Spear Targets Chico's and HOTT

10/17/2003 12:00 am EST


Gregory Spear

Editor and President, The Spear Report

"The market was recently stunned by some amazing retail sales numbers; chain store revenues grew almost 6% year-over-year in September, the highest reading of any month in 2003," says Gregory Spear, editor of The Spear Report. Here are his comments on two retailers--one focused on teens, the other on specialty women's wear.

"Hot Topic (HOTT NASDAQ) caters to the rebellious 12-19-year-old set, 35 million strong. More than $400 million a year is spent in over 445 Hott Topic-owned stores in 48 states. HOTT is hot because they keep up with trend-du-jour. Much of teen culture is music-driven. HOTT has plenty of music-licensed merchandise and most of their inventory is ordered no more than 60 days ahead, so it is fresh and relevant. Hott Topic thrived in the back-to-school season, as well. The company posted a 9% same-store sales increase for that month and raised third quarter guidance for the second time. The teen apparel retailer's sales for the five weeks ended Oct. 5 rose 31% to $48.9 million. Management is serious about what they do. Much credit goes to CEO Elizabeth McLaughlin, who is able to bridge the two worlds of world-class business and teen lifestyle. Technically the chart is picture-perfect and if the stock fulfills its chart potential, it will be a $90 stock in a few years. Buy on dips!

 "When it comes to women's retail, Chico's (CHS NYSE) is in a class by itself. Chico's, which operates 525 stores, focuses on selling great-looking, colorful, fashionable clothes to women over 35 who can appreciate and afford to pay a little extra for quality, style, and timeliness. The concept is so well received that while the majority of women's clothing retailers have a seasonal merchandise strategy, Chico's turns over most of its inventory every month. This generates tremendous repeat business, pricing power and tech stock-like margins above 60%. That's how the specialty women's wear retailer has booked double-digit same-store sales growth in every quarter for the last seven fiscal years. Earnings in the second quarter rose 67% on a 38% increase in revenue. Short interest is among the highest of any major retailer (23%), which we believe will keep a healthy floor under the share price. CHS has plenty of upside potential. Buy on dips. The stock is our favorite retailer."

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