Melrose Pace : Hot Topic Brings Urban Hip to Suburban Malls

There was more than music on Orval Madden’s middle-aged mind when he caught Marilyn Manson’s rock-shock act in Las Vegas recently.

The 48-year-old retail executive was at least as interested in the fashion trends that might strike a chord with young shoppers at his Hot Topic chain.

Making the scene is a requirement for a merchant who specializes in cutting-edge apparel and accessories.

About half of Hot Topic’s business comes from T-shirts, patches and posters inspired by red-hot musical acts. Then there’s the vinyl pants, hemp necklaces, body-piercing ornaments and green hair dye.

“Eighty percent of the merchandise we carry is not available at any other mall store,” Madden says.

Hot Topic is bringing a bit of Melrose Avenue to suburban malls. The Pomona company now has 79 outlets in 21 states and plans to open at least 40 more in the next year.

Hot Topic is expanding at a time when malls are losing traffic from traditional middle-income customers, according to Ira Kalish, senior economist with Price Waterhouse in Los Angeles.

“The apparel business is stagnant, with a lot of cookie-cutter stores,” observes Kalish.

*

Malls may be magnets for teens, but they are more likely hanging out, dining at food courts or catching movies than finding merchandise they’re eager to buy.

“A store aimed at mall rats makes a lot of sense,” Kalish said.

Teens and young adults jammed the 2,400-square-foot Hot Topic store in Montclair Plaza in San Bernardino County on a recent Sunday afternoon. Many lingered around the so-called rock wall, a 30-foot-long display of T-shirts featuring alternative artists such as Nine Inch Nails and Bush.

“I’ve bought 37 shirts here,” said 19-year-old David Rhodes of West Covina. Rhodes, about to enter college after being discharged from the U.S. Army, says he frequents this Hot Topic twice a month.

Janae Garcia, a 16-year-old from Glendora, was checking out the Marilyn Manson band’s Web site on one of two computers set up for customers to surf the Internet.

“I shop here a lot,” the high schooler says. “It’s original.”

Shoppers such as Rhodes and Garcia have helped boost Hot Topic’s sales well above the industry average. In 1996, its store sales per square foot were $578, nearly twice the levels of traditional apparel retailers, according to Lauren Cooks Levitan, an analyst at Robertson, Stephens & Co. in San Francisco.

The company earlier this month reported sales of $43.6 million for the 12 months ended Feb. 1, up 85% from $23.6 million for the same period a year earlier. Sales at stores open at least a year increased 8.9%.

The sales growth reflects the fact that, for the time being, Hot Topic has this niche nearly to itself. Its primary competitors are “street alternative” and vintage clothing stores that can be found on hip strips like Melrose but not in Bakersfield, where Hot Topic has a store.

“It’s a unique place if you’re 17 and you live in suburbia,” Levitan says.

But for how long? Los Angeles-based Sandy Potter, co-owner of Directives West, a company that tracks fashion trends for retailers around the country, says the industry started noticing Hot Topic’s success two years ago.

“It took the industry by surprise,” she says.

At least one competitor is making moves that suggest others want a piece of this action.

The Irvine-based parent of Wet Seal and Contempo Casuals has been operating three experimental stores called Limbo Lounge in Berkeley, Riverside and Cerritos. Limbo Lounges feature juice bars, virtual reality games and domes where patrons can listen to music and shop for cutting-edge apparel and accessories.

The market for such stores is growing. According to the U.S. Census, the nation’s teen population will increase from 25 million today to 32 million by 2010. That’s twice the growth rate of the overall population.

Teens spend on average $3,000 a year and make the majority of their apparel spending decisions themselves, apparel analysts say.

But what do teens want? And how long will they want it? In the faddish world of 12- to 22-year-olds, what’s hot now can turn stone-cold overnight.

“The downside when you’re so trendy is that you must be able to change rapidly,” Kalish says. “You could be wiped out in two years if you don’t keep up.”

Hot Topic tries to limit the risk by ordering its trendy merchandise only 30 to 60 days ahead, Madden says. Hot Topic places prospective items in five to 10 stores before rolling them out.

Hot Topic started eight years ago with one location in Montclair. Madden, a veteran executive with Federated Department Stores, was fulfilling a long-held dream to have his own business.

While still an employee in the 1980s, Madden opened a chain of accessory specialty boutiques for Federated called Accessory Place. The experience boosted his confidence.

“I found out I could dream up a business idea, develop a plan and execute it,” he says.

One day Madden noticed teens sporting rock ‘n’ roll-inspired T-shirts, presumably items they’d purchase at a huge markup at concerts.

“A lightbulb went off,” Madden recalls. “Maybe there’s a demand for this in malls.”

Madden and his wife, LeAnn, took $300,000 in personal savings and opened Hot Topic in 1989.

“We put in literally every cent we had,” Madden says. “If the business had failed, we’d have been wiped out.”

When the store broke even its first year, Madden was able to attract backing from private investors, then venture capital firms, and last fall, the company went public, raising $24.3 million in a stock offering. Hot Topic shares rose 50 cents to $24.75 on Nasdaq on Friday. The stock has soared from a low of $14.50 last year.

Hot Topic strives to maintain an open, informal corporate culture in synch with the youth culture it’s targeting.

At its 45,000-square-foot warehouse headquarters in an industrial park in distinctly un-hip Pomona, Hot Topic has, literally, no walls between departments. The 75 employees, who show up to work in jeans and T-shirts, toil at their desks near monitors constantly beaming MTV.

This is part of the trend spotting that Madden requires of Hot Topic employees. The company encourages its generally youthful staff--mostly around age 20 at the stores--to frequent dance clubs and concerts. Spot a trend, report on it, and Hot Topic will pop for the ticket.

“We hire music-loving teenagers to work in our stores, and they’re a great source of information,” Madden says.

Close attention to the music scene has paid off. In December, two of the company’s merchandising executives caught the MTV debut of a new video from No Doubt, a popular group from Anaheim. Lead singer Gwen Stefani appeared in punk-inspired tank tops and hip huggers.

“Our instincts said this will be a trend,” says Betsy McLaughlin, vice president and general merchandise manager.

Immediately, Hot Topic execs were on the phone to a vendor who could manufacture similar pants and shirts. The items made it to Hot Topic’s shelves by January, and McLaughlin says they are selling briskly.

“We have to be inspired, to react quickly, so we can get those styles in the store as soon as possible,” McLaughlin says.