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| HAST > SEC Filings for HAST > Form 10-Q on 2-Jun-2009 | All Recent SEC Filings |
2-Jun-2009
Quarterly Report
the following critical accounting estimates comprise our more significant
estimates and assumptions used in the preparation of our financial statements.
Our significant estimates and assumptions are reviewed, and any required
adjustments are recorded, on a monthly or quarterly basis.
Lower of Cost or Market for Merchandise Inventory. Our merchandise inventories
are recorded at the lower of cost, which approximates the first-in, first-out
("FIFO") method, or market. As with any retailer, economic conditions, cyclical
customer demand and changes in purchasing or distribution can affect the
carrying value of inventory. As circumstances warrant, we record the lower of
cost or market inventory adjustments. In some instances, these adjustments can
have a material effect on the financial results of an annual or interim period.
In order to determine such adjustments, we evaluate the age, inventory turns and
estimated fair value and returnability of merchandise inventory by product
category and record an adjustment if estimated market value is below cost.
Rental Asset Depreciation. We have established rental asset depreciation
policies that match rental product costs with the related revenues. These
policies require that we make significant estimates, based upon our experience,
as to the ultimate revenue and the timing of the revenue to be generated from
our rental product. 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
earnings, typically include a lower initial product cost with a percentage of
the net rental revenues to be shared with studios over an agreed period of time.
Any up-front costs exceeding the designated salvage value are amortized on an
accelerated basis and revenue-sharing payments pursuant to the applicable
arrangement are expensed as the related revenue is earned. Additionally, certain
titles have performance guarantees. We analyze titles that are subject to
performance guarantees and recognize an estimated expense for under-performing
titles throughout the applicable period based upon our analysis of the estimated
shortfall. We revise these estimates on a monthly basis, based on actual
results.
Impairment or Disposal of Long-Lived Assets. We evaluate under-performing stores
on a quarterly basis to determine whether projected future cash flows over the
remaining lease term are sufficient to recover the carrying value of the fixed
asset investment in each individual store. If projected future cash flows are
less than the carrying value of the fixed asset investment, an impairment charge
is recognized if the estimated fair value is less than the carrying value of
such assets. The carrying value of leasehold improvements as well as certain
other property and equipment is subject to impairment write-down.
Income Taxes. 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 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 earnings data, expressed as a
percentage of revenue, and the number of superstores open at the end of the
periods presented herein.
Three Months Ended
April 30,
2009 2008
Merchandise revenue 82.8 % 82.1 %
Rental revenue 17.2 17.9
Total revenues 100.0 100.0
Merchandise cost of revenue 68.2 69.2
Rental cost of revenue 35.7 33.8
Total cost of revenues 62.6 62.9
Gross profit 37.4 37.1
Selling, general and administrative expenses 34.9 33.1
Pre-opening expenses - -
Operating income 2.5 4.0
Other income (expense):
Interest expense (0.2 ) (0.3 )
Other, net - -
Income before income taxes 2.3 3.7
Income tax expense 0.9 1.4
Net income 1.4 % 2.3 %
Summary of Superstore Activity
Three Months Ended Year Ended
April 30, January 31,
2009 2008 2009
Beginning number of stores 153 153 153
Openings - - 2
Closings - - (2 )
Ending number of stores 153 153 153
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Financial Results for the First Quarter of Fiscal Year 2009 Revenues. Total revenues for the first quarter decreased approximately $6.2 million, or 4.7%, to $125.7 million compared to $131.9 million for the first quarter of fiscal 2008. Included in fiscal 2008 was approximately $2.0 million in revenues resulting from an additional day of sales due to leap year. Excluding this extra day of sales, total revenues for the first quarter decreased approximately $4.2 million, or 3.2%. The following is a summary of our revenues results (dollars in thousands):
Three Months Ended April 30,
2009 2008
Percent of Percent of (Decrease)
Revenues Total Revenues Total Dollar Percent
Merchandise revenue $ 104,096 82.8 % $ 108,317 82.1 % $ (4,221 ) -3.9 %
Rental revenue 21,597 17.2 % 23,619 17.9 % (2,022 ) -8.6 %
Total revenues $ 125,693 100.0 % $ 131,936 100.0 % $ (6,243 ) -4.7 %
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Comparable-store revenues ("Comp"):
Fiscal
2009
2009 (excludes leap day)
Total -5.9 % -4.4 %
Merchandise -5.1 % -3.7 %
Rental -9.3 % -7.6 %
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Below is a summary of the Comp results for our major merchandise categories:
Three Months Ended April 30,
2009
2009 2008 (excludes leap day)
Hardback Café 8.5 % 14.2 % 10.0 %
Electronics 5.5 % 26.8 % 7.1 %
Trends 5.1 % 36.8 % 6.6 %
Consumables 4.5 % 12.5 % 6.4 %
Books 0.2 % 5.6 % 1.7 %
Movies -5.7 % 3.2 % -4.3 %
Video Games -10.4 % 29.8 % -9.1 %
Music -15.2 % -16.0 % -13.9 %
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Stores included in the Comps calculation are those stores that have been open
for a minimum of 60 weeks. Also included are stores that were remodeled or
relocated during the comparable period. Sales via the internet are included and
closed stores are removed from each comparable period for the purpose of
calculating Comps. The following discussion of merchandise and rental Comp sales
excludes the additional day of sales due to leap year.
Hardback Café Comps increased 10.0% primarily as a result of an additional four
cafés open, in existing stores, during the quarter compared to the same period
in the prior year and increased sales of specialty café drinks and mugs.
Electronics Comps increased 7.1% for the quarter primarily due to strong sales
of digital converter boxes, third-party gift cards and Blu-ray DVD players,
partially offset by lower sales of portable electronic devices, including MP3
players. Trends Comps increased 6.6% for the quarter primarily due to strong
sales of apparel and action figures, partially offset by lower sales of plush
products and greeting cards. Key drivers in the apparel category included
t-shirts, sports apparel, and bags. Consumables Comps increased 6.4% for the
quarter, primarily due to strong sales of seasonal candy as well as candy and
snacks cross-merchandised on our video rental wall. Book Comps increased 1.7%
for the period. Strong sales of used and value books, as well as strong sales of
new hardbacks were offset by lower sales of magazines. Strong performers during
the quarter included the Twilight Saga
Series by Stephenie Meyer and The Shack by William P. Young. Movie Comps
decreased 4.3% for the quarter, primarily resulting from lower sales of new
DVDs, partially offset by increased sales of Blu-ray DVDs and Used DVDs. Video
Game Comps decreased 9.1% primarily due to lower sales of older generation video
games and lower sales of video game consoles, partially offset by increased
sales of used video games for the Microsoft XBOX 360, Sony Playstation 3, and
Nintendo Wii. Music Comps decreased 13.9% for the quarter due to lower sales of
new and used CDs, resulting directly from a continued industry decline as well
as reduced footprint in thirty-one stores. Merchandise Comps, excluding the sale
of music, decreased 1.3% for the quarter.
Rental Comps decreased 7.6% for the first quarter, primarily due to fewer
rentals of new DVDs and increased promotions offered during the current quarter,
partially offset by increased rentals of Blu-ray movies and video games. Rental
Video Game Comps increased 4.3% for the period while Rental Movie Comps
decreased 9.0%.
Gross Profit - Merchandise. For the first quarter, total merchandise gross
profit dollars decreased approximately $0.3 million, or 0.9%, to $33.1 million
from $33.4 million for the same period in the prior year primarily due to lower
revenues, partially offset by increased margin rates. As a percentage of total
merchandise revenue, merchandise gross profit increased to 31.8% for the quarter
compared to 30.8% for the same period in the prior year, primarily resulting
from lower markdown expense and costs to return product, partially offset by
increased shrinkage expense.
Gross Profit - Rental. For the first quarter, total rental gross profit dollars
decreased approximately $1.7 million, or 10.9%, to $13.9 million from
$15.6 million for the same period in the prior year primarily due to lower
rental revenues partially offset by lower rental shrinkage expense. As a
percentage of total rental revenue, rental gross profit decreased to 64.3% for
the quarter compared to 66.3% for the same period in the prior year 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 34.9% for the first quarter compared to 33.1% for the
same quarter in the prior year, primarily as a result of lower revenues. SG&A
increased approximately $0.2 million during the quarter, or 0.5%, to
$43.9 million compared to $43.7 million for the same quarter last year.
Liquidity and Capital Resources
We generate cash from operations from the sale of merchandise and the rental of
products, most of which is received in cash and cash equivalents. Our primary
sources of working capital are cash flows from operating activities, including
trade credit from vendors, and borrowings under our revolving credit facility,
with the most significant source in the first quarter of fiscal 2009 and 2008
being cash flow from operating activities. Other than our principal capital
requirements arising from the purchasing, warehousing and merchandising of
inventory and rental products, opening new stores and expanding or reformatting
existing stores and updating existing and implementing new information systems
technology, we have no anticipated material capital commitments, except for the
stock buyback programs discussed more fully in Item 2 of Part II of this
Quarterly Report on Form 10-Q. We believe our cash flow from operations and
borrowings under our revolving credit facility will be sufficient to fund our
ongoing operations, new stores, store expansions, and store reformations for the
next twelve months.
At April 30, 2009, total outstanding debt was approximately $35.3 million. We
project our outstanding debt level will be in the range of $49.5 million to
$52.5 million by the end of fiscal 2009. At April 30, 2009, we had approximately
$49.1 million in excess availability, after the $10 million availability
reserve, under the Facility (as defined below).
Consolidated Cash Flows
Operating Activities. Net cash provided by operating activities totaled
approximately $13.4 million for the three months ended April 30, 2009, compared
to $4.1 million for the three months ended April 30, 2008. Net earnings for the
quarter were approximately $1.7 million compared to net earnings of $3.0 million
for the same period in fiscal 2008. Merchandise inventories increased
$0.1 million for the quarter, compared to a decrease of $11.0 million during the
same period in fiscal 2008, primarily due to the timing of merchandise returns
resulting from lower inventory levels at the beginning of the quarter as
compared to
the prior year. Trade accounts payable increased approximately $12.8 million for
the quarter compared to a decrease of $10.6 million in the same period of fiscal
2008 resulting from increased large deal purchases during the first quarter of
fiscal 2009. Merchandise inventories, net of trade payables, decreased
approximately $5.1 million for the quarter, compared to an increase of
$4.7 million during the same period in the prior year. Accrued expenses and
other liabilities decreased approximately $6.1 million during the quarter
compared to a decrease of $1.0 million during the same period in fiscal 2008,
primarily driven by the timing of payments of federal income taxes.
Investing Activities. Net cash used in investing activities decreased
approximately $0.4 million from $3.5 million for the three months ended
April 30, 2008, to $3.1 million for the three months ended April 30, 2009.
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 three
months ended April 30, 2009, cash used in financing activities was approximately
$14.0 million compared to $0.6 million for the three months ended April 30,
2008, primarily resulting from net repayments to our credit facility during the
quarter of approximately $9.2 million compared to net borrowings of $2.1 million
for same period in the prior year. Changes in our cash overdraft position
increased from a use of $1.5 million for the three months ended April 30, 2008
to a use of $4.7 million for the three months ended April 30, 2009, due to the
timing of payments issued to vendors during the period. The Company purchased
approximately $0.1 million of treasury stock during the three months ended
April 30, 2009 compared to $1.3 million during the three months ended April 30,
2008.
Capital Structure. We have a syndicated secured Loan and Security Agreement with
Bank of America (the "Facility"). The amount outstanding under the Facility is
limited by a borrowing base predicated on (i) eligible inventory, as defined in
the Facility, and (ii) certain rental assets, net of accumulated depreciation
less specifically defined reserves and is limited to a ceiling of $100 million,
less a $10 million availability reserve. We can borrow at various interest-rate
options based on the prime rate or London Interbank Offered Rate ("LIBOR"), plus
applicable margin depending upon the level of our minimum availability. The
borrowing base under the Facility is limited to an advance rate of 65% of
eligible inventory and certain rental assets, which can be adjusted to reduce
availability under the Facility. The lender may increase specifically defined
reserves to reduce availability in the event of adverse changes in our industry
or our financial condition, that are projected to impact the value of our assets
pledged as collateral. The lender must exercise reasonable judgment and act in
good faith with respect to any changes in the specifically defined reserves. The
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