture. What, after all, changes more quickly than the trends and tastes of punk or alternative teenagers? Hot Topic’s sales, however, proved naysayers wrong: by the middle of the 1990s the company had opened dozens of locations, and all were pulling a profit.

1995–97: THE EXPLOSIVE GROWTH OF HOT TOPIC

The key to Hot Topic’s success, other than keeping up with music trends and styles, was the company’s tremendous variety and scope of merchandise. No other apparel company marketing itself to teens and young adults carried the amazing number of different logos, T-shirts, and novelty items carried by Hot Topic; and no company was as willing to overtly appeal to a group that had traditionally defined itself through cultural alienation. Logos and apparel inspired by such controversial bands as Marilyn Manson and Nine Inch Nails were actively promoted by the company; cosmetics of strange hues and even more eccentric names were prominently displayed next to jewelry meant to go anywhere but one’s ear lobes; and, most important, the displays and inventory changed faster than almost any other national chain. Madden, in speaking of his store layout, said in an interview that “Our target consumers are kids 12 to 22 years old. We want those kids to be totally overwhelmed with our merchandise mix when they first walk in the door.”

To keep up with this ever-revolving, ever-shifting cache of merchandise, Madden bought a 45,000-square-foot warehouse in the City of Industry, California, where he headquartered his distribution space and his management team. There, the company employed dozens of buyers who were responsible for keeping up with music and teen fashion, and who aggressively canvassed merchants around the country. As head of the company, Madden kept the atmosphere at company headquarters pointedly open and the hierarchy to a minimum. The space was without cubicles; there was no dress code—indeed, piercings, baggy urban wear, and varying hair colors were encouraged—and the entire area was covered with huge video screens playing the newest music videos throughout the day. The location was state-of-the-art in terms of technology, too, with a computer system tapped into every store’s inventory, monitored and updated daily.

COMPANY PERSPECTIVES

You’ll find a passion for music in everything we do, and you’ll see that our customers share that same passion. It’s in our stores. It’s at HQ. It’s in our distribution centers. It’s in our product. It’s Everything About the Music. Turn it up.

Hot Topic’s policy of openness was part of the company’s success and contributed a good deal to its rapid growth. Salespeople were encouraged to take an active role in the development and introduction of new merchandising ideas for the company, and every buyer was required to respond personally to suggestions. Madden even developed a policy whereby the company would pay for the ticket to any concert a salesperson desired to attend if the employee agreed to write up a “fashion report” the following day. This policy was a direct and effective way of keeping up with the trends of teens and young adults in any region, and it also allowed undiluted access to the tastes of the company’s primary consumer market. In one case, a Hot Topic employee attended an all-night rave, and the next day he presented his company with an idea for creating special jeans pockets in which to store the popular see-in-the-dark glow sticks many ravers carried; within months the jeans had become a Hot Topic exclusive.

By 1996 Hot Topic had sales of over $44 million and had opened almost 80 locations nationwide. In the fall of that year, Hot Topic went public with an initial public offering of 1.3 million shares of stock. The stock, which initially sold at $18 a share, raised almost $24 million for the company. Madden retained a 30 percent ownership in the company, which only one year later was valued at over $100 million. Hot Topic had truly taken off and was helping to create a new and powerful niche market in the retail industry.

After going public in the autumn of 1996, Hot Topic’s stock had by May of the following year skyrocketed in value, trading at almost double its initial price. However, despite the company’s drastic increase in sales and steady expansion, it suffered a slight financial setback during the summer of 1997. During that time, Hot Topic’s stock fell sharply in a period of a few days, causing some analysts to question the wisdom of taking public a company that devoted itself exclusively to such an unpredictable consumer base. While reasons for the company’s stumble were never made clear, some thought the rough luck of Hot Topic’s competitor Gadzooks, which had suffered severely on the market, was rubbing off on the company, making investors worried. Despite this period of rockiness, however, Hot Topic soon recovered, and that year saw an 85 percent increase in its overall revenue compared to the company’s previous year.

HOT TOPIC TAKES OFF

The end of the 1990s saw Hot Topic increase its sales and location sites, blossoming in just a period of months from a chain of 79 stores in 1997 to 128 locations the following year. The company continued to expand its inventory, with its apparel and novelty items growing into the thousands. Hot Topic also introduced its own label, called Morbid, which produced everything from T-shirts to makeup. The line sold well from its inception and eventually grew to make up over 20 percent of company sales.

The majority of Hot Topic’s sales consisted of the company’s music-inspired products, from T-shirts with band logos to CDs. To keep up with customer demand, Hot Topic developed licensing agreements with such major distributors as Sony Music and Winterland, allowing the company quick access to popular product lines and logos. Particularly popular in 1998 were products featuring the bands Korn, Pantera, Marilyn Manson, and Metallica. That year, Hot Topic’s sales were also aided by the huge popularity of the controversial animation sitcom South Park. South Park T-shirts and logos had become a staple at Hot Topic locations, and, when the show took off, so did the company’s South Park -inspired inventory. The company also continued expanding its general apparel lines, selling juniors, unisex, and men’s clothing from small, trendy labels such as Kik Girl, Taffy, Caffeine, Lip Service, and Porn Star. Indeed, increased growth in every segment seemed the only strategy for Hot Topic, a fact reflected in the company’s 1998 sales, which were almost 62 percent higher than those of 1997.

By the end of the decade Hot Topic had developed an ordering strategy that helped the company keep current on consumer trends despite the company’s rapidly growing size: new items, bought in small quantities, were tested in a few stores. If they sold well, they could be on the shelves of every Hot Topic store in two to eight weeks—beating by several months the turnaround time of most retailers. This way, a product or even an entire line of apparel could quickly jump from the images of MTV to the consumer’s wardrobe. Equally important, Hot Topic became expert at sensing when a given trend had begun to cool—or had become so popular as to become mainstream, losing its alternative edge—quickly pulling such items from their shelves.

KEY DATES

1989:: Hot Topic is founded by Orv Madden.
1990:: Hot Topic begins to expand.
1996:: Hot Topic goes public.
1997:: The company introduces its own label.
1999:: Hot Topic hits sales of over $100 million.
2001:: The company opens Torrid; Betsy McLaughlin is appointed Hot Topic’s CEO.

Even though Hot Topic sought aggressively to become a staple in the traditional mall setting, nontraditional, fresh inventory remained the company’s primary focus, and it was this mode of operation that attracted a loyal customer following. In a 1997 interview with Chain Store Age, the financial analyst Lauren Cooks Levitan said of Hot Topic that the company “has won the hearts of its customers by listening to them. The confidence and trust teens have in this company is amazing.” The intense customer loyalty Hot Topic had cultivated continued to pay off: in 1999 the company’s sales were up another 25 percent, and by year’s end it had opened almost 200 stores in 35 states. That trust extended to employees as well: the company developed a reputation as having an extremely open culture in which salespeople—themselves young, devoted music and pop-culture fans—were encouraged to convey their ideas to senior executives. The company offered to pay for concert tickets if the employee wrote up a fashion report afterward, a policy that allowed Hot Topic to stay on top of music-related trends as they developed.

CHANGES AFOOT IN THE NEW CENTURY

In early 2000, Madden began making plans for a successor. He promoted Elizabeth (Betsy) McLaughlin, the senior vice-president of merchandising, to the post of president. By 2001 McLaughlin was named CEO, and Madden, at the age of 52, retired from Hot Topic. That same year, Hot Topic stores began sporting a new look, veering away from the Goth style and embracing a more industrial, music-club atmosphere. Designers traveled to London, touring trendy shops and hip clubs to get a feel for the new store design. The result was a space with a warehouse dance-club atmosphere, featuring red fluorescent lights, simulated brick walls, and faux rusted-steel beams.

Perhaps the most substantial change for 2001 was the opening of the first Torrid store, a Hot Topic spinoff with a similar inventory but a slightly different customer base: Torrid caters to plus-size customers, carrying apparel in sizes 12 to 26. Torrid was launched after executives noticed that the plus-size clothes in Hot Topic stores flew off the shelves. Customers wrote to the company in gratitude, asking for an even greater selection of plus-size items. With 30 percent of young American women wearing plus-size clothing, McLaughlin—who had struggled to find cool clothes in larger sizes when she was a teen—knew this was a niche that no other retailer had filled. Full-figured teens and young adults had few options for age-appropriate clothing: most plus-size stores catered to middle-aged or older women. The first Torrid store opened in California in April 2001, with five more opening throughout that year and an additional 30 stores by the spring of 2003. Upon discovering Torrid, customers reacted with intense emotions, as McLaughlin explained to Galina Espinoza of People: “Some people thought we had staged customers, because when they went into a store, they saw a mom or daughter screaming with joy or crying.”

Throughout 2001, 2002, and 2003, Hot Topic— aided by the success of Torrid—continued to grow rapidly, opening numerous new stores and experiencing substantial sales gains year after year. Industry observers spoke with admiration of the company’s ability to spot new trends, respond to customers’ ideas, and cycle hip new items through their stores. Teen fashion trends were undergoing a subtle shift, however, and by mid-2004, Hot Topic had begun to stumble after many years of sterling sales figures. Sales growth slowed, and the company’s stock price went down. While their core customer remained devoted to Hot Topic’s dark, edgy vibe, many teenage girls began gravitating toward sunnier, more feminine fashions. The preppy look made a return, and pink became the hot new color. In addition, the ways young people listened to music had changed: the increasing popularity of downloading music as opposed to buying CDs led to a less stringent identification with a particular type of music. Instead of identifying strongly with the punk or heavy metal aesthetic, for example, many teens plugged into a more diverse array of musical styles—and music-influenced clothing styles—making it harder for a company like Hot Topic to distinguish itself from its teen-apparel competition.

Hot Topic was forced to make some changes, addressing the challenge of staying true to their original customer base while also reflecting current trends. Although pastels remained taboo, Hot Topic did broaden its color palette to include such tones as silver, burgundy, blue, and green. In addition, the company reduced the variety of its inventory, placing greater emphasis on music-licensed items such as T-shirts. Beginning in 2007, Hot Topic began another major remodel, retaining industrial-style elements like concrete and steel while also incorporating more neutral colors and brighter lighting. Continuing to emphasize music as the company’s driving force, the newly remodeled stores featured a larger music area with numerous listening stations where customers could tune in to the latest releases. As Hot Topic approached its twentieth year in business, it continued to struggle with the changing music-fashion landscape. As of early 2007, sales figures were still rising, though far more slowly than in the past, and same-store numbers had dropped for several years in a row. Many analysts remained confident in Hot Topic’s ability to adapt to current trends, though some continued to express concern for the health of a retail chain so subject to the fickle tastes of teenagers.

Rachel H. Martin
Updated, Judy Galens