Music-oriented teen retailer Hot Topic saw its profits and same-store sales fall in the fourth quarter despite an improvement in its gross margins.

For the three months ended 3 February, net income fell 16.3% to US$8.9m, or $0.20 a diluted share, from $10.6m, or $0.23, in the prior year. Stripping out special charges and gains, EPS actually rose to $0.24 from $0.21. The adjusted EPS figure exceeded consensus estimates, which had earlier been lowered, by $0.03.

Net sales for the City of Industry, California-based specialty chain were up 4.4% to $240.5m in the 14-week 2006 quarter versus $230.4m in its 13-week predecessor. Comparing matching 14-week quarters, same-store sales decreased 5.3% in the more recent period.

Although gross margin increased to 34% of sales from 32.1% in the year-ago period, increases in selling, general and administrative expenses, coupled with a $3m benefit in the 2005 quarter due to gift card breakage, dropped the 2006 bottom line below its 2005 counterpart.

For the full year, net income contracted 39.2% to $13.6m, or $0.30 a diluted share, from $22.4m, or $0.49. Net sales picked up 3.6% to $751.6m from $725.1m. Hot Topic earlier reported that its comparable-store sales for the year, after adjustment for an extra week in 2006, were down 6.6%.

Hot Topic operates 694 Hot Topic stores and 131 Torrid units. Torrid offers plus-size clothing to young women.

By Arnold J Karr.