Add
HAST to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| HAST > SEC Filings for HAST > Form 10-K on 21-Apr-2009 | All Recent SEC Filings |
21-Apr-2009
Annual Report
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. 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. During
the fourth quarter of fiscal 2008, we expensed approximately $54,000 related to
approximately 51,000 remaining VHS rental units in our stores.
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 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 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. In determining net income for financial statement purposes, we
make certain estimates and judgments in the calculation of tax expense 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 earnings 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 option lives involve management's best estimates
at that time, both of which impact the fair value of the option calculated under
the Black-Scholes pricing model and, ultimately, the expense that will be
recognized over the life of the option.
We recognize compensation expense only for the portion of options that are
expected to vest. Therefore, we apply estimated forfeiture rates that are
derived from historical employee termination behavior. If the actual number of
forfeitures differs from those estimated by management, additional adjustments
to compensation expense may be required in future periods.
In addition to stock options, we award performance-based stock awards. The grant
date fair value of performance-based stock awards is equal to the average of the
opening and closing stock price on the day on which they are granted.
Compensation expense is recognized for these awards if management deems it
probable that the performance conditions will be met. Management must use their
judgment to determine the probability that a performance condition will be met.
If actual results differ from management's assumptions, future results could be
materially impacted.
Results of Operations
The following tables present our statement of operations data, expressed as a
percentage of revenue, and the number of stores open at the end of period for
the three most recent fiscal years.
Fiscal Year
2008 2007 2006
Merchandise revenue 83.8 % 83.6 % 82.8 %
Rental asset revenue 16.2 16.4 17.2
Total revenues 100.0 100.0 100.0
Merchandise cost of revenue 69.9 70.2 71.8
Rental asset cost of revenue 35.5 34.7 36.0
Total cost of revenues 64.4 64.4 65.6
Gross profit 35.6 35.6 34.4
Selling, general and administrative expenses 33.9 32.3 32.4
Pre-opening expenses - - -
33.9 32.3 32.4
Operating income 1.7 3.3 2.0
Other income (expense):
Interest expense (0.3 ) (0.5 ) (0.6 )
Other, net - - 0.1
(0.3 ) (0.5 ) (0.5 )
Income before income taxes 1.4 2.8 1.5
Income tax expense 0.6 0.9 0.6
Net income 0.8 % 1.9 % 0.9 %
Fiscal Year
2008 2007 2006
Hastings Stores:
Beginning number of stores 153 154 153
Openings 2 1 1
Closings (2 ) (2 ) -
Ending number of stores 153 153 154
|
Fiscal 2008 Compared to Fiscal 2007
Revenues. Total revenues for fiscal 2008 decreased $9.0 million, or 1.6%, to
$538.7 million compared to $547.7 million for the prior year. We believe the
current financial crisis and its impact on consumer spending had a significant
impact on our revenues during fiscal 2008. The following is a summary of our
revenue results (dollars in thousands):
Fiscal Year Ended January 31,
2009 2008 (Decrease)
Percent of Percent of
Revenues Total Revenues Total Dollar Percent
Merchandise revenue $ 451,492 83.8 % $ 458,076 83.6 % $ (6,584 ) -1.4 %
Rental revenue 87,256 16.2 % 89,609 16.4 % (2,353 ) -2.6 %
Total revenues $ 538,748 100.0 % $ 547,685 100.0 % $ (8,937 ) -1.6 %
|
Comparable-store revenues:
Total -1.6 %
Merchandise -1.5 %
Rental -2.5 %
|
Below is a summary of the comparable-store revenues ("Comp") results for our eight largest merchandise categories:
Fiscal Year Ended January 31,
2009 2008
Trends 22.6 % 8.1 %
Consumables 14.6 % 3.8 %
Electronics 12.9 % 20.3 %
Hard Back Café 8.7 % 10.9 %
Books 1.3 % 2.1 %
Video Games 0.5 % 17.3 %
Movies -2.4 % 4.0 %
|
Trends Comps increased 22.6% compared to the prior year, driven by strong sales
of Webkinz plush products, as well as movie memorabilia products and sports
apparel and merchandise. Consumables Comps increased 14.6% compared to the prior
year due to strong sales across all categories. Consumable sales represented
1.9% of total revenues for the year. Electronics Comps increased 12.9% primarily
as a result of strong sales of Blu-ray DVD players, digital converter boxes, and
third-party gift cards, partially offset by lower sales of refurbished iPods and
MP3 players. Books Comps increased 1.3% for the year resulting from strong sales
of new and used trade paperback books, used hardback books, calendars, and books
on CD, partially offset by lower sales of new hardback books. Top selling books
for the year included Stephenie Meyer's The Twilight Sagaseries, The Shack by
William P. Young, and The New Earth by Eckhart Tolle. Video Game Comps increased
0.5% for the year primarily due to strong sales of new and used video games for
the Sony Playstation 3, Microsoft XBOX 360, and Nintendo Wii, partially offset
by lower sales of older generation video games and lower sales of video game
consoles. Movie Comps decreased 2.4% for the year primarily due to lower sales
of new DVDs, partially offset by strong sales of Blu-ray format DVDs as well as
increased sales of used DVDs and new and used DVD boxed sets. New DVD sales were
lower primarily due to new releases that did not perform as well as expected,
particularly in the third and fourth quarters, which we attribute to the current
economic recession. Music Comps decreased 16.3% for the year resulting from
continued industry decline, as well as our de-emphasis on the category through
the reduction of the retail space dedicated to music in thirty stores, which
were reformatted during fiscal 2008. Merchandise Comps, excluding the sales of
Music, increased 2.3% for the fiscal year ended January 31, 2009.
Rental Comps decreased 2.5% for the year primarily as a result of fewer rentals
of DVDs partially offset by strong rentals of video games and Blu-ray movies.
Rental Comps were impacted by an unusually limited slate of titles
released, primarily during the first nine months of fiscal 2008, as well as a
strong following of viewers for the Olympics, coverage of the 2008 political
conventions, and media coverage of the current economic recession in the economy
and financial markets. Rental Video Game Comps increased 15.9% for the year
while Rental Video Comps decreased 5.3%.
Fiscal 2008 is a leap year which includes an extra day of sales in February.
Excluding this extra day of sales, merchandise Comps would have decreased 1.8%
for fiscal 2008 and rental Comps would have decreased 3.0% for the year.
Excluding the extra day of sales, merchandise Comps excluding the sales of Music
would have increased 1.9%.
For fiscal 2009, we are projecting a negative total Comp in the low single
digits for both merchandise and rental sales. Generally, it is difficult for us
to project future Comp sales. Uncertainty in the direction of the economy makes
forecasts of future performance even more difficult. We are assuming this very
challenging environment will continue throughout fiscal 2009. As a part of our
budget process we have implemented, among other actions, a freeze on raises for
our associates, including senior management, and reduced capital expenditures by
approximately $10.6 million. Our Comp sales are to a great extent dependent upon
the quantity and quality of new releases from the studios, publishers, and
hardware manufacturers, as well as general economic conditions and other factors
not under our control.
Gross Profit - Merchandise. For fiscal 2008, total merchandise gross profit
dollars decreased approximately $0.9 million, or 0.7%, to $135.7 million
compared to $136.6 million for fiscal 2007 primarily resulting from lower
revenues. As a percentage of total merchandise revenues, merchandise gross
profit increased to 30.1% for fiscal 2008 from 29.8% for the prior year
primarily resulting from improvements in purchasing as well as lower markdown
expense, partially offset by increases in shrinkage costs and freight costs for
the period.
Gross Profit - Rental. For fiscal 2008, total rental gross profit dollars
decreased approximately $2.2 million, or 3.8%, to $56.3 million from
$58.5 million for the prior year. As a percentage of total rental revenues,
rental gross profit decreased to 64.5% for fiscal 2008, compared to 65.3% for
fiscal 2007 resulting primarily from lower rental revenues as well as increased
purchases of rental assets for the year, which led to increased rental asset
depreciation expense as compared to the prior year. In an effort to drive
revenues, we purchased more rental units during the fourth quarter of fiscal
2008.
Selling, General and Administrative expenses ("SG&A"). SG&A increased
approximately $5.5 million, or 3.1%, to $182.5 million for fiscal 2008, compared
to $177.0 million for fiscal 2007, primarily due to additional costs associated
with the operation of new, expanded, and relocated stores and increased store
labor costs associated primarily with increases in the minimum wage and
increased advertising expense. Additionally, during the fourth quarter, we
recorded approximately $0.8 million in impairment charges for six
underperforming stores, three of which we anticipate closing during fiscal 2009,
when each of their respective leases expire. As a percentage of total revenues,
SG&A increased to 33.9% for the twelve months ended January 31, 2009, compared
to 32.3% for the prior year.
Interest Expense. For fiscal 2008, interest expense decreased approximately
$0.9 million to $2.0 million, compared to $2.9 million during fiscal 2007
resulting primarily from lower interest rates. The average rate of interest
charged for the twelve months ended January 31, 2009, decreased to 4.03%
compared to 6.60% for the prior year.
Income Tax Expense. During fiscal 2008, the Company recorded a charge of
approximately $0.8 million related to an Internal Revenue Service audit of our
previously filed federal tax returns. The IRS audit resulted in a change in our
tax method used to account for gift cards and the $0.8 million represents
interest due as a result of the audit. During fiscal 2007, the Company
recognized a discrete tax benefit in the amount of $0.9 million related to a
favorable settlement of a prior year's state tax liability. Primarily as a
result of these items, the effective tax rates for the fiscal years ended
January 31, 2009 and 2008 were 45.9% and 32.6%, respectively
Fiscal 2007 Compared to Fiscal 2006
Revenues. Total revenues for fiscal 2007 decreased $0.6 million, or 0.1%, to
$547.7 million compared to $548.3 million for the prior year. The following is a
summary of our revenue results (dollars in thousands):
Fiscal Year Ended January 31,
2008 2007 Increase/(Decrease)
Percent of Percent of
Revenues Total Revenues Total Dollar Percent
Merchandise revenue $ 458,076 83.6 % $ 454,142 82.8 % $ 3,934 0.9 %
Rental revenue 89,609 16.4 % 94,190 17.2 % (4,581 ) -4.9 %
Total revenues $ 547,685 100.0 % $ 548,332 100.0 % $ (647 ) -0.1 %
|
Comparable-store revenues:
Total -0.1 %
Merchandise 0.8 %
Rental -4.8 %
|
Below is a summary of the Comp results for our eight largest merchandise categories:
Fiscal Year Ended January 31,
2008 2007
Electronics 20.3 % 27.3 %
Video Games 17.3 % 8.7 %
Hard Back Café 10.9 % 25.6 %
Trends 8.1 % -3.3 %
Movies 4.0 % 13.1 %
Books 2.1 % 0.4 %
Consumables 3.8 % -1.6 %
|
Effective February 1, 2007, we realigned our merchandise product categories in
order to more effectively manage our business. Some products were reclassified
within reporting categories, and new reporting categories were created for
electronics, musical instruments, and wireless products. Comp results listed in
the chart above reflect the new categorization for both fiscal 2007 and fiscal
2006.
Electronics department Comps increased 20.3% compared to the same period last
year, primarily as a result of strong sales of iPods, MP3 players and related
accessories, as well as increased sales of third-party gift cards. Video Game
Comps increased 17.3% primarily due to strong sales of video game hardware,
including XBOX 360, Nintendo Wii, and PlayStation 3 consoles, as well as strong
sales of new games for these gaming systems. Comps for the Trends department
rose 8.1% due to improved plan-o-gramming throughout the department and an
improved assortment of products. Key categories driving Trends included strong
sales of apparel, such as backpacks, bags and hats, as well as action figures,
collectible card games, and seasonal merchandise. These drivers were partially
offset by lower sales of board games and puzzles resulting from reduced levels
of inventory carried for these products. Movie Comps increased 4.0%, which was
primarily due to strong sales of used DVDs along with increased sales of next
generation formats, led by Blu-ray. Book Comps increased 2.1% during fiscal 2007
primarily due to the July release of the seventh and final book in the Harry
Potter series as well as strong sales of used books. Music Comps fell 15.3%,
directly as a result of continued industry declines as consumers looked to other
forms of music alternatives, primarily through digital downloads. Merchandise
Comps, excluding the sale of Music, increased 6.0% during fiscal 2007.
Rental Comps decreased 4.8% in fiscal 2007 compared to fiscal 2006 due to a
weaker slate of box office releases compared to the prior year along with a
shift of consumer preference toward buying DVDs and games instead of renting. We
have responded to this shift. As a result, the combined sales and rental of
movies and video games resulted in a Comp increase of 3.4%.
Gross Profit - Merchandise. For fiscal 2007, total merchandise gross profit
dollars increased approximately $8.5 million, or 6.6%, to $136.6 million from
$128.1 million for the same period last year. Merchandise gross profit dollars
increased primarily due to increased margin rates, which are primarily a result
of continued price and margin management. As a percentage of total merchandise
revenues, gross profit increased to 29.8% for fiscal 2007 from 28.2% for the
same period in the prior year.
Gross Profit - Rental. For fiscal 2007, total rental gross profit dollars decreased approximately $1.8 million, or 3.0%, to $58.5 million from $60.3 million for the same period last year. Rental gross profit dollars decreased primarily due to lower revenues. As a percentage of total rental revenues, rental gross profit increased to 65.3% for fiscal 2007 compared to 64.0% for the same period in the prior year. Rental margin rates are primarily a function of depreciation, which in turn is a function of rental purchases. Due to a weaker slate of box office releases throughout fiscal 2007, overall rental purchases were down versus fiscal 2006. Traditional rental DVD and game purchases decreased to $24.4 million for fiscal 2007 compared to $26.5 million . . .
|
|