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EXCEL - IDEA: XBRL DOCUMENT - HASTINGS ENTERTAINMENT INC | Financial_Report.xls |
EX-32.1 - EXHIBIT 32.1 - HASTINGS ENTERTAINMENT INC | c25500exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - HASTINGS ENTERTAINMENT INC | c25500exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - HASTINGS ENTERTAINMENT INC | c25500exv31w1.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, 2011
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 | 75-1386375 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
3601 Plains Boulevard, Amarillo, Texas | 79102 | |
(Address of principal executive offices) | (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 (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes þ 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, 2011 | ||
Common Stock, $.01 par value per share | 8,381,747 shares |
HASTINGS ENTERTAINMENT, INC.
Form 10-Q
For the Quarterly Period Ended October 31, 2011
Form 10-Q
For the Quarterly Period Ended October 31, 2011
INDEX
Page | ||||||||
3 | ||||||||
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5 | ||||||||
6 | ||||||||
10 | ||||||||
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22 | ||||||||
22 | ||||||||
22 | ||||||||
23 | ||||||||
24 | ||||||||
25 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
HASTINGS ENTERTAINMENT, INC.
Consolidated Balance Sheets
October 31, 2011 and January 31, 2011
(Dollars in thousands, except par value)
October 31, | January 31, | |||||||
2011 | 2011 | |||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 5,092 | $ | 6,149 | ||||
Merchandise inventories, net |
181,996 | 146,636 | ||||||
Deferred income taxes |
6,655 | 6,022 | ||||||
Prepaid expenses and other current assets |
15,017 | 11,742 | ||||||
Total current assets |
208,760 | 170,549 | ||||||
Rental assets, net of accumulated depreciation of $20,813 and $20,312 at
October 31, 2011 and January 31, 2011, respectively |
14,143 | 13,129 | ||||||
Property, equipment and improvements, net of accumulated depreciation of $214,024
and
$204,225 at October 31, 2011 and January 31, 2011, respectively |
41,443 | 41,588 | ||||||
Deferred income taxes |
1,186 | 1,668 | ||||||
Intangible assets, net |
391 | 391 | ||||||
Other assets |
2,241 | 2,358 | ||||||
Total Assets |
$ | 268,164 | $ | 229,683 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 85,364 | $ | 60,555 | ||||
Accrued expenses and other current liabilities |
26,332 | 26,124 | ||||||
Total current liabilities |
111,696 | 86,679 | ||||||
Long term debt |
54,942 | 31,766 | ||||||
Other liabilities |
6,788 | 6,512 | ||||||
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 8,381,747 shares outstanding at October 31, 2011; 11,944,544 shares issued and 8,743,550 shares outstanding at January 31, 2011 |
119 | 119 | ||||||
Additional paid-in capital |
37,028 | 36,673 | ||||||
Retained earnings |
79,424 | 88,589 | ||||||
Accumulated other comprehensive income |
97 | 107 | ||||||
Treasury stock, at cost
3,562,797 shares and 3,200,994 shares at October 31, 2011
and January 31, 2011, respectively |
(21,930 | ) | (20,762 | ) | ||||
Total Shareholders Equity |
94,738 | 104,726 | ||||||
Total Liabilities and Shareholders Equity |
$ | 268,164 | $ | 229,683 | ||||
See accompanying notes to unaudited consolidated financial statements.
3
Table of Contents
HASTINGS ENTERTAINMENT, INC.
Unaudited
Consolidated Statements of Operations
For the Three and Nine Months Ended October 31, 2011 and 2010
(Dollars in thousands, except per share amounts)
Three Months Ended October 31, | Nine Months Ended October 31, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Merchandise revenue |
$ | 92,638 | $ | 94,462 | 289,929 | 301,175 | ||||||||||
Rental revenue |
15,841 | 17,673 | 52,792 | 58,801 | ||||||||||||
Gift card breakage revenue |
145 | 149 | 575 | 537 | ||||||||||||
Total revenues |
108,624 | 112,284 | 343,296 | 360,513 | ||||||||||||
Merchandise cost of revenue |
65,177 | 65,038 | 201,186 | 206,333 | ||||||||||||
Rental cost of revenue |
6,299 | 6,456 | 20,470 | 21,768 | ||||||||||||
Total cost of revenues |
71,476 | 71,494 | 221,656 | 228,101 | ||||||||||||
Gross profit |
37,148 | 40,790 | 121,640 | 132,412 | ||||||||||||
Selling, general and administrative expenses |
46,180 | 45,675 | 134,607 | 135,753 | ||||||||||||
Pre-opening expenses |
30 | | 242 | | ||||||||||||
Operating loss |
(9,062 | ) | (4,885 | ) | (13,209 | ) | (3,341 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(405 | ) | (374 | ) | (894 | ) | (695 | ) | ||||||||
Other, net |
93 | 46 | 230 | 91 | ||||||||||||
Loss before income taxes |
(9,374 | ) | (5,213 | ) | (13,873 | ) | (3,945 | ) | ||||||||
Income tax benefit |
(3,851 | ) | (2,134 | ) | (4,708 | ) | (1,802 | ) | ||||||||
Net loss |
$ | (5,523 | ) | $ | (3,079 | ) | (9,165 | ) | (2,143 | ) | ||||||
Basic loss per share |
$ | (0.65 | ) | $ | (0.35 | ) | (1.07 | ) | (0.23 | ) | ||||||
Diluted loss per share |
$ | (0.65 | ) | $ | (0.35 | ) | (1.07 | ) | (0.23 | ) | ||||||
Weighted-average common shares
outstanding: |
||||||||||||||||
Basic |
8,508 | 8,849 | 8,605 | 9,120 | ||||||||||||
Dilutive effect of stock awards |
| | | | ||||||||||||
Diluted |
8,508 | 8,849 | 8,605 | 9,120 | ||||||||||||
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, 2011 and 2010
(Dollars in thousands)
Nine Months Ended | ||||||||
October 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (9,165 | ) | $ | (2,143 | ) | ||
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities: |
||||||||
Rental asset depreciation expense |
8,422 | 8,224 | ||||||
Purchases of rental assets |
(18,277 | ) | (20,139 | ) | ||||
Property, equipment and improvements depreciation expense |
12,803 | 12,989 | ||||||
Deferred income taxes |
(158 | ) | 208 | |||||
Loss on rental assets lost, stolen and defective |
1,069 | 1,403 | ||||||
Loss on disposal or impairment of property and equipment,
excluding rental assets |
218 | 64 | ||||||
Non-cash stock-based compensation |
759 | 481 | ||||||
Changes in operating assets and liabilities: |
||||||||
Merchandise inventories, net |
(27,586 | ) | (11,009 | ) | ||||
Prepaid expenses and other current assets |
(3,275 | ) | (2,994 | ) | ||||
Trade accounts payable |
21,789 | 21,254 | ||||||
Accrued expenses and other current liabilities |
223 | (1,220 | ) | |||||
Excess tax benefit from stock-based compensation |
(15 | ) | (48 | ) | ||||
Other assets and liabilities, net |
458 | (84 | ) | |||||
Net cash provided by (used in) operating activities |
(12,735 | ) | 6,986 | |||||
Cash flows from investing activities: |
||||||||
Purchases of property, equipment and improvements |
(12,878 | ) | (9,259 | ) | ||||
Net cash used in investing activities |
(12,878 | ) | (9,259 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings under revolving credit facility |
389,033 | 381,020 | ||||||
Repayments under revolving credit facility |
(365,857 | ) | (375,087 | ) | ||||
Purchase of treasury stock |
(1,624 | ) | (5,471 | ) | ||||
Change in cash overdraft |
3,020 | 3 | ||||||
Deferred financing costs paid |
(68 | ) | (599 | ) | ||||
Proceeds from exercise of stock options |
37 | 202 | ||||||
Excess tax benefit from stock-based compensation |
15 | 48 | ||||||
Net cash provided by financing activities |
24,556 | 116 | ||||||
Net decrease in cash and cash equivalents |
(1,057 | ) | (2,157 | ) | ||||
Cash and cash equivalents at beginning of period |
6,149 | 8,863 | ||||||
Cash and cash equivalents at end of period |
$ | 5,092 | $ | 6,706 | ||||
See accompanying notes to unaudited consolidated financial statements.
5
Table of Contents
Hastings Entertainment, Inc
Notes to Unaudited Consolidated 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
earnings, 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, 2011.
The balance sheet at January 31, 2011 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, 2011.
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, 2012 is
referred to as fiscal year 2011.
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 to the Audited Consolidated Financial
Statements in our Annual Report on Form 10-K for the fiscal year ended January 31, 2011.
For the three months ended October 31, 2011 and 2010, we recognized approximately $0.1 million of
stock-based compensation expense. For the nine months ended October 31, 2011 and 2010, we
recognized approximately $0.8 million and $0.5 million, respectively, of stock-based compensation
expense. These amounts include expense related to incentive stock options, non-qualified stock
options, and restricted stock units.
As of October 31, 2011, we had 379,621 shares available to grant as stock-based compensation awards
under our various stock incentive plans.
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Table of Contents
Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
3. Long-term Debt
On July 22, 2010, we entered into the Amended and Restated Loan and Security Agreement with Bank of
America, N.A., as agent, which amended and restated our Loan and Security Agreement dated as of
August 29, 2000, as otherwise amended (the Prior Agreement), and on July 21, 2011, we entered
into an amendment (the First Amendment) to the Amended Agreement with Bank of America, N.A
(collectively, the Amended Agreement). The First Amendment increased the revolving credit
facility from $100 million to $115 million, increased our borrowing base, lowered our interest
rates, and allowed for the payment of dividends, which was previously prohibited under the Amended
Agreement. The Amended Agreement is substantially the same as the Prior Agreement, extends the
maturity date of the Prior Agreement from August 29, 2011 to July 22, 2014, and provides that we
may repurchase up to $10.0 million worth of our common stock. The Amended Agreement also provides
that we may repurchase additional shares of our common stock in the event we meet certain criteria
set forth in the Amended Agreement. The Amended Agreement includes certain debt and acquisition
limitations and requires a minimum availability of 10% of the lesser of (a) the Borrowing Base, or
(b) the Revolving Credit Ceiling, provided however that we must also maintain Availability that is
greater than or equal to $10 million at all times. Our obligations under the Amended Agreement are
secured by a pledge of substantially all of the assets of the Company and our subsidiary and are
guaranteed by our subsidiary.
The amount outstanding under the Amended Agreement is limited by a borrowing base predicated on the
sum of (a) 85% of Eligible Credit Card Receivables plus (b) either (i) at all times during the
year, other than those stated in (ii), 90% of the liquidation value of eligible inventory or (ii)
from September 1st through and including December 27th of each year, 92.5% of
the liquidation value of eligible inventory, less (c) Availability Reserves (each term as defined
in the Amended Agreement), and is limited to a ceiling of $115 million, less a minimum availability
reserve that is greater than or equal to 10% of the lesser of (a) the Borrowing Base, or (b) the
Revolving Credit Ceiling, provided however that we must also maintain Availability that is greater
than or equal to $10 million at all times. 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.
Interest under the Amended Agreement will accrue, at our election, at a Base Rate or Libor Rate,
plus, in each case, an Applicable Margin, which is determined by reference to the level of
Availability as defined in the Amended Agreement, with the Applicable Margin for Libor Rate loans
ranging from 2.00% to 2.50% and the Applicable Margin for Base Rate loans ranging from 1.00% to
1.50%. In addition, unused line fees ranging from 0.30% to 0.375% (determined by reference to the
level of usage under the Amended Agreement) are also payable on unused commitments.
We utilize standby letters of credit to support certain insurance policies. The aggregate amount
of the letters of credit at October 31, 2011, was approximately $0.7 million, which reduces the
excess availability under the Amended Agreement.
At October 31, 2011, we had approximately $46.2 million in excess availability, after the
availability reserve, under the Amended Agreement. The average rates of interest incurred for the
three months ended October 31, 2011 and 2010 were 2.7% and 3.0%, respectively. The average rates
of interest incurred for the nine months ended October 31, 2011 and 2010 were 2.6% and 2.4%,
respectively. Deferred financing costs that were amortized into interest expense during the three
and nine months ended October 31, 2011 and 2010 are excluded from the calculation of the average
rate of interest for each respective period.
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Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
4. 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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net loss |
$ | (5,523 | ) | $ | (3,079 | ) | $ | (9,165 | ) | $ | (2,143 | ) | ||||
Average shares outstanding: |
||||||||||||||||
Basic |
8,508 | 8,849 | 8,605 | 9,120 | ||||||||||||
Effect of stock awards |
| | | | ||||||||||||
Diluted |
8,508 | 8,849 | 8,605 | 9,120 | ||||||||||||
Loss per share: |
||||||||||||||||
Basic |
$ | (0.65 | ) | $ | (0.35 | ) | $ | (1.07 | ) | $ | (0.23 | ) | ||||
Diluted |
$ | (0.65 | ) | $ | (0.35 | ) | $ | (1.07 | ) | $ | (0.23 | ) | ||||
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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Shares of common stock
underlying options |
659 | 614 | 659 | 614 | ||||||||||||
Exercise price range per share |
$ | 1.69 to $8.70 | $ | 1.69 to $8.70 | $ | 1.69 to $8.70 | $ | 1.69 to $8.70 |
5. 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 each of October 31, 2011 and January 31, 2011, we had approximately $1.4 million in assets which
are carried at fair value on a recurring basis. These assets, which are reflected in Other Assets
in the consolidated balance sheets, 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.
Our long-term debt approximates fair value as of both October 31, 2011 and January 31, 2011, due to
the instrument bearing interest at variable rates that are comparable to what is currently
available to us. We entered into the First Amendment with Bank of America on July 21, 2011, at
which time our current interest rates were determined. See Note 3 on Debt for a more detailed
discussion of our bank credit agreement.
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Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)
6. Income Taxes
The effective tax rate for the three months ended October 31, 2011 was 41.1%, as compared to 40.9%
for the same period in the prior year.
The effective tax rate for the nine months ended October 31, 2011 was 33.9%, as compared to 45.7%
for the same period in the prior year. This rate difference resulted primarily from the
relationship between permanent book to tax differences incurred in comparison to the level of book
income or loss before taxes for the respective periods. The rate was also affected by certain
state margin and other franchise related taxes that are not based on income or loss before taxes
and as such remain consistent between the periods while the Companys loss before taxes was
significantly more than the same period in the prior year. Additionally, during the nine months
ended October 31, 2010, we recorded a discrete tax benefit of approximately $0.2 million related to
amended state returns resulting from an Internal Revenue Service audit of our previously filed
Federal tax returns.
7. 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.
8. Recent Accounting Pronouncements
During June 2011, the Financial Accounting Standards Board issued ASU 2011-05: Comprehensive Income
(Topic 220), Presentation of Comprehensive Income (ASU 2011-05), which amends existing guidance
to allow companies two choices of how to present items of net income (loss), items of other
comprehensive income (loss) and total comprehensive income (loss): (1) in one continuous statement
of comprehensive income (loss) or (2) in two separate consecutive statements. Under the new
guidance, companies will no longer be allowed to present other comprehensive income (loss) in the
statement of stockholders equity. Also, companies will be required to present the components of
other comprehensive income (loss) in their interim and annual financial statements. ASU 2011-05
requires retrospective application and is effective for public companies for fiscal years, and
interim periods within those years, beginning after December 15, 2011. The Company will adopt ASU
2011-05 beginning with fiscal 2012 and does not anticipate any material impact on the Companys
consolidated financial statements.
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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 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 that 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 opinions 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
challenging times that the U.S. and global economies are currently experiencing, the effects 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; the effect of
inclement weather on the ability of consumers to reach our stores 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 Entertainment, Inc. (the Company, Hastings, or Hastings
Entertainment) 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, movies on DVD and Blu-ray, video games, video game consoles and
consumer 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, 2011, we
operated 143 superstores principally in medium-sized markets located in 20 states, primarily in the
Western and Midwestern United States. We also operate three concept stores, Sun Adventure Sports,
located in Amarillo, Texas and Lubbock, Texas, and TRADESMART, located in Littleton, Colorado.
We also operate a multimedia entertainment e-commerce web site offering a broad selection of books,
software, video games, movies on DVD and Blu-ray, music, trends, and consumer electronics. We fill
orders for new and used product placed at this website and also through Amazon Marketplace using
our proprietary goShip program, which allows us to ship directly from stores. We have one
wholly-owned subsidiary, Hastings Internet, Inc.
References herein to fiscal years are to the twelve-month periods that end in January of each
following calendar year. For example, the twelve-month period ending January 31, 2012 is referred
to as fiscal 2011.
10
Table of Contents
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 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 market 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 amount and timing of revenue to be
generated from our rental product. We utilize an accelerated method of depreciation because it
approximates the pattern of demand for the 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 operations, typically include a lower
initial product cost than traditional rental purchases with a certain percentage of the net rental
revenues 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 rental cost of sales 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 rental revenue 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, in addition to certain other property and
equipment, is subject to impairment write-down.
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Income Taxes. In determining net income (loss), we make certain estimates and judgments in the
calculation of the 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 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 a 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 to be recorded in the
statement of operations 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 and cancellations, as well as 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 the
grant date, 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 restricted stock awards, including restricted stock units
and performance-based restricted stock awards. The grant date fair value of restricted stock
awards is equal to the average of the opening and closing stock price on the day on which they are
granted. For performance-based restricted stock awards, compensation expense is recognized if
management deems it probable that the performance conditions will be met. Management must use its
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.
Gift Card Breakage Revenue. We sell gift cards through each of our stores and through our web site
www.goHastings.com. The gift cards we sell have no stated expiration dates or fees and are subject
to potential escheatment rights in some of the jurisdictions in which we operate. Gift card
liabilities are recorded as deferred revenue at the time of sale of such cards, with the costs of
designing, printing and distributing the cards recorded as expense as incurred. Prior to the
fourth quarter of fiscal 2009, the liability was relieved and revenue was recognized only upon
redemption of the gift cards. Beginning in the fourth quarter of fiscal 2009, we had sufficient
historical data to analyze gift card redemption patterns and a final determination of the
escheatment laws applicable to our operations. As a result, during the fourth quarter of fiscal
2009, we recorded approximately $8.5 million of revenue related to the initial change in estimated
breakage on gift cards we previously issued and sold. Subsequent to the initial change in estimate
related to gift card breakage, gift card breakage revenue is recognized as gift cards are redeemed,
based upon an analysis of the aging and utilization of gift cards, our determination that the
likelihood of future redemption is remote and our determination that such balances are not subject
to escheatment laws applicable to our operations.
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Results of Operations
The following tables present our statement of operations 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, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Merchandise revenue |
85.3 | % | 84.1 | % | 84.5 | % | 83.5 | % | ||||||||
Rental revenue |
14.6 | 15.8 | 15.4 | 16.3 | ||||||||||||
Gift card breakage revenue |
0.1 | 0.1 | 0.1 | 0.2 | ||||||||||||
Total revenues |
100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||
Merchandise cost of revenue |
70.4 | 68.9 | 69.4 | 68.5 | ||||||||||||
Rental cost of revenue |
39.8 | 36.5 | 38.8 | 37.0 | ||||||||||||
Total cost of revenues |
65.8 | 63.7 | 64.6 | 63.3 | ||||||||||||
Gross profit |
34.2 | 36.3 | 35.4 | 36.7 | ||||||||||||
Selling, general and administrative
expenses |
42.5 | 40.7 | 39.2 | 37.7 | ||||||||||||
Pre-opening expenses |
| | 0.1 | | ||||||||||||
Operating loss |
(8.3 | ) | (4.4 | ) | (3.8 | ) | (1.0 | ) | ||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(0.4 | ) | (0.2 | ) | (0.3 | ) | (0.1 | ) | ||||||||
Other, net |
0.1 | | | | ||||||||||||
Loss before income taxes |
(8.6 | ) | (4.6 | ) | (4.0 | ) | (1.1 | ) | ||||||||
Income tax benefit |
(3.5 | ) | (1.9 | ) | (1.4 | ) | (0.5 | ) | ||||||||
Net loss |
(5.1 | )% | (2.7 | )% | (2.7 | )% | (0.6 | )% | ||||||||
Summary of Superstore Activity (1)
Three Months Ended | Nine Months Ended | Year Ended | ||||||||||||||||||
October 31, | October 31, | January 31, | ||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | ||||||||||||||||
Beginning number of stores |
145 | 147 | 146 | 149 | 149 | |||||||||||||||
Openings |
| | 1 | | | |||||||||||||||
Closings |
(2 | ) | (1 | ) | (4 | ) | (3 | ) | (3 | ) | ||||||||||
Ending number of stores |
143 | 146 | 143 | 146 | 146 | |||||||||||||||
(1) | As of October 31, 2011, we operated three concept stores, including two Sun Adventure
Sports and one TRADESMART, which were not included in the summary of superstore activity.
TRADESMART was opened August 2011. Our two Sun Adventure Sports stores were opened June
2010 and October 2011. |
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Financial Results for the Third Quarter of Fiscal Year 2011
Revenues. Total revenues for the third quarter decreased approximately $3.7 million, or 3.3%, to
$108.6 million compared to $112.3 million for the third quarter of fiscal 2010. As of October 31,
2011, we operated three fewer Hastings superstores, as compared to October 31, 2010. The following
is a summary of our revenues results (dollars in thousands):
Three Months Ended October 31, | ||||||||||||||||||||||||
2011 | 2010 | Decrease | ||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
Revenues | Of Total | Revenues | Of Total | Dollar | Percent | |||||||||||||||||||
Merchandise Revenue |
$ | 92,638 | 85.3 | % | $ | 94,462 | 84.1 | % | $ | (1,824 | ) | -1.9 | % | |||||||||||
Rental Revenue |
15,841 | 14.6 | % | 17,673 | 15.8 | % | (1,832 | ) | -10.4 | % | ||||||||||||||
Gift Card Breakage
Revenue |
145 | 0.1 | % | 149 | 0.1 | % | (4 | ) | -2.7 | % | ||||||||||||||
Total Revenues |
$ | 108,624 | 100.0 | % | $ | 112,284 | 100.0 | % | $ | (3,660 | ) | -3.3 | % | |||||||||||
Comparable-store revenues (Comp)
Total |
-4.4 | % | ||
Merchandise |
-2.9 | % | ||
Rental |
-11.8 | % |
Below is a summary of the Comp results for our major merchandise categories:
Three Months Ended October 31, | ||||||||
2011 | 2010 | |||||||
Trends |
11.1 | % | 19.0 | % | ||||
Hardback Café |
6.7 | % | 7.2 | % | ||||
Electronics |
3.6 | % | -0.4 | % | ||||
Music |
-2.6 | % | -6.2 | % | ||||
Movies |
-3.4 | % | 5.6 | % | ||||
Books |
-4.5 | % | -6.2 | % | ||||
Consumables |
-6.6 | % | 3.4 | % | ||||
Video Games |
-9.4 | % | 6.7 | % |
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.
Gift card breakage revenues are not included, and closed stores are removed from each comparable
period for the purpose of calculating Comps.
Trends Comps increased 11.1% for the quarter, primarily due to increased sales of apparel, action
figures, novelty items, new comics and collectible card games such as Magic: The Gathering. Key
drivers in the apparel category included hats, jewelry and bags. Key drivers in the novelty
category included assorted tween merchandise, movie memorabilia merchandise and barware. Hardback
Café Comps increased 6.7% during the quarter resulting from increased sales of blended, iced and
hot specialty café drinks, partially offset by increased promotional pricing during the quarter.
Electronics Comps increased 3.6% for the quarter primarily due to increased sales of headphones,
computer accessories and MP3 player accessories, partially offset by lower sales of refurbished
iPods. Sales of refurbished iPods were impacted by lower inventory due to reduced availability in
the supply chain. Music Comps decreased 2.6% for the quarter primarily resulting from lower sales
of used and new CDs. Movie Comps decreased 3.4% for the quarter primarily due to lower sales of
new and used DVDs and DVD boxed sets, partially offset by increased sales of Blu-ray movies. Books
Comps decreased 4.5% for the quarter resulting from increased promotional pricing during the
quarter along with decreased sales of new mass market books and hardbacks and magazines, partially
offset by increased sales of used hardbacks, trade paperbacks and mass market books. Sales of new
books were negatively impacted by a weaker slate of new releases for the current quarter and by the
increasing popularity of electronic book readers. Consumables Comps decreased 6.6% for the quarter
primarily due to lower
sales of assorted candies, popcorn and bottled drinks. Video Game Comps decreased 9.4% for the
quarter primarily as a result of lower sales of video game consoles, new video games for the
Nintendo Wii and Microsoft XBOX 360, and older generation video games. These decreases were
partially offset by increased sales of used video game accessories and new Sony Playstation 3 video
games. Sales of new video games were negatively impacted by a significantly weaker slate of new
releases during the current quarter.
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Rental Comps decreased 11.8% for the third quarter, primarily resulting from fewer rentals of DVDs,
along with increased promotional pricing during the quarter, partially offset by increased rentals
of Blu-ray movies. Rental Video Comps decreased 12.7% during the quarter, and units rented
decreased 9.4%. Rental Video Comps were negatively impacted by a lower quality of new releases
during the current period and by competitor rental kiosks and subscription-based rental services.
Rental Video Game Comps decreased 5.1% for the quarter, and units rented decreased 8.4%.
Gross Profit Merchandise. For the third quarter, total merchandise gross profit dollars
decreased approximately $1.9 million, or 6.5%, to $27.5 million from $29.4 million for the same
period in the prior year, primarily due to lower merchandise margin rates along with lower
revenues. As a percentage of total merchandise revenue, merchandise gross profit decreased to
29.6% for the quarter compared to 31.1% for the same period in the prior year, resulting primarily
from increased promotional pricing during the quarter and a shift in mix of revenues by category as
compared to the prior year, along with increased freight costs, partially offset by lower shrinkage
expense, lower costs to return products and lower markdown expense. The decrease in shrinkage
expense is a direct result of our comprehensive store audit program that assesses store level
execution and controls designed to reduce shrink, with a strong focus on our high-shrinkage stores.
Gross Profit Rental. For the third quarter, total rental gross profit dollars decreased
approximately $1.7 million, or 15.2%, to $9.5 million from $11.2 million for the same period in the
prior year, primarily due to lower revenues along with lower rental margin rates. As a percentage
of total rental revenue, rental gross profit decreased to 60.2% for the quarter compared to 63.5%
for the same period in the prior year, also primarily due to lower revenues, partially offset by
lower shrinkage expense.
Selling, General and Administrative Expenses (SG&A). As a percentage of total revenue, SG&A
increased to 42.5% for the third quarter compared to 40.7% for the same period in the prior year
due to deleveraging resulting from lower revenues. SG&A increased approximately $0.5 million
during the quarter, or 1.1%, to $46.2 million compared to $45.7 million for the same quarter last
year. The main drivers increasing SG&A included an increase in store labor costs of approximately
$0.3 million, an increase of approximately $0.1 million in store maintenance costs and an increase
of approximately $0.1 million in store supplies. These increases were primarily offset by a
decrease in store utility costs of approximately $0.2 million and a decrease in occupancy costs of
approximately $0.2 million.
Interest Expense. For the third quarter, interest expense remained consistent at $0.4 million.
Higher average debt levels during the quarter were offset by a lower average rate of interest
incurred during the quarter. The average rate of interest charged for the third quarter decreased
to 2.7% compared to 3.0% for the same period in the prior year.
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Financial Results for the Nine Months Ended October 31, 2011
Revenues. Total revenues for the nine months ended October 31, 2011 decreased approximately $17.2
million, or 4.8%, to $343.3 million compared to $360.5 million for the nine months ended October
31, 2010. The following is a summary of our revenues results (dollars in thousands):
Nine Months Ended October 31, | ||||||||||||||||||||||||
2011 | 2010 | Increase (Decrease) | ||||||||||||||||||||||
Percent | Percent | |||||||||||||||||||||||
Revenues | Of Total | Revenues | Of Total | Dollar | Percent | |||||||||||||||||||
Merchandise Revenue |
$ | 289,929 | 84.5 | % | $ | 301,175 | 83.5 | % | $ | (11,246 | ) | -3.7 | % | |||||||||||
Rental Revenue |
52,792 | 15.4 | % | 58,801 | 16.3 | % | (6,009 | ) | -10.2 | % | ||||||||||||||
Gift Card Breakage
Revenue |
575 | 0.1 | % | 537 | 0.2 | % | 38 | 7.1 | % | |||||||||||||||
Total Revenues |
$ | 343,296 | 100.0 | % | $ | 360,513 | 100.0 | % | $ | (17,217 | ) | -4.8 | % | |||||||||||
Comparable-store revenues (Comp)
Total |
-5.3 | % | ||
Merchandise |
-4.2 | % | ||
Rental |
-10.8 | % |
Below is a summary of the Comp results for our major merchandise categories:
Nine Months Ended October 31, | ||||||||
2011 | 2010 | |||||||
Trends |
10.9 | % | 12.9 | % | ||||
Hardback Café |
5.1 | % | 10.9 | % | ||||
Electronics |
1.8 | % | 1.7 | % | ||||
Music |
-2.3 | % | -6.2 | % | ||||
Video Games |
-3.6 | % | 18.4 | % | ||||
Movies |
-7.1 | % | 8.8 | % | ||||
Books |
-7.8 | % | -3.0 | % | ||||
Consumables |
-7.3 | % | 5.7 | % |
Trends Comps increased 10.9% for the period primarily due to increased sales of apparel, new
comics, novelty items, action figures and collectible card games such as Magic: The Gathering. Key
drivers in the apparel category included hats, jewelry and bags. Key drivers in the novelty
category included assorted tween merchandise, movie memorabilia merchandise, barware and lighting.
Hardback Café Comps increased 5.1% for the period primarily resulting from increased sales of
specialty café drinks, primarily blended and iced drinks. Electronics Comps increased 1.8% during
the period due to increased sales of headphones, computer accessories and refurbished iPods,
partially offset by lower sales of Blu-ray players. Music Comps decreased 2.3% during the period
resulting from lower sales of used CDs, partially offset by a slight increase in vinyl album sales.
Video Game Comps decreased 3.6% for the period, primarily due to lower sales of new video games
for the Nintendo Wii, new and used video game consoles and older generation video games. These
decreases were partially offset by an increase in sales for used video gaming accessories and new
and used video games for the Microsoft XBOX 360. Movie Comps decreased 7.1% during the period,
primarily resulting from decreased sales of DVD boxed sets, along with new and used DVDs, partially
offset by strong sales of Blu-ray movies. Consumable Comps decreased 7.3% during the period due to
lower sales of bottled drinks, promotional and assorted candies and fountain drinks. Book Comps
decreased 7.8% during the period primarily resulting from lower sales of new mass market books,
hardbacks and trade paperbacks, along with magazines. Sales of new books were negatively impacted
by the increasing popularity of electronic book readers. These decreases were partially offset by
a slight increase in sales of used hardbacks and value books.
Rental Comps decreased 10.8% during the period primarily due to fewer rentals of DVDs partially
offset by an increase in rentals of Blu-ray movies and a slight increase in video game rentals.
Rental Video Comps decreased 12.2% for the period and units rented decreased 11.9%. Rental Video
Comps were negatively impacted by a lower quality of new releases during the current period and by
competitor rental kiosks and subscription-based rental services. Rental Video Game Comps increased
1.2%, while units rented decreased 2.6%.
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Gross Profit Merchandise. For the current nine months, total merchandise gross profit dollars
decreased approximately $6.1 million, or 6.4%, to $88.7 million from $94.8 million for the same
period in the prior year, primarily due to lower revenues, along with lower merchandise margin
rates. As a percentage of total merchandise revenue, merchandise gross profit decreased to 30.6%
for the current nine months, compared to 31.5% for the same period in the prior year, primarily due
to increased promotional pricing, increased freight costs and increased costs to return products,
partially offset by lower shrinkage expense and lower markdown expense. The decrease in shrinkage
expense is a direct result of our comprehensive store audit program that assesses store level
execution and controls designed to reduce shrink, with a strong focus on our high-shrinkage stores.
Gross Profit Rental. For the current nine months, total rental gross profit dollars decreased
approximately $4.7 million, or 12.7%, to $32.3 million from $37.0 million for the same period in
the prior year primarily due to lower revenues, along with lower rental margin rates. As a
percentage of total rental revenue, rental gross profit decreased to 61.2% for the current nine
month period compared to 63.0% for the same period in the prior year, also primarily as a result of
lower rental revenues.
Selling, General and Administrative Expenses (SG&A). As a percentage of total revenue, SG&A
increased to 39.2% for the current nine months compared to 37.7% for the same period in the prior
year primarily due to deleveraging resulting from lower revenues. SG&A decreased approximately
$1.2 million, or 0.9%, to $134.6 million compared to $135.8 million for the same period last year.
The main drivers of the decrease in SG&A included a decrease in bonuses under our bonus incentive
programs of approximately $0.7 million, a decrease in associate health insurance costs of
approximately $0.5 million, and a decrease in advertising expenses of approximately $0.6 million.
These decreases were partially offset by an increase in store maintenance costs of approximately
$0.5 million.
Interest Expense. For the current nine months, interest expense increased approximately $0.2
million, or 28.6%, to $0.9 million, compared to $0.7 million for the same period in the prior year
primarily as a result of higher interest rates. The average rate of interest charged for the
current nine months increased to 2.6% compared to 2.4% for the same period in the prior year.
Income Tax Benefit. The effective tax rate for the nine months ended October 31, 2011 was 33.9%,
as compared to 45.7% for the same period in the prior year. This rate difference resulted
primarily from the relationship between permanent book to tax differences incurred in comparison to
the level of book income or loss before taxes for the respective periods. The rate was also
affected by certain state margin and other franchise related taxes that are not based on income or
loss before taxes and as such remain consistent between the periods while the Companys loss before
taxes was significantly more than the same period in the prior year. Additionally, during the nine
months ended October 31, 2010, we recorded a discrete tax benefit of approximately $0.2 million
related to amended state returns resulting from an Internal Revenue Service audit of our previously
filed Federal tax returns.
Store Closures
During the third quarter, we closed two underperforming stores which gave us a total of four
superstore closures for the nine months ended October 31, 2011. We have decided to close two
additional stores during the fourth quarter. These stores, which have previously been impaired,
will have future lease payments remaining that will require the recording of additional abandoned
lease charges. These charges will be recorded in our financial statements in the month they
actually close, and depending on our ability to find subtenants or negotiate buyouts with the
landlords, they could have a material impact on our earnings for the fourth quarter and full fiscal
year. The closing of under performing stores is expected to have a favorable impact on future
store operating profit.
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
flow from operating activities including trade credit from vendors and borrowings under our
revolving credit facility, with the most significant source during the first nine months of fiscal
2011 and 2010 being borrowings under our revolving credit facility. 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,
store expansions, and store reformations for the next twelve months.
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At October 31, 2011, total outstanding debt was approximately $54.9 million. We project our
outstanding debt level will be in the range of $45.0 million to 47.0 million by the end of fiscal
2011. At October 31, 2011, we had approximately $46.2 million in excess availability, after the
$10 million availability reserve, under the Amended Agreement (as defined below).
Consolidated Cash Flows
Operating Activities. Net cash used by operating activities totaled approximately
$12.7 million for the nine months ended October 31, 2011, compared to cash provided by
operating activities of $7.0 million for the nine months ended October 31, 2010. Net loss
for the current period was approximately $9.2 million compared to $2.1 million for same
period in fiscal 2010. Merchandise inventories increased approximately $27.6 million for
the current period, compared to $11.0 million during the same period in fiscal 2010
primarily due to differences in the timing and amount of inventory build-up based on
anticipated sales for the holiday season, along with the build of inventory for our new
TRADESMART store which opened August 1, 2011 and the build of inventory related to our
roll-out of electronic book reader tablets. Trade accounts payable increased $21.8 million
for the current period compared to an increase of $21.3 million during the same period in
fiscal 2010. Merchandise inventories, net of trade accounts payable, increased
approximately $5.8 million for the current period compared to a decrease of $10.2 million
for the same period in the prior year primarily due to the higher increase in merchandise
inventories in the current period and differences of timing of payments to vendors
surrounding the holiday purchases in the current year compared to the prior year. Accrued
expenses and other liabilities increased approximately $0.2 million during the current
period compared to a decrease of $1.2 million during the same period in fiscal 2010
primarily due to the timing of payments of property taxes, along with higher salary accruals
as compared to the prior year. |
Investing Activities. Net cash used in investing activities increased approximately
$3.6 million from $9.3 million for the nine months ended October 31, 2011, to $12.9 million
for the nine months ended October 31, 2011. This increase was primarily due to increased
expenditures related to two new stores opened during fiscal 2011. For fiscal 2011, we
project capital expenditures to be approximately $16.1 million. The planned increase is
primarily due to increased expenditures related to the opening of three stores, the
remodeling of two stores, and the relocating of one store planned to take place during the
fourth quarter. |
Financing Activities. Cash provided by or used in financing activities is primarily
associated with borrowings and payments made under our revolving credit facility (described
below under Capital Structure). For the nine months ended October 31, 2011, cash provided
by financing activities was approximately $24.6 million compared to $0.1 million for the
nine months ended October 31, 2010. For the current nine months, net borrowings from our
revolving credit facility were approximately $23.2 million compared to net borrowings of
approximately $5.9 million for same period in the prior year. Changes in our cash overdraft
position increased from cash provided of approximately $3,000 for the nine months ended
October 31, 2010 to cash provided of $3.0 million for the nine months ended October 31,
2011, due to the timing of payments issued to vendors during the period. The Company
purchased approximately $1.6 million of treasury stock during the nine months ended October
31, 2011 compared to $5.5 million during the nine months ended October 31, 2010. |
On December 4, 2009, we entered into a stock transfer agreement with the Marmaduke Family Limited
Partnership (the Partnership). Under the stock transfer agreement, for a period of three years
following the death of Mr. John H. Marmaduke, the Companys President and Chief Executive Officer,
the Partnership may tender for purchase to the Company, and, if so tendered, the Company will be
required to purchase, the number of shares of the Companys common stock belonging to the
Partnership that equal an aggregate fair market value of $5.0 million. During this three year
period, the Partnership may elect to tender portions of such
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shares in various lots and parcels, at
any time
and from time to time, and any tender shall not exhaust or limit the Partnerships right to tender
an additional amount of such shares, subject to the limitations set within the stock transfer
agreement. Under the stock transfer agreement, the Company is not obligated to purchase, and the
Partnership does not have the right to tender, any amount of such shares with an aggregate fair
market value in excess of $5.0 million. In the event that Mr. Marmaduke resigns as an officer or
director of the Company prior to his death, the Partnerships right to tender the shares to the
Company shall terminate. The stock transfer agreement shall terminate on the earlier of February
9, 2019, or four years after the death of Mr. Marmaduke. The Company is currently the beneficiary
of a $10 million key-man life insurance policy on Mr. Marmaduke, a portion of the proceeds of which
would be used to complete any purchases of shares resulting from the stock transfer agreement.
Capital Structure. On July 22, 2010, we entered into the Amended and Restated Loan and Security
Agreement (as amended, modified or otherwise supplemented from time to time, the Amended
Agreement) with Bank of America, N.A., as agent, which amended and restated our Loan and Security
Agreement dated as of August 29, 2000, as otherwise amended (the Prior Agreement), and on July
21, 2011, we entered into an amendment (the First Amendment) to the Amended Agreement with Bank
of America, N.A (collectively, the Amended Agreement). The First Amendment increased the
revolving credit facility from $100 million to $115 million, increased our borrowing base, lowered
our interest rates, and allowed for the payment of dividends, which was previously prohibited under
the Amended Agreement. The Amended Agreement is substantially the same as the Prior Agreement,
extends the maturity date of the Prior Agreement from August 29, 2011 to July 22, 2014, and
provides that we may repurchase up to $10.0 million worth of our common stock. The Amended
Agreement also provides that we may repurchase additional shares of our common stock in the event
we meet certain criteria set forth in the Amended Agreement. The Amended Agreement includes
certain debt and acquisition limitations and requires a minimum availability of 10% of the lesser
of (a) the Borrowing Base, and (b) the Revolving Credit Ceiling, provided however that we must also
maintain Availability that is greater than or equal to $10 million at all times. Our obligations
under the Amended Agreement are secured by a pledge of substantially all of the assets of the
Company and our subsidiary and are guaranteed by our subsidiary.
The amount outstanding under the Amended Agreement is limited by a borrowing base predicated on the
sum of (a) 85% of Eligible Credit Card Receivables plus (b) either (i) at all times during the
year, other than those stated in (ii), 90% of the liquidation value of eligible inventory or (ii)
from September 1st through and including December 27th of each year, 92.5% of
the liquidation value of eligible inventory, less (c) Availability Reserves (each term as defined
in the Amended Agreement), and is limited to a ceiling of $115 million, less a minimum availability
reserve that is greater than or equal to 10% of the lesser of (a) the Borrowing Base, and (b) the
Revolving Credit Ceiling, provided however that we must also maintain Availability that is greater
than or equal to $10 million at all times. 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.
Interest under the Amended Agreement will accrue, at our election, at a Base Rate or Libor Rate,
plus, in each case, an Applicable Margin, which is determined by reference to the level of
Availability as defined in the Amended Agreement, with the Applicable Margin for Libor Rate loans
ranging from 2.00% to 2.50% and the Applicable Margin for Base Rate loans ranging from 1.00% to
1.50%. In addition, unused line fees ranging from 0.30% to 0.375% (determined by reference to the
level of usage under the Amended Agreement) are also payable on unused commitments.
At October 31, 2011, we had approximately $46.2 million in excess availability, after the
availability reserve, under the Amended Agreement. We expect to have approximately $58.0 million
to $60.0 million in excess availability, after the availability reserve and outstanding letters of
credit, at January 31, 2012. However, excess availability may be reduced in the future as changes
in the borrowing base occur or the lenders increase availability reserves. The average rates of
interest incurred for the three months ended October 31, 2011 and 2010 were 2.7% and 3.0%,
respectively. The average rates of interest incurred for the nine months ended October 31, 2011
and 2010 were 2.6% and 2.4%, respectively. Deferred financing costs that were amortized into
interest expense during the three and nine months ended October 31, 2011 and 2011 are excluded from
the calculation of the average rate of interest for each respective period.
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We utilize standby letters of credit to support certain insurance policies. The aggregate amount
of the letters of credit at October 31, 2011, was approximately $0.7 million, which reduces the
excess availability under the Amended Agreement.
At October 31, 2011, our minimum lease commitments for the remainder of fiscal 2011 were
approximately $4.6 million. Total existing minimum operating lease commitments for fiscal years
2011 through 2026 were approximately $156.5 million as of October 31, 2011.
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, 2011, 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, 2011, 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, 2011.
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. 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 rental activity in the
spring because customers spend more time outdoors. Major world or sporting events, such as the
Super Bowl, the Olympic Games and 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 store openings, the number and popularity of new book, music, video and video
game titles, as well as the popularity of electronics and trends merchandise, the cost of 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, at our
option, on 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, 2011 outstanding
balance of the variable rate debt would be approximately $0.5 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 Quarterly Report on Form 10-Q. Our disclosure controls and procedures
are designed to provide reasonable assurance of achieving their objectives, and, based upon the
forgoing 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 Commission and such information is accumulated and
communicated to management as appropriate to allow timely decisions regarding required disclosure.
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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, 2011, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
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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 fiscal year ended January 31, 2011 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, 2011 is
as follows:
ISSUER PURCHASES OF EQUITY SECURITIES
Approximate dollar | ||||||||||||||||
Total number of | value of shares that | |||||||||||||||
Average | shares purchased | may yet be | ||||||||||||||
Total number | price | as part of publicly | purchased under | |||||||||||||
of shares | paid per | announced plans | the plans or | |||||||||||||
Period | purchased (1) | share | or programs | programs (2) | ||||||||||||
August 1, 2011
through August 31,
2011 |
77,386 | $ | 3.29 | 77,386 | N/A | |||||||||||
September 1, 2011
through September
30, 2011 |
64,722 | 2.93 | 64,722 | N/A | ||||||||||||
October 1, 2011
through October 31,
2011 |
93,101 | 2.10 | 93,101 | N/A | ||||||||||||
Total |
235,209 | $ | 2.72 | 235,209 | $ | 6,650,127 | ||||||||||
(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 $32.5 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. |
|
(2) | A total of 5,111,649 shares have been purchased under the repurchase plan at a total
cost of approximately $30.8 million, or approximately $6.04 per share. |
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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. Any exhibits designated by an asterisk are
management contracts and/or compensatory plans or arrangement required to be filed as
exhibits to this Quarterly Report on Form 10-Q. |
Exhibit | ||||||
Number | Description of Documents | |||||
3.1 | (1) | Third Restated Articles of Incorporation of the Company. |
||||
3.2 | (2) | Amended and Restated Bylaws of the Company. |
||||
4.1 | (3) | 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 | (2) | 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. |
||||
101.INS | (5) | XBRL Instance Document |
||||
101.SCH | (5) | XBRL Taxonomy Extension Schema |
||||
101.CAL | (5) | XBRL Taxonomy Extension Calculation Linkbase |
||||
101.LAB | (5) | XBRL Taxonomy Extension Label Linkbase |
||||
101.PRE | (5) | XBRL Taxonomy Extension Presentation Linkbase |
(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 Exhibit 3.1 to the Companys Form 8-K (File No. 000-24381) filed on
January 17, 2008 and incorporated herein by reference. |
|
(3) | 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. |
|
(4) | Filed herewith. |
|
(5) | In accordance with Regulation S-T, the XBRL-related information in Exhibit No. 101 to this
Quarterly Report on Form 10-Q shall be deemed furnished and not filed. |
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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 9, 2011 | /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 | (2) | Amended and Restated Bylaws of the Company. |
||||
4.1 | (3) | 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 | (2) | 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. |
||||
101.INS | (5) | XBRL Instance Document |
||||
101.SCH | (5) | XBRL Taxonomy Extension Schema |
||||
101.CAL | (5) | XBRL Taxonomy Extension Calculation Linkbase |
||||
101.LAB | (5) | XBRL Taxonomy Extension Label Linkbase |
||||
101.PRE | (5) | XBRL Taxonomy Extension Presentation Linkbase |
(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 Exhibit 3.1 to the Companys Form 8-K (File No. 000-24381) filed on
January 17, 2008 and incorporated herein by reference. |
|
(3) | 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. |
|
(4) | Filed herewith. |
|
(5) | In accordance with Regulation S-T, the XBRL-related information in Exhibit No. 101 to this
Quarterly Report on Form 10-Q shall be deemed furnished and not filed. |
25