My rating downgrade comes after numerous tours of Pacific Sunwear stores since Black Friday, where I have observed light customer traffic at peak mall times and a correlated step up in the amount of inventory on the selling floor. Soft traffic plus elevated inventory creates risk to consensus earnings forecasts for 4Q10 (currently at a LPS of $0.10, but scattered about are estimates towards the low-end of management's guidance for a LPS of $0.07) and the somewhat bullish outlook conveyed by management for 1H11. Hot Topic has been one of the more promotional teen apparel retailers this season, owing to off-trend merchandise in key categories. The stock is richly valued at 43.7x my EPS estimate for FY11; that's a P/E multiple approximately triple my teen apparel sector coverage mean. I continue to view other players in the sector as better investment opportunities given cheaper valuations in the context of growing U.S. businesses and international contribution.