Print this article | Return to Article | Return to CFO.com
Finance chief Jim McGinty says the pop-culture accessories retailer is changing the way it plans for blockbuster films like The Hunger Games, Harry Potter, and Twilight.
Marielle Segarra, CFO.com | US
April 5, 2012
The Hunger Games, the film based on the first of three wildly successful teen novels, has everything that fills theater seats: action, suspense, family, fashion, and a doomed loved triangle. It's no wonder that the film has pulled in more than $251 million domestically since it opened at the end of March.
It also comes as no surprise that companies like Hot Topic, a pop-culture-oriented apparel and accessory retailer, are tying their profits to the hit film. Hot Topic, a $697 million company that targets older teens, has a long-running relationship with popular franchises like Harry Potter and Twilight. But budgeting and planning for the movie releases has not always been easy.
"We've had some big blockbusters in the past that kind of caused our business to go boom and bust," says Hot Topic CFO Jim McGinty. "Boom when they came out, and then bust either immediately after" or at the end of the year, when the stores held an abundance of excess inventory that no one wanted to buy.
Case in point: Twilight, the film based on a teen novel about a girl who falls in love with a handsome vampire. After the first Twilight movie was released, the demand for Bella- and Edward-related merchandise shot through the roof - and the company was on a sales high, McGinty says. When the next Twilight film, New Moon, came out, Hot Topic bought more merchandise than it could sell. "We made a big commitment," he says. "The idea was more about making sure we didn't miss a sale."
Ultimately, this strategy backfired. "In buying that much merchandise, we probably didn't miss a sale, but we certainly gave up margin dollars because of the markdowns on the back end," says McGinty. Because the stores were so heavily stocked, they would sometimes sell only about 40% of their film-related inventory by the time a popular movie was released.
The numbers worry the finance chief because Hot Topic makes most of its movie-related sales before a film lands in theaters. The week after the release, after most of the die-hard fans have already hit the theaters and the stores, "sometimes sales drop back to almost nothing," says McGinty.
In part, that's because fans buy the merchandise as a way to interact with the film, he says. "The teenagers, particularly the girls, when they go to see the movie, they want to show that they're part of The Hunger Games," McGinty says. "At the midnight showing, they're wearing their T-shirt with Peeta or Katniss on it," he adds, referring to characters in the film.
Apart from the cost of markdowns, overbuying merchandise could actually hurt sales among a teen audience, McGinty says. "I think if they go in the day of the movie and all the shelves are full, and it doesn't look like anything's missing, I think it does create that appearance of 'it must not be as desirable as I would have expected,'" he says.
With that in mind, Hot Topic is changing its approach to planning for popular movies, starting with The Hunger Games. "We're buying much more cautiously to get full price on a much greater percentage of goods [we] bring in than we would otherwise," McGinty says. The company aimed to sell 70% to 80% of those goods leading up to the film's release last month.
As part of its new strategy, Hot Topic also made it easier to get some items, like T-shirts and hoodies, into its stores quickly when demand outpaces supply. To accomplish this, the company keeps an excess of blank clothing ready so that it can print it and deliver it to stores within two weeks, rather than two months. "We get an early read on it, and if it's selling well, we can [print] more . . . so we don't lose much in the way of sales," says McGinty.
This time around, the company has also narrowed its merchandise selection. "When New Moon (the second Twilight film) was released, you might have had choices of eight different T-shirts with Bella and Edward on them," says McGinty. To cut down on inventory, stores now "offer the customer the best four."
Under this approach, Hot Topic might miss some business on items like necklaces, because it takes a long time to get accessories into the stores when they run out. But missing some sales is "well worth it on the markdowns that you save on the back end," McGinty says.
To keep an eye on waxing and waning interest, Hot Topic also closely monitors social-media tools like Google Trends. As of today, Google searches for "Hunger Games" continue on an upward trend. Searches for "Twilight" have dropped since 2011, but they seem to peak once every year or so - presumably when each installment is released in theaters.
McGinty could not divulge the company's Hunger Games-related sales. But he says the new approach dovetails with Hot Topic's focus on its fashion apparel business. Since its regular clothing is doing well, the company no longer needs to "rely on cyclical movie properties to feed [its] business," McGinty says.
Going forward, Hot Topic plans to apply the same strategy to other blockbuster hits, including the release of The Avengers in early May, The Amazing Spider-Man in early July, and The Dark Knight Rises, the third Batman movie directed by Christopher Nolan, at the end of July.