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EX-31.1 - EX-31.1 - HASTINGS ENTERTAINMENT INC | d70316exv31w1.htm |
EX-31.2 - EX-31.2 - HASTINGS ENTERTAINMENT INC | d70316exv31w2.htm |
EX-32.1 - EX-32.1 - HASTINGS ENTERTAINMENT INC | d70316exv32w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
(Registrants telephone number, including area code)
(Registrants 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 issuers 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
Form 10-Q
For the Quarterly Period Ended October 31, 2009
INDEX
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, 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.
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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)
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.
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Table of Contents
HASTINGS ENTERTAINMENT, INC.
Unaudited Consolidated Statements of Cash Flows
For the Nine Months Ended October 31, 2009 and 2008
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)
(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.
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Table of Contents
Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
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 managements 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
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Table of Contents
Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
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 | ||
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Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
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.
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Hastings Entertainment, Inc.
Notes to the Unaudited Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
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.
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Table of Contents
ITEM 2 | MANAGEMENTS 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 managements 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
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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
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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 managements 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 managements assumptions, future results could be materially impacted.
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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 | |||||||||||||||
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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
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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 Companys 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 Companys 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 | % | |||||||||||
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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
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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 Companys 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 Companys 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
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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.
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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 Companys 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 lenders 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
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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. |
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(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 Companys 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 Companys 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 Companys Form 8-K (File No. 000-24381) filed on January 17, 2008 and incorporated herein by reference. | |
(4) | Filed herewith. |
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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) |
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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 Companys 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 Companys 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 Companys Form 8-K (File No. 000-24381) filed on January 17, 2008 and incorporated herein by reference. | |
(4) | Filed herewith. |
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