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: 1,653
Sales: $103.4 million (1999)
Stock Exchanges: NASDAQ
Ticker Symbol: HOTT
NAIC: 44815 Clothing Accessories Stores; 44819 Other Clothing Stores

Hot Topic, Inc., a retail chain operating almost 200 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, multi-hued hair-dye, and unisex, music-influenced apparel, Hot Topic proves that shock value can lead to stock value, with the company generating revenue into the hundreds of millions of dollars after little more than a decade in business. The company occupies and has helped to create a singular, rapidly expanding niche market in the retail industry, and makes no secret of the fact that its targeted market is one usually shunned by more traditional merchants. Founded by retail veteran Orv Madden, Hot Topic devotes itself equally to the sale of trendy, MTV-influenced apparel and novelty items, some of which are marketed under the company’s own label. The retailer went public in 1996 and has a goal of opening 500 stores before the year 2010.

The Founding of Hot Topic: 1989 to 1994

Hot Topic was founded by Orv Madden in 1989, after the executive became aware of the marketing opportunities which had been created by MTV and other popular forms of alternative youth culture. Previous 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 earned 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 well prepared him 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 which, while being 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 which 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 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 multi-chain 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 carried inventory which 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 the obvious one of keeping up with music trends and styles, was the company’s tremendous variety and scope of merchandise. No other apparel company which marketed 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 so overtly appeal to a group which 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 lay-out, 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 located 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 urbanwear, and varying hair colors were encouraged—and the entire area was covered with huge video screens which played 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, which was monitored and updated daily.

Hot Topic’s policy of openness was part of the company’s success and contributed a good deal to its rapid growth. Sales people 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 was a direct and effective way of keeping up with the trends of teens and young adults in any region, and such a policy 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 set back on the market 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.

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.

1997-99: Hot Topic Takes Off

The end of the 1990s saw Hot Topic only increase its sales and location sites, blossoming in just a period of months from a chain of 79 stores, in 1997, to a chain of 128 locations the following year. The company had also continued to expand its inventory, its apparel and novelty items growing into the thousands, and had undertaken the introduction of its own label as well. The company’s line, which it called Morbid, produced everything from t-shirts to make-up. The line had sold well from its inception and eventually grew to make up for 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 which allowed 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 recently 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 which helped the company keep current on consumer trends despite the company’s rapidly growing size: the buying team never ordered items any more than 60 days ahead of when the items were to be debuted; this way, a product or even an entire line of apparel could almost literally jump from the images of MTV to the consumer’s wardrobe. Even though Hot Topic sought aggressively to become a staple in the traditional mall setting, non-traditional, fresh inventory remained the company’s primary focus, and it was this mode of operation which 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.”

It was a trust—and loyal customer base—with the potential for a huge financial payoff. At the end of the 1990s it was estimated that the average teenager spent about $3,000 a year on recreation; not a great deal of money at first glance, until one multiplies that sum with the United States’ expanding teenage population. Hot Topic aimed at nothing less than gaining the loyalty of every popular-music lover under the age of 25, and it appeared by decade’s end that the company had just about succeeded in its aim. By 1999, the company’s sales were up another 25 percent, and it had opened almost 200 stores in 35 states.