Attached files

file filename
EX-31.1 - EX-31.1 - HASTINGS ENTERTAINMENT INCd70316exv31w1.htm
EX-31.2 - EX-31.2 - HASTINGS ENTERTAINMENT INCd70316exv31w2.htm
EX-32.1 - EX-32.1 - HASTINGS ENTERTAINMENT INCd70316exv32w1.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 000-24381
HASTINGS ENTERTAINMENT, INC.
(Exact name of registrant as specified in its charter)
     
Texas
(State or other jurisdiction of
incorporation or organization)
  75-1386375
(I.R.S. Employer
Identification No.)
     
3601 Plains Boulevard, Amarillo, Texas
(Address of principal executive offices)
  79102
(Zip Code)
(806) 351-2300
(Registrant’s telephone number, including area code)
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ  No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o  No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer o   Smaller reporting company þ
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o  No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
Class   Outstanding at October 31, 2009
     
Common Stock, $.01 par value per share   9,520,772 shares
 
 

 


 

HASTINGS ENTERTAINMENT, INC.
Form 10-Q
For the Quarterly Period Ended October 31, 2009
INDEX
             
        Page
PART I — FINANCIAL INFORMATION        
 
           
  Financial Statements.        
 
           
 
  Consolidated Balance Sheets as of October 31, 2009 (Unaudited), and January 31, 2009     3  
 
           
 
  Unaudited Consolidated Statements of Earnings for the Three and Nine Months Ended October 31, 2009 and 2008     4  
 
           
 
  Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended October 31, 2009 and 2008     5  
 
           
 
  Notes to the Unaudited Consolidated Financial Statements     6  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations.     11  
 
           
  Quantitative and Qualitative Disclosures about Market Risk.     20  
 
           
  Controls and Procedures.     20  
 
           
PART II — OTHER INFORMATION        
 
           
  Legal Proceedings.     21  
 
           
  Risk Factors.     21  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds.     21  
 
           
  Exhibits.     22  
 
           
SIGNATURES     23  
 
           
INDEX TO EXHIBITS     24  
 EX-31.1
 EX-31.2
 EX-32.1

2


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1 — FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC.
Consolidated Balance Sheets
October 31, 2009 and January 31, 2009
(Dollars in thousands, except par value)
                 
    October 31,     January 31,  
    2009     2009  
 
  (Unaudited)        
 
             
Assets
           
Current assets:
               
Cash and cash equivalents
  $ 6,022     $ 7,449  
Merchandise inventories, net
    179,642       147,957  
Deferred income taxes
    11,013       11,180  
Prepaid expenses and other current assets
    12,206       11,224  
 
           
Total current assets
    208,883       177,810  
Rental assets, net of accumulated depreciation of $21,597 and $22,647 at October 31, 2009 and January 31, 2009, respectively
    14,188       15,463  
Property, equipment and improvements, net of accumulated depreciation of $188,167 and $177,266 at October 31, 2009 and January 31, 2009, respectively
    50,728       56,585  
Deferred income taxes
    878       2,434  
Intangible assets, net
    391       391  
Other assets
    962       1,020  
 
           
Total Assets
  $ 276,030     $ 253,703  
 
           
 
               
Liabilities and Shareholders’ Equity
               
 
               
Current liabilities:
               
Trade accounts payable
  $ 93,690     $ 61,823  
Accrued expenses and other liabilities
    34,841       40,614  
 
           
Total current liabilities
    128,531       102,437  
Long term debt
    42,291       44,507  
Other liabilities
    6,009       4,723  
 
               
Shareholders’ equity:
               
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
           
Common stock, $.01 par value; 75,000,000 shares authorized; 11,944,544 shares issued and 9,520,772 shares outstanding at October 31, 2009; 11,944,544 shares issued and 9,766,818 shares outstanding at January 31, 2009
    119       119  
Additional paid-in capital
    36,801       36,651  
Retained earnings
    77,821       79,951  
Accumulated other comprehensive income (loss)
    20       (67 )
Treasury stock, at cost 2,423,772 shares and 2,177,726 shares at October 31, 2009 and January 31, 2009, respectively
    (15,562 )     (14,618 )
 
           
Total Shareholders’ Equity
    99,199       102,036  
 
           
Total Liabilities and Shareholders’ Equity
  $ 276,030     $ 253,703  
 
           
See accompanying notes to unaudited consolidated financial statements.

3


Table of Contents

HASTINGS ENTERTAINMENT, INC.
Unaudited Consolidated Statements of Earnings
For the Three and Nine Months Ended October 31, 2009 and 2008
(In thousands, except per share amounts)
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
Merchandise revenue
  $ 94,434     $ 95,991     $ 295,896     $ 308,168  
Rental revenue
    17,903       18,277       59,327       63,702  
 
                       
Total revenues
    112,337       114,268       355,223       371,870  
 
                               
Merchandise cost of revenue
    64,869       66,748       202,651       213,893  
Rental cost of revenue
    6,464       6,249       21,069       21,806  
 
                       
Total cost of revenues
    71,333       72,997       223,720       235,699  
 
                       
 
                               
Gross profit
    41,004       41,271       131,503       136,171  
 
                               
Selling, general and administrative expenses
    45,731       45,860       133,508       133,902  
Pre-opening expenses
          98       3       111  
 
                       
 
                               
Operating income (loss)
    (4,727 )     (4,687 )     (2,008 )     2,158  
 
                               
Other income (expense):
                               
Interest expense
    (211 )     (561 )     (778 )     (1,488 )
Other, net
    17       117       96       159  
 
                       
 
                               
Income (loss) before income taxes
    (4,921 )     (5,131 )     (2,690 )     829  
 
                               
Income tax expense (benefit)
    (1,485 )     (1,475 )     (560 )     836  
 
                       
 
                               
Net loss
  $ (3,436 )   $ (3,656 )   $ (2,130 )   $ (7 )
 
                       
 
                               
Basic loss per share
  $ (0.36 )   $ (0.36 )   $ (0.22 )   $ (0.00 )
 
                       
 
                               
Diluted loss per share
  $ (0.36 )   $ (0.36 )   $ (0.22 )   $ (0.00 )
 
                       
 
                               
Weighted-average common shares outstanding:
                               
Basic
    9,574       10,114       9,658       10,241  
Dilutive effect of stock awards
                       
 
                       
 
                               
Diluted
    9,574       10,114       9,658       10,241  
 
                       
See accompanying notes to unaudited consolidated financial statements.

4


Table of Contents

HASTINGS ENTERTAINMENT, INC.
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 2009 and 2008
(Dollars in thousands)
                 
    Nine Months Ended  
    October 31,  
    2009     2008  
Cash flows from operating activities:
               
Net loss
  $ (2,130 )   $ (7 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Rental asset depreciation expense
    9,185       10,060  
Purchases of rental assets
    (15,805 )     (21,284 )
Property, equipment, and improvements depreciation expense
    14,327       15,018  
Deferred income taxes
    1,723       (6,739 )
Loss on rental assets lost, stolen and defective
    606       874  
Loss on disposal of other assets
    379       730  
Non-cash stock-based compensation
    224       48  
Changes in operating assets and liabilities:
               
Merchandise inventories
    (24,562 )     (8,524 )
Prepaid expenses and other current assets
    (982 )     1  
Trade accounts payable
    35,029       15,991  
Accrued expenses and other current liabilities
    (5,773 )     1,497  
Excess tax benefit from stock option exercises
          (132 )
Other assets and liabilities, net
    1,431       200  
 
           
Net cash provided by operating activities
    13,652       7,733  
 
           
 
               
Cash flows from investing activities:
               
Purchases of property, equipment, and improvements
    (8,683 )     (20,559 )
 
           
Net cash used in investing activities
    (8,683 )     (20,559 )
 
           
 
               
Cash flows from financing activities:
               
Borrowings under revolving credit facility
    365,806       399,743  
Repayments under revolving credit facility
    (368,022 )     (381,445 )
Purchase of treasury stock
    (1,018 )     (3,887 )
Change in cash overdraft
    (3,162 )     (1,797 )
Proceeds from exercise of stock options
          326  
Excess tax benefit from stock option exercises
          132  
 
           
Net cash (used in) provided by financing activities
    (6,396 )     13,072  
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    (1,427 )     246  
Cash and cash equivalents at beginning of period
    7,449       3,982  
 
           
Cash and cash equivalents at end of period
  $ 6,022     $ 4,228  
 
           
See accompanying notes to unaudited consolidated financial statements.

5


Table of Contents

Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Hastings Entertainment, Inc. and its subsidiary (“Hastings,” the “Company,” “we,” “our,” or “us”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions in Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations of the Securities and Exchange Commission. All adjustments, consisting of normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair presentation of the results of interim periods. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for a full year because of, among other things, seasonality factors in the retail business. As is the case with many retailers, a significant portion of our revenues, and an even greater portion of our operating income, is generated in the fourth fiscal quarter, which includes the holiday selling season. The unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
The balance sheet at January 31, 2009, has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
We have evaluated subsequent events and transactions occurring between the end of our fiscal quarter, October 31, 2009 and December 4, 2009, when the financial statements were issued, for possible recognition or disclosure in the financial statements. As a result of this evaluation, there were no subsequent events that required either recognition or disclosure in the financial statements.
Our fiscal year ends on January 31 and is identified as the fiscal year for the immediately preceding calendar year. For example, the fiscal year that will end on January 31, 2010 is referred to as fiscal year 2009.

6


Table of Contents

Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
2. Stock-Based Compensation
We have various stock incentive plans, which allow us to issue stock options, stock appreciation rights, restricted shares, restricted stock units, performance awards and other awards. Stock-based compensation is discussed more fully in Note 12 in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
For the three months ended October 31, 2009 and 2008, we recognized approximately $68,000 and ($292,000), respectively, of stock-based compensation expense (reduction of expense). For the nine months ended October 31, 2009 and 2008, we recognized approximately $175,000 and ($2,000), respectively, of stock-based compensation expense (reduction of expense). These amounts include expense related to incentive stock options, non-qualified stock options, restricted stock units, and performance-based restricted stock awards. For the three and nine months ended October 31, 2008, approximately $339,000 of stock compensation expense previously recognized in earlier periods was reversed, due to management’s estimation that it was no longer probable performance conditions related to certain performance-based stock awards would be achieved. For the three and nine months ended October 31, 2008, there was no expense related to restricted stock units.
As of October 31, 2009, we had 471,917 shares available to grant stock-based compensation awards under our various stock incentive plans.
Option Exchange
On June 3, 2009, Hastings shareholders approved a proposal to allow for a one-time stock option exchange program (“Option Exchange”), designed to provide eligible associates with an opportunity to exchange certain under-water stock options for a lesser amount of restricted stock units. Stock options eligible for exchange were those with an exercise price of $5.00 or greater, regardless of whether the options were vested or not. Hastings commenced the Option Exchange on June 15, 2009, and the Option Exchange expired on July 13, 2009. A total of 406,717 eligible stock options were tendered by employees, representing 97.2% of the total stock options eligible for exchange. On July 14, 2009, Hastings granted 135,575 restricted stock units in exchange for the eligible stock options surrendered. The Option Exchange resulted in an incremental cost of $126,098, which represents the difference between the fair value of the restricted stock units granted and the exchange date fair value of the eligible options surrendered. The grant date fair value of the restricted stock units was $4.20, which represents the average of the opening and closing prices of Hastings Common Stock on July 14, 2009. The exchange date fair value of the eligible options surrendered was determined using the Black-Scholes option pricing model. The incremental cost associated with the Option Exchange is being recognized over the vesting period of the restricted stock units, which vest ratably over two years from the date of grant. Approximately $15,000 and $18,000, of the incremental cost was recognized as compensation expense during the three and nine months ended October 31, 2009, respectively.
3. Long-term Debt
On October 31, 2009 and January 31, 2009, the balances on the Facility (as defined below) were $42.3 million and $44.5 million, respectively.
We have a syndicated secured Loan and Security Agreement with Bank of America (the “Facility”). The amount outstanding under the Facility is limited by a borrowing base predicated on (i) eligible inventory, as defined in the Facility, and (ii) certain rental assets, net of accumulated depreciation less specifically defined reserves and is limited to a ceiling of $100 million, less a $10 million availability reserve. We can borrow at various interest-rate options based on the prime rate or London Interbank Offered Rate (“LIBOR”) plus applicable margin depending on the level of our minimum availability. The borrowing base under the Facility is limited to an advance rate of 65% of eligible inventory and certain rental assets, which can be adjusted to reduce availability under the Facility. The lender may increase specifically defined reserves to reduce availability in the event of adverse changes in our industry or our financial condition that are projected to impact the value of our assets pledged as collateral. The lender must exercise reasonable judgment and act in good faith with respect to any changes in the specifically defined reserves. The Facility contains no financial covenants, prohibits the payment of dividends and includes

7


Table of Contents

Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
certain other debt and acquisition limitations, allows for the repurchase of up to $27.3 million of our common stock and requires a minimum availability of $10 million at all times. The Facility is secured by substantially all of the assets of the Company and our subsidiary and is guaranteed by our subsidiary. Unless the Facility is amended and the maturity extended, the Facility matures on August 29, 2011. At October 31, 2009, we had $42.7 million in excess availability, after the $10 million availability reserve, under the Facility. The average rates of interest being charged under the Facility for the three and nine months ended October 31, 2009 were 1.94% and 2.46%, respectively.
We utilize standby letters of credit to support certain insurance policies. The aggregate amount of letters of credit at October 31, 2009, was approximately $1.0 million, which reduces the excess availability under the Facility.
4. Store Closing Reserve
From time to time and in the normal course of business, we evaluate our store base to determine if we need to close one or more stores. Such evaluations include, among other factors, current and future profitability, market trends, age of store and lease status.
Amounts in Accrued Expenses and Other Liabilities include accruals for the estimated fair value of future minimum lease payments and other costs attributable to closed or relocated stores, net of estimated sublease income. Expenses related to store closings are included in Selling, General and Administrative expenses in our consolidated statements of earnings.
The following tables provide a rollforward of reserves that were established for these charges for the nine months ended October 31, 2009 and 2008.
         
Balance at January 31, 2009
  $ 32  
Changes in estimates
    12  
Additions to provision
    47  
Cash outlay
    (91 )
 
     
Balance at October 31, 2009
  $  
 
     
 
       
 
       
Balance at January 31, 2008
  $ 377  
Changes in estimates
    65  
Additions to provision
    59  
Cash outlay
    (385 )
 
     
Balance at October 31, 2008
  $ 116  
 
     

8


Table of Contents

Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
5. Loss per Share
The computations for basic and diluted loss per share are as follows:
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
Net loss
  $ (3,436 )   $ (3,656 )   $ (2,130 )   $ (7 )
 
                       
 
                               
Average shares outstanding:
                               
Basic
    9,574       10,114       9,658       10,241  
Effect of stock awards
                       
 
                       
Diluted
    9,574       10,114       9,658       10,241  
 
                       
 
                               
Loss per share:
                               
Basic
  $ (0.36 )   $ (0.36 )   $ (0.22 )   $ (0.00 )
 
                       
 
                               
Diluted
  $ (0.36 )   $ (0.36 )   $ (0.22 )   $ (0.00 )
 
                       
The following options to purchase shares of common stock were not included in the computation of diluted loss per share because their inclusion would have been antidilutive:
                                 
    Three Months Ended October 31,     Nine Months Ended October 31,  
    2009     2008     2009     2008  
Shares of common stock underlying options
    535       831       535       831  
Exercise price range per share
  $ 1.33 to $8.70     $ 1.33 to $10.64     $ 1.33 to $8.70     $ 1.33 to $10.64  
6. Fair Value Measurements
We account for certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. These levels are:
    Level 1 — Observable Inputs — quoted prices in active markets for identical assets and liabilities;
 
    Level 2 — Observable inputs other than the quoted prices in active markets for identical assets and liabilities — includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and
 
    Level 3 — Unobservable inputs — includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.
At October 31, 2009 and January 31, 2009, we had approximately $0.8 million and $0.7 million, respectively, in assets which are carried at fair value on a recurring basis. These assets consist of available-for-sale investments related to our non-qualified supplemental executive retirement plan (“SERP”). The fair value of these investments was determined using Level 1 inputs.
The carrying amount of long-term debt approximates fair value as of October 31, 2009 and January 31, 2009, due to the instrument bearing interest at variable rates that are comparable to what is currently available to us. The carrying amount of accounts payable approximates fair value because of its short maturity period.

9


Table of Contents

Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
7. Income Taxes
The effective tax rate for the three months ended October 31, 2009 was (30.2%), as compared to (28.7%) for the same period in the prior year. During the three months ended October 31, 2009, we recorded a discrete tax charge of approximately $0.4 million related to amended state and federal tax returns resulting from an Internal Revenue Service (“IRS”) audit of our previously filed tax returns. During the three months ended October 31, 2008, we recorded a net discrete tax charge of approximately $0.5 million primarily related to an IRS audit of our previously filed tax returns. Primarily as a result of these discrete tax charges, the effective tax rate for the nine months ended October 31, 2009 was (20.8%) as compared to 101.0% for the same period in the prior year.
8. Litigation and Contingencies
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.
9. Recent Accounting Pronouncements
In December 2007, the FASB issued guidance for business combinations, which requires, among other things, the acquiring entity in a business combination to recognize the full fair value of the assets acquired, liabilities assumed and any non-controlling interest as of the acquisition date; the immediate expense recognition of transaction costs; and accounting for restructuring plans separately from the business combination. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This guidance will generally have an impact only if we enter into a business combination.
In April 2009, the FASB issued guidance that requires interim disclosures about the fair value of instruments, similar to what is currently required to be disclosed on an annual basis. We adopted the provisions of this guidance for our quarter ended July 31, 2009.
In May 2009, the FASB issued guidance which establishes general standards for the accounting and disclosure of subsequent events that occur after the balance sheet date but before financial statements are issued or are available to be issued, and specifically sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. We adopted the provisions of this guidance for our quarter ended July 31, 2009 with no material impact to our financial statements.
In June 2009, the FASB issued the FASB Accounting Standards Codification™ and the Hierarchy of Generally Accepted Accounting Principles (the “Codification”). This guidance established the Codification as the single source for authoritative U.S. GAAP. All existing accounting standards documents were superseded and all other accounting literature not included in the Codification is considered non-authoritative, other than guidance issued by the SEC. We adopted the provisions of this guidance beginning in the quarter ended October 31, 2009, with no material impact to our financial statements.

10


Table of Contents

ITEM 2   — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-looking Statements
Certain written and oral statements set forth below or made by Hastings Entertainment, Inc. (the “Company,” “Hastings,” or “Hastings Entertainment”) with the approval of an authorized executive officer constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to the business, expansion, merchandising and marketing strategies of Hastings, industry projections or forecasts, inflation, effect of critical accounting policies including lower of cost or market for inventory adjustments, the returns process, rental asset depreciation, store closing reserves, impairment or disposal of long-lived assets, revenue recognition, and vendor allowances, sufficiency of cash flow from operations and borrowings under our revolving credit facility and statements expressing general optimism about future operating results, are forward-looking statements. Such statements are based upon our management’s current estimates, assumptions and expectations, which are based on information available at the time of the disclosure, and are subject to a number of factors and uncertainties, including, but not limited to, consumer appeal of our existing and planned product offerings, and the related impact of competitor pricing and product offerings; overall industry performance and the accuracy of our estimates and judgments regarding trends; our ability to obtain favorable terms from suppliers; our ability to respond to changing consumer preferences, including with respect to new technologies and alternative methods of content delivery, and to effectively adjust our offerings if and as necessary; the application and impact of future accounting policies or interpretations of existing accounting policies; whether our assumptions turn out to be correct; our inability to attain such estimates and expectations; a downturn in market conditions in any industry relating to the products we inventory, sell or rent; the degree to which we enter into and maintain vendor relationships; the extremely challenging times that the U.S. and global economies are currently experiencing, the conditions of which have had and will continue to have an adverse impact on spending by Hastings’ current retail customer base and potential new customers, and the possibility that general economic conditions could deteriorate further; volatility of fuel and utility costs; acts of war or terrorism inside the United States or abroad; unanticipated adverse litigation results or effects; and other factors which may be outside of our control; any of which could cause actual results to differ materially from those described herein. We undertake no obligation to affirm, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with the unaudited consolidated financial statements of the Company and the related notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
General
Incorporated in 1972, Hastings is a leading multimedia entertainment retailer. We operate entertainment superstores that buy, sell, trade, and rent various home entertainment products, including books, music, software, periodicals, new and used CDs, DVDs, video games, video game consoles, and electronics. We also offer consumables and trends products such as apparel, t-shirts, action figures, posters, greeting cards, and seasonal merchandise. As of October 31, 2009, we operated 150 superstores principally in medium-sized markets located in 21 states, primarily in the Western and Midwestern United States. We also operate a multimedia entertainment e-commerce web site offering a broad selection of books, software, video games, DVDs and music. We have one wholly-owned subsidiary, Hastings Internet, Inc. References herein to fiscal years are to the twelve-month periods that end on January 31st of each following calendar year. For example, the twelve-month period ending January 31, 2010, is referred to as fiscal 2009, and the twelve-month period ended January 31, 2009, is referred to as fiscal 2008.
Critical Accounting Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe

11


Table of Contents

the following critical accounting estimates comprise our more significant estimates and assumptions used in the preparation of our financial statements. Our significant estimates and assumptions are reviewed, and any required adjustments are recorded, on a monthly or quarterly basis.
Lower of Cost or Market for Merchandise Inventory. Our merchandise inventories are recorded at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. As with any retailer, economic conditions, cyclical customer demand and changes in purchasing or distribution can affect the carrying value of inventory. As circumstances warrant, we record the lower of cost or market inventory adjustments. In some instances, these adjustments can have a material effect on the financial results of an annual or interim period. In order to determine such adjustments, we evaluate the age, inventory turns and estimated fair value and returnability of merchandise inventory by product category and record an adjustment if estimated market value is below cost.
Rental Asset Depreciation. We have established rental asset depreciation policies that match rental product costs with the related revenues. These policies require that we make significant estimates, based upon our experience, as to the ultimate revenue and the timing of the revenue to be generated from our rental product. For substantially all of our rental assets, we utilize an accelerated method of depreciation because it approximates the pattern of demand for such product, which is higher when the product is initially released by the studios for rental and declines over time. In establishing salvage values for our rental product, we consider the sales prices and sales volume of our previously rented product and other used product.
We currently depreciate the cost of our rental assets on an accelerated basis over six months or nine months, except for rental assets purchased for the initial stock of a new store, which are depreciated on a straight-line basis over 36 months. Rental assets, which include DVDs, Books on CD and Video Games, are depreciated to salvage values ranging from $4 to $10. Rental assets purchased for less than established salvage values are not depreciated.
We also review the carrying value of our rental assets to ensure that estimated future cash flows exceed the carrying value. We periodically record adjustments to the value of previously rented product primarily for estimated obsolescence or excess product based upon changes in our original assumptions about future demand and market conditions. If future demand or actual market conditions are less favorable than our original estimates, additional adjustments, including adjustments to useful lives or salvage values, may be required. We continually evaluate the estimates surrounding the useful lives and salvage values used in depreciating our rental assets. Changes to these estimates resulting from changes in consumer demand, changes in customer preferences or the price or availability of retail products may materially impact the carrying value of our rental assets and our rental margins.
The costs of rental product purchased pursuant to revenue-sharing arrangements, which are recorded in rental cost of sales on the consolidated statements of earnings, typically include a lower initial product cost with a percentage of the net rental revenues to be shared with studios over an agreed period of time. Any up-front costs exceeding the designated salvage value are amortized on an accelerated basis and revenue-sharing payments pursuant to the applicable arrangement are expensed as the related revenue is earned. Additionally, certain titles have performance guarantees. We analyze titles that are subject to performance guarantees and recognize an estimated expense for under-performing titles throughout the applicable period based upon our analysis of the estimated shortfall. We revise these estimates on a monthly basis, based on actual results.
Impairment or Disposal of Long-Lived Assets. We evaluate under-performing stores on a quarterly basis to determine whether projected future cash flows over the remaining lease term are sufficient to recover the carrying value of the fixed asset investment in each individual store. If projected future cash flows are less than the carrying value of the fixed asset investment, an impairment charge is recognized if the estimated fair value is less than the carrying value of such assets. The carrying value of leasehold improvements as well as certain other property and equipment is subject to impairment write-down.
Income Taxes. We make certain estimates and judgments in the calculation of the income tax provision and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between financial statement carrying amounts of assets and liabilities and their income tax bases. We base the measurement of deferred tax assets and liabilities on enacted tax rates that we expect will apply to taxable earnings in the year when we expect to settle or recover those

12


Table of Contents

temporary differences. We recognize the effect on deferred tax assets and liabilities on any change in income tax rates in the period that includes the enactment date.
The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has greater than fifty percent likelihood, on a cumulative basis, of being realized upon ultimate settlement. We recognize interest and penalties relating to any uncertain tax positions as a component of income tax expense.
Share-Based Compensation. Determining the amount of share-based compensation expense requires us to develop estimates that are used in calculating the grant-date fair value of stock options. In determining the fair value of stock options, we use the Black-Scholes valuation model, which requires us to make estimates of the following assumptions:
    Expected volatility — The estimated stock price volatility is derived based upon our historical stock prices over the expected life of the option.
 
    Expected life of the option — The estimate of an expected life is calculated based on historical data relating to grants, exercises, cancellations, and the vesting period and contractual life of the option.
 
    Risk-free interest rate — The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life of the option.
Our stock price volatility and expected option lives involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes pricing model and, ultimately, the expense that will be recognized over the vesting period of the option.
We recognize compensation expense only for the portion of options that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
In addition to stock options, we award performance-based stock awards. The grant date fair value of performance-based stock awards is equal to the average of the opening and closing stock price on the day on which they are granted. Compensation expense is recognized for these awards if management deems it probable that the performance conditions will be met. Management must use their judgment to determine the probability that a performance condition will be met. If actual results differ from management’s assumptions, future results could be materially impacted.

13


Table of Contents

Results of Operations
The following tables present our statement of earnings data, expressed as a percentage of revenue, and the number of superstores open at the end of the periods presented herein.
                                 
    Three Months Ended     Nine Months Ended  
    October 31,     October 31,  
    2009     2008     2009     2008  
Merchandise revenue
    84.1 %     84.0 %     83.3 %     82.9 %
Rental revenue
    15.9       16.0       16.7       17.1  
 
                       
Total revenues
    100.0       100.0       100.0       100.0  
 
Merchandise cost of revenue
    68.7       69.5       68.5       69.4  
Rental cost of revenue
    36.1       34.2       35.5       34.2  
 
                       
Total cost of revenues
    63.5       63.9       63.0       63.4  
 
                       
 
Gross profit
    36.5       36.1       37.0       36.6  
 
Selling, general and administrative expenses
    40.7       40.1       37.6       36.0  
Pre-opening expenses
          0.1              
 
                       
 
Operating income (loss)
    (4.2 )     (4.1 )     (0.6 )     0.6  
 
Other income (expense):
                               
Interest expense
    (0.2 )     (0.5 )     (0.2 )     (0.4 )
Other, net
          0.1              
 
                       
 
Income (loss) before income taxes
    (4.4 )     (4.5 )     (0.8 )     0.2  
 
Income tax expense (benefit)
    (1.3 )     (1.3 )     (0.2 )     0.2  
 
                       
 
Net income (loss)
    (3.1 )%     (3.2 )%     (0.6 )%     0.0 %
 
                       
Summary of Superstore Activity
                                         
    Three Months Ended     Nine Months Ended     Year Ended  
    October 31,     October 31,     January 31,  
    2009     2008     2009     2008     2009  
Beginning number of stores
    151       152       153       153       153  
Openings
          1             1       2  
Closings
    (1 )           (3 )     (1 )     (2 )
 
                             
Ending number of stores
    150       153       150       153       153  
 
                             

14


Table of Contents

Financial Results for the Third Quarter of Fiscal Year 2009
Revenues. Total revenues for the third quarter decreased approximately $1.9 million, or 1.7%, to $112.3 million compared to $114.3 million for the third quarter of fiscal 2008. The following is a summary of our revenues results (dollars in thousands):
                                                 
    Three Months Ended October 31,        
    2009     2008     Decrease  
            Percent             Percent                  
    Revenues     of Total     Revenues     of Total     Dollar     Percent  
Merchandise revenue
  $ 94,434       84.1 %   $ 95,991       84.0 %   $ (1,557 )     -1.6 %
Rental revenue
    17,903       15.9 %     18,277       16.0 %     (374 )     -2.0 %
 
                                   
Total revenues
  $ 112,337       100.0 %   $ 114,268       100.0 %   $ (1,931 )     -1.7 %
 
                                   
       
Comparable-store revenues (“Comp”)
Total
    -1.6%
Merchandise
    -1.6%
Rental
    -1.6%
Below is a summary of the Comp results for our major merchandise categories:
                 
    Three Months Ended October 31,
    2009   2008
Hardback Café
    16.5 %     7.9 %
Video Games
    8.5 %     -14.8 %
Electronics
    5.1 %     8.6 %
Consumables
    3.8 %     13.1 %
Books
    0.2 %     1.0 %
Movies
    -3.1 %     -5.0 %
Trends
    -4.1 %     21.7 %
Music
    -10.4 %     -19.5 %
Stores included in the Comps calculation are those stores that have been open for a minimum of 60 weeks. Also included are stores that were remodeled or relocated during the comparable period. Sales via the internet are included and closed stores are removed from each comparable period for the purpose of calculating Comps. Prior year Comp sales have been revised to reflect current year classification of Comp sale categories.
Hardback Café Comps increased 16.5% for the quarter, primarily as a result of four additional cafes open in existing stores during the quarter, as compared to the prior year, and increased sales of specialty café drinks. Video Game Comps increased 8.5% for the quarter, primarily due to strong sales of new and used video games for the Xbox 360 and Playstation 3 consoles, and increased sales of Nintendo DS games and hardware, partially offset by lower sales of older generation video games. Electronics department Comps increased 5.1% for the quarter, as a result of increased sales of MP3 players and accessories, Blu-ray DVD players, headphones and digital converter boxes, partially offset by lower sales of storage devices, including CD storage cases and recordable discs, and batteries. Consumable Comps increased 3.8% for the quarter, primarily due to increased sales of fountain drinks, and assorted gums and candies, including seasonal candy for Halloween and snacks cross-merchandised on our video rental wall. Books Comps increased 0.2% for the quarter. Increased sales of used trade paperbacks and hardbacks, and increased sales of value priced books, were offset by lower sales of new hardbacks and trade paperbacks. Movie Comps decreased 3.1% for the quarter, primarily due to lower sales of new DVDs and DVD boxed sets, partially offset by increased sales of Blu-ray DVDs. Trends Comps decreased 4.1% for the quarter, primarily due to lower sales of Webkinz plush products, collectible card games, graphic novels, and apparel, partially offset by increased sales of board games and action figures. Key drivers in apparel included bags, footwear, and eyewear. Music Comps decreased 10.4% for the quarter, primarily due to the lowering of price points on new and used CDs and a

15


Table of Contents

continued industry decline and reduced Music footprint in forty stores. Unit sales for Music increased 11.1% for the quarter. Merchandise Comps, excluding the sale of new music, increased 0.4% for the quarter.
Rental Comps decreased 1.6% for the quarter, primarily due to increased promotions offered during the current quarter and the lowering of thousands of movie titles in our stores to a $0.99 per week rental price point. Rental Video Game Comps increased 6.1% for the quarter while Rental Video Comps decreased 2.7%.
Gross Profit — Merchandise. For the third quarter, total merchandise gross profit dollars increased approximately $0.4 million, or 1.4%, to $29.6 million from $29.2 million for the same period last year, primarily as a result of increased merchandise margin rates, partially offset by lower merchandise revenues. As a percentage of total merchandise revenue, merchandise gross profit increased to 31.3% for the quarter compared to 30.5% for the same period in the prior year, resulting from continued improvements in inventory management.
Gross Profit — Rental. For the third quarter, total rental gross profit dollars decreased approximately $0.6 million, or 5.0%, to $11.4 million from $12.0 million for the same period in the prior year, as the result of lower rental revenues primarily due to the lowering of thousands of movie titles in our stores to a $0.99 per week price point. As a percentage of total revenue, rental gross profit decreased to 63.9% for the quarter compared to 65.8% for the same period in the prior year, primarily due to lower revenues.
Selling, General and Administrative Expenses (“SG&A”). As a percentage of total revenue, SG&A increased to 40.7% for the third quarter compared to 40.1% for the same quarter in the prior year due to deleveraging resulting from lower revenues. SG&A decreased approximately $0.2 million during the quarter, or 0.4%, to $45.7 million compared to $45.9 million for the same quarter last year. Reductions across most expense categories, resulting from improved expense management, offset increases in store occupancy costs associated with the operation of new, expanded, and relocated stores.
Interest Expense. For the third quarter, interest expense decreased approximately $0.4 million, or 66.7%, to $0.2 million, compared to $0.6 million during fiscal 2008 resulting primarily from lower interest rates and lower average debt levels during the period. The average rate of interest charged for the quarter decreased to 1.94% compared to 4.08% for the same period in the prior year.
Income Tax Expense (Benefit). During the third quarter, the Company recorded a discrete tax charge of approximately $0.4 million related to amended state and federal tax returns resulting from an Internal Revenue Service (“IRS”) audit of the Company’s previously filed tax returns. During the three months ended October 31, 2008, the Company recorded a net discrete tax charge of approximately $0.5 million primarily related to an IRS audit of the Company’s previously filed tax returns. Primarily as a result of these discrete tax charges, the effective tax rates for the three months ended October 31, 2009 and 2008 were (30.2%) and (28.7%), respectively.
Financial Results for the Nine Months Ended October 31, 2009
Revenues. Total revenues for the nine months ended October 31, 2009 decreased approximately $16.7 million, or 4.5%, to $355.2 million compared to $371.9 million for the same period in fiscal 2008. Included in fiscal 2008 was approximately $2.0 million in revenues resulting from an additional day of sales due to the leap year. Excluding this extra day of sales, total revenues for the nine months ended October 31, 2009, decreased approximately $14.7 million, or 4.0%. The following is a summary of our revenues results (dollars in thousands):
                                                 
    Nine Months Ended October 31,        
    2009     2008     Decrease  
            Percent             Percent              
    Revenues     of Total     Revenues     of Total     Dollar     Percent  
Merchandise revenue
  $ 295,896       83.3 %   $ 308,168       82.9 %   $ (12,272 )     -4.0 %
Rental revenue
    59,327       16.7 %     63,702       17.1 %     (4,375 )     -6.9 %
 
                                   
Total revenues
  $ 355,223       100.0 %   $ 371,870       100.0 %   $ (16,647 )     -4.5 %
 
                                   

16


Table of Contents

Comparable-store revenues (“Comp”)
             
    Nine Months Ended October 31, 2009
    2009   2008   (excludes leap day)
Total
  -5.5%   -0.5%   -4.9%
Merchandise
  -5.1%   -0.2%   -4.6%
Rental
  -7.3%   -2.3%   -6.6%
Below is a summary of the Comp results for our major merchandise categories:
                   
    Nine Months Ended October 31, 2009
    2009   2008   (excludes leap day)
Hardback Café
  13.9 %   9.5 %   14.5 %
Consumables
  3.8 %   12.0 %   4.5 %
Electronics
  0.9 %   17.2 %   1.5 %
Trends
  -0.3 %   23.1 %   0.1 %
Books
  -0.4 %   1.6 %   0.1 %
Movies
  -5.7 %   0.3 %   -5.2 %
Video Games
  -8.6 %   5.4 %   -8.1 %
Music
  -13.9 %   -15.7 %   -13.5 %
Stores included in the Comps calculation are those stores that have been open for a minimum of 60 weeks. Also included are stores that were remodeled or relocated during the comparable period. Sales via the internet are included and closed stores are removed from each comparable period for the purpose of calculating Comps. The following discussion of merchandise and rental Comp sales excludes the additional day of sales in fiscal 2008 due to the leap year. Prior year Comp sales have been revised to reflect current year classification of Comp sale categories.
Hardback Café Comps increased 14.5% for the period, primarily as a result of increased sales of specialty café drinks and four additional cafés open in existing stores during the period, as compared to the prior year. Consumable Comps increased 4.5% for the period, primarily due to increased sales of assorted candies and gums, including sales of seasonal candy and candy and snacks cross-merchandised on our video rental wall. Electronics Comps increased 1.5% for the period, primarily resulting from strong sales of digital converter boxes, Blu-ray DVD players and MP3 players, partially offset by lower sales of refurbished iPods. Trends Comps increased 0.1% for the period. Increased sales of action figures, apparel, and board games were partially offset by lower sales of Webkinz plush products and collectible card games. Key drivers in apparel included t-shirts, licensed sports apparel, and accessories. Books Comps increased 0.1% for the period. Increased sales of value priced books, used hardbacks, and used trade paperbacks were partially offset by lower sales of new hardbacks and trade paperbacks, and magazines. Movies Comps decreased 5.2% for the period, primarily due to lower sales of new and used DVDs and DVD boxed sets, partially offset by increased sales of new and used Blu-ray movies. Video Games Comps decreased 8.1% for the period, primarily due to lower sales of video game consoles and older generation video games, partially offset by increased sales of used video games for the Microsoft XBOX 360, Sony Playstation 3 and Nintendo Wii consoles. Music Comps decreased 13.5% for the period, primarily due to the lowering of price points on new and used CDs and a continued industry decline and reduced Music footprint in forty stores. Merchandise Comps, excluding the sale of new music, decreased 2.5% during the period.
Rental Comps decreased 6.6% for the first nine months of fiscal 2009, primarily resulting from fewer rentals of DVDs and increased promotions offered during the current period, partially offset by increased rentals of Blu-ray movies and video games. Comparable promotional coupons increased significantly for the first nine months of fiscal 2009, which contributed to the decrease in Rental Comps. Rental Video Game Comps increased 5.1% for the period while Rental Movie Comps decreased 8.9%.
Gross Profit — Merchandise. For the current nine months, total merchandise gross profit dollars decreased approximately $1.1 million, or 1.2%, to $93.2 million from $94.3 million for the same period in the prior year

17


Table of Contents

primarily due to a decrease in merchandise revenues, partially offset by an increase in merchandise margin rates. As a percentage of total merchandise revenue, merchandise gross profit increased to 31.5% for the nine months ended October 31, 2009, compared to 30.6% for the same period in the prior year, primarily resulting from continued improvements in inventory management.
Gross Profit — Rental. For the current nine months, total rental gross profit dollars decreased approximately $3.6 million, or 8.6%, to $38.3 million from $41.9 million for the same period in the prior year as the result of lower rental revenues primarily due to the lowering of thousands of movie titles in our stores to a $0.99 per week price point. As a percentage of total rental revenue, rental gross profit decreased to 64.5% for the nine months ended October 31, 2009, compared to 65.8% for the same period in the prior year due primarily to lower revenues.
Selling, General and Administrative Expenses (“SG&A”). As a percentage of total revenue, SG&A increased to 37.6% for the current nine months compared to 36.0% for the same period in the prior year. SG&A decreased approximately $0.4 million during the nine months ended October 31, 2009, or 0.3%, to $133.5 million compared to $133.9 million for the same period last year. Reductions across most expense categories, resulting from improved expense management, offset increases in store occupancy costs associated with the operation of new, expanded, and relocated stores and increased advertising costs.
Interest Expense. For the current nine months, interest expense decreased approximately $0.7 million, or 46.7%, to $0.8 million, compared to $1.5 million during fiscal 2008 resulting primarily from lower interest rates and lower average debt levels during the period. The average rate of interest charged for the period decreased to 2.46% compared to 4.26% for the same period in the prior year.
Income Tax Expense (Benefit). During the nine months ended October 31, 2009, the Company recorded a discrete tax charge of approximately $0.4 million related to amended state and federal tax returns resulting from an IRS audit of the Company’s previously filed tax returns. During the nine months ended October 31, 2008, the Company recorded a net discrete tax charge of approximately $0.5 million primarily related to an IRS audit of the Company’s previously filed tax returns. Primarily as a result of these discrete tax charges, the effective tax rates for the nine months ended October 31, 2009 and 2008 were (20.8%) and 101.0%, respectively.
Liquidity and Capital Resources
We generate cash from operations from the sale of merchandise and the rental of products, most of which is received in cash and cash equivalents. Our primary sources of working capital are cash flows from operating activities, including trade credit from vendors, and borrowings under our revolving credit facility, with the most significant source in the first nine months of fiscal 2009 being cash flows from operating activities. Other than our principal capital requirements arising from the purchasing, warehousing and merchandising of inventory and rental products, opening new stores and expanding or reformatting existing stores, and updating existing and implementing new information systems technology, we have no anticipated material capital commitments, except for the stock buyback programs discussed more fully in Item 2 of Part II of this Quarterly Report on Form 10-Q. We believe our cash flow from operations and borrowings under our revolving credit facility will be sufficient to fund our ongoing operations, new stores and store expansions, reformations and relocations for the next twelve months.
At October 31, 2009, total outstanding debt was approximately $42.3 million. We project our outstanding debt level will be in the range of $45.0 million to $48.0 million by the end of fiscal 2009. At October 31, 2009, we had approximately $42.7 million in excess availability, under the Facility (as defined below), after the $10 million availability reserve.
Consolidated Cash Flows
Operating Activities. Net cash provided by operating activities increased $6.0 million, from $7.7 million for the nine months ended October 31, 2008, to $13.7 million for the nine months ended October 31, 2009. Net loss was approximately $2.1 million for the nine months ended October 31, 2009, compared to net loss of approximately $7,000 for the same period in fiscal 2008. Merchandise inventories increased $24.6 million for the nine months ended October 31, 2009, compared to an increase of $8.5 million during the same period in fiscal 2008, primarily due to differences in the timing of inventory build-up for the

18


Table of Contents

upcoming holiday season. Trade accounts payables increased $35.0 million for the nine months ended October 31, 2009, compared to an increase of $16.0 million during the same period in fiscal 2008, primarily due to the increase in merchandise inventories and differences in the timing of payments to vendors surrounding holiday purchases in the current year compared to the prior year. Merchandise inventories, net of trade payables, decreased approximately $10.5 million during the current period, compared to a decrease of $7.5 million during the same period in the prior year. Purchases of rental assets were $15.8 million for the nine months ended October 31, 2009, compared to $21.3 million during the same period in fiscal 2008, resulting primarily from fewer titles released during the first nine months of fiscal 2009 and lower purchases due to lower anticipated rental revenues resulting from the current economic recession. During fiscal 2008, an IRS audit of our previously filed income tax returns resulted in a change in our tax method used to account for gift cards. This change resulted in an increase in deferred tax assets and a related increase in current federal tax liabilities classified within accrued expenses and other liabilities, during fiscal 2008. Deferred income tax benefit totaled $1.7 million for the nine months ended October 31, 2009, compared to deferred tax expense of $6.7 million for the same period in fiscal 2008, and accrued expenses and other liabilities decreased $5.8 million for the current period compared to an increase of $1.5 million for the same period in fiscal 2008, primarily as a result of the IRS audit.
Investing Activities. Net cash used in investing activities decreased $11.9 million, from $20.6 million for the nine months ended October 31, 2008, to $8.7 million for the nine months ended October 31, 2009, due to our planned reductions in capital expenditures. We currently anticipate an increase in capital expenditures during fiscal 2010 as the economy recovers from the recession.
Financing Activities. Cash provided by or used in financing activities is primarily associated with borrowings and payments made under our Facility (described below under “Capital Structure”). For the nine months ended October 31, 2009, cash used in financing activities was approximately $6.4 million compared to cash provided by financing activities of $13.1 million for the nine months ended October 31, 2008, primarily resulting from net repayments under our credit facility during the period of approximately $2.2 million compared to net borrowings of $18.3 million for the same period in the prior year. Changes in our cash overdraft position increased from a use of $1.8 million for the nine months ended October 31, 2008 to a use of $3.2 million for the nine months ended October 31, 2009, due to the timing of payments to vendors during the period. The Company purchased approximately $1.0 million of treasury stock during the nine months ended October 31, 2009, compared to $3.9 million during the nine months ended October 31, 2008.
Capital Structure. We have a syndicated secured Loan and Security Agreement with Bank of America (the “Facility”). The amount outstanding under the Facility is limited by a borrowing base predicated on (i) eligible inventory, as defined in the Facility, and (ii) certain rental assets, net of accumulated depreciation less specifically defined reserves and is limited to a ceiling of $100 million, less a $10 million availability reserve. We can borrow at various interest-rate options based on the prime rate or London Interbank Offered Rate (“LIBOR”) plus applicable margin depending on the level of our minimum availability. The borrowing base under the Facility is limited to an advance rate of 65% of eligible inventory and certain rental assets, which can be adjusted to reduce availability under the Facility. The lender may increase specifically defined reserves to reduce availability in the event of adverse changes in our industry or our financial condition that are projected to impact the value of our assets pledged as collateral. The lender must exercise reasonable judgment and act in good faith with respect to any changes in the specifically defined reserves. The Facility contains no financial covenants, prohibits the payment of dividends, includes certain other debt and acquisition limitations, allows for the repurchase of up to $27.3 million of our common stock and requires a minimum availability of $10 million at all times. The Facility is secured by substantially all of the assets of the Company and our subsidiary and is guaranteed by our subsidiary. Unless the Facility is amended and the maturity extended, the Facility matures on August 29, 2011. At October 31, 2009, we had $42.7 million in excess availability under the Facility, after the $10 million availability reserve. We expect to have $29.0 million to $32.0 million in excess availability, after the $10 million availability reserve and outstanding letters of credit, at January 31, 2010. The average rates of interest being charged under the Facility for the three and nine months ended October 31, 2009, were 1.9% and 2.5%, respectively.
We utilize standby letters of credit to support certain insurance policies. The aggregate amount of letters of credit at October 31, 2009, was approximately $1.0 million, which reduces the excess availability under the Facility.

19


Table of Contents

At October 31, 2009, our minimum lease commitments for the remaining three months of fiscal 2009 were approximately $4.4 million. Total existing minimum lease commitments for fiscal years 2009 through 2025 were approximately $169.7 million as of October 31, 2009.
Contractual obligations and off-balance sheet arrangements. We have contractual obligations associated with ongoing business and financing activities, which will result in cash payments in future periods. These obligations include long-term debt, operating leases and certain revenue-sharing agreements. As of October 31, 2009, other than operating leases and standby letters of credit, we had not entered into any off-balance sheet arrangements or third-party guarantees, nor does our business ordinarily require us to do so. At October 31, 2009, there have been no material changes in our contractual obligations or off-balance sheet arrangements from those reported in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.
Seasonality
As is the case with many retailers, a significant portion of our revenues, and an even greater portion of our operating income, is generated in the fourth fiscal quarter, which includes the holiday selling season. As a result, a substantial portion of our annual earnings has been, and will continue to be, dependent on the results of the fourth quarter, which could be impacted by the extremely challenging times that the U.S. and global economies are currently experiencing, the conditions of which have had and will continue to have an adverse impact on spending by Hastings’ current retail customer base and potential new customers. Less than satisfactory net sales for such period could have a material adverse effect on the Company’s financial condition or results of operations for the year and may not be sufficient to cover any losses that may have been incurred in the first three quarters of the year. We experience reduced video rental activity in the spring because customers spend more time outdoors. Major world or sporting events, such as the Super Bowl, the Olympic Games or the World Series, also have a temporary adverse effect on revenues. Future operating results may be affected by many factors, including variations in the number and timing of superstore openings, the number and popularity of new book, music and video titles, the cost of the new release or “best renter” titles, changes in comparable-store revenues, competition, marketing programs, increases in the minimum wage, weather, special or unusual events and other factors that may affect our operations.
ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the ordinary course of our business, we are exposed to certain market risks, primarily changes in interest rates. Our exposure to interest rate risk consists of variable rate debt based on, at our option, the lender’s base rate or LIBOR plus a specified percentage. The annual impact on our results of operations of a 100 basis point interest rate change on the October 31, 2009, outstanding balance of the variable rate debt would be approximately $0.4 million. After an assessment of these risks to our operations, we believe that the primary market risk exposures (within the meaning of Regulation S-K Item 305) are not material and are not expected to have any material adverse impact on our financial position, results of operations or cash flows for the next fiscal year.
ITEM 4 — CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange

20


Table of Contents

Commission and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
There has not been any change in our internal control over financial reporting during our fiscal quarter ended October 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1   — LEGAL PROCEEDINGS.
We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.
ITEM 1A   — RISK FACTORS.
Our Annual Report on Form 10-K for the year ended January 31, 2009, includes a detailed discussion of our risk factors. Since that time, there have been no material changes to our risk factors.
ITEM 2   — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
A summary of our purchases of shares of common stock for the three months ended October 31, 2009 is as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
                                 
                    Total number of     Approximate dollar  
                    shares purchased as     value of shares  
                    part of publicly     that may yet be  
    Total number of shares     Average price paid     announced plans or     purchased under the  
Period   purchased (1)     per share     programs     plans or programs(2)  
August 1, 2009 through August 31, 2009
    27,900     $ 3.91       27,900       N/A  
September 1, 2009 through September 30, 2009
    51,012       4.06       51,012       N/A  
October 1, 2009 through October 31, 2009
    61,200       4.33       61,200       N/A  
 
                         
Total
    140,112     $ 4.15       140,112     $ $4,694,608  
 
                         
 
(1)   All shares were open-market purchases made under a repurchase plan publicly announced in a press release dated September 28, 2001. Our Board of Directors initially authorized the repurchase of up to $5.0 million of our common stock. To date, the Board of Directors has approved the repurchase of up to an additional $22.5 million of our common stock. Each such authorization to increase amounts was publicly announced in a press release. The repurchases satisfied the conditions of the safe harbor of Rule 10b-18 under the Exchange Act.

21


Table of Contents

(2)   A total of 3,677,245 shares have been purchased under the repurchase plan at a total cost of approximately $22.6 million, or approximately $6.15 per share.
ITEM 6   — EXHIBITS.
  a.   The following exhibits are filed herewith or incorporated by reference as indicated as required by Item 601 of Regulation S-K. The exhibits designated by an asterisk are management contracts and/or compensatory plans or arrangement required to be filed as exhibits to this report.
                 
Exhibit Number           Description of Documents
  3.1       (1 )  
Third Restated Articles of Incorporation of the Company.
  3.2       (3 )  
Amended and Restated Bylaws of the Company.
  4.1       (2 )  
Specimen of Certificate of Common Stock of the Company.
  4.2       (1 )  
Third Restated Articles of Incorporation of the Company (see 3.1 above).
  4.3       (3 )  
Amended and Restated Bylaws of the Company (see 3.2 above).
  31.1       (4 )  
Principal Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
  31.2       (4 )  
Principal Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
  32.1       (4 )  
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
(1)   Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, dated March 18, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
 
(2)   Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
 
(3)   Previously filed as an exhibit to the Company’s Form 8-K (File No. 000-24381) filed on January 17, 2008 and incorporated herein by reference.
 
(4)   Filed herewith.

22


Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized:
         
  HASTINGS ENTERTAINMENT, INC
 
 
Date: December 4, 2009  /s/ Dan Crow    
  Dan Crow   
  Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) 
 

23


Table of Contents

         
INDEX TO EXHIBITS
                 
Exhibit Number           Description of Documents
  3.1       (1 )  
Third Restated Articles of Incorporation of the Company.
  3.2       (3 )  
Amended and Restated Bylaws of the Company.
  4.1       (2 )  
Specimen of Certificate of Common Stock of the Company.
  4.2       (1 )  
Third Restated Articles of Incorporation of the Company (see 3.1 above).
  4.3       (3 )  
Amended and Restated Bylaws of the Company (see 3.2 above).
  31.1       (4 )  
Principal Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
  31.2       (4 )  
Principal Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
  32.1       (4 )  
Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
(1)   Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, dated March 18, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
 
(2)   Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.
 
(3)   Previously filed as an exhibit to the Company’s Form 8-K (File No. 000-24381) filed on January 17, 2008 and incorporated herein by reference.
 
(4)   Filed herewith.

24