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Zacks Analyst Blog Highlights: Hot Topic, Zumiez, Burger King Holdings, Diageo and McDonald's

Zacks.com Analyst Blog features: Hot Topic Inc. (Nasdaq: HOTT), Zumiez Inc. (Nasdaq: ZUMZ), Burger King Holdings Inc. (NYSE: BKC), Diageo plc (NYSE: DEO) and McDonald's Corp. (NYSE: MCD).

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Here are highlights from Thursday’s Analyst Blog:

Mixed Results at Teen Retailers

In a season of steep discounting to lure shoppers, two teen retailers, Hot Topic Inc. (Nasdaq: HOTT) and Zumiez Inc. (Nasdaq: ZUMZ), posted improved same-store sales for the month of August 2010, helped by back-to-school buying and state sales-tax holidays. Tax free shopping days boosted mid-month sales though the lift was short-lived.

Zumiez

Zumiez remained the bright spot with positive same-store sales of 9.1% for August, handily surpassing a negative 12.1% in the same period last year. The year-over-year improvement in same store sales was mainly due to traction from popular merchandise. The August results marked the 9th consecutive month of positive same-store sales. Net sales jumped 14.9% to $59.4 million from $51.7 million in the same period last year.

Zumiez sees comparable store sales to increase in the mid-single-digit range for the third quarter of 2010. The company plans to open 27 new stores in fiscal 2010.

Hot Topic

Hot Topic still remained in the red with same-store sales growth being negative 3.7% in August. However, the fall in the same-store sales narrowed from a negative 8.1% witnessed in the prior-year period. This was the 16th consecutive month of negative same-store sales. It was in April 2009 that the company had last reported positive same-store sales of 3.1%. Total sales, at $65.3 million, dropped 2.0% for the month of August.

Segment Details at Hot Topic

Hot Topic: Segment same-store sales had declined 7.5%, 12.5% and 9.6% in the months of March, April and May, respectively. However, numbers improved somewhat in June with a decline of 1.6%, but again plunged 9.4% in July. In the month under review, although same-store sales of 3.3% was still red; it fared better than the preceding month.

Torrid: Torrid registered a fall of 5.6% in August with total sales of $92.0 million.

Lingering high unemployment levels and lower consumer spending continue to cast doubt on any type of near-term economic recovery. Thus, it is not surprising that promotional activity is steep and that traffic levels remain inconsistent, with conversion driven primarily by heavy discounting and events such as tax-free holidays.

Burger King Soars on Buyout Talk

Burger King Holdings Inc. (NYSE: BKC) shares jumped 16.7% to $19.19 on Wednesday pre-market trading, on the news that the company is in talks with potential buyers. The two interested parties can be a British private-equity firm 3i Group Plc, and a private investment firm 3G Capital Management.

One potential candidate 3i Group Plc confirmed that it is not in discussion with the Miami-based company Burger King. However, the status of the talks is unclear with the other suitor and Burger King has not yet commented on this issue.

Till date, market capitalization of Burger King is $2.6 billion while its enterprise value is $3.2 billion. Founded in 1954, the company is not new to private equity takeover. In 2002, Burger King was acquired by private equity funds controlled by TPG Capital, Bain Capital Partners and the Goldman Sachs Funds. The private equity firm purchased the company from Diageo plc (NYSE: DEO), a British spirits company for $1.5 billion. In May 2006, Burger King went public, although private equity firms, including TPG, Bain Capital and Goldman Sachs Fund still own 31% stake in Burger King.

Burger King, the world’s second-largest hamburger chain after McDonald's Corp. (NYSE: MCD), recently reported its fourth quarter and fiscal 2010 results. The fourth quarter and fiscal 2010 earnings dropped 16.0% and 8.0% year over year to 36 cents and $1.36, respectively. Total revenue plunged 1% year over year in both the quarter and fiscal year 2010. The results were hurt due to a decline in comparable sales as restaurant industry remains under pressure, given the economic downturn and a high level of unemployment.

We believe that the company will continue to struggle in fiscal year 2011, as Burger King expects the next year to remain challenging due to the continuation of sluggish economy and a weak consumer environment, resulting from the high unemployment rate. Though the possibility of the deal being finalized seems negligible, but based on the economic challenges being faced by the company, any such deal will be beneficial to the company.

We have a Zacks #4 Rank (short-term Sell recommendation). We also reiterate our long-term Neutral rating.

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