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| HAST > SEC Filings for HAST > Form 10-Q on 2-Sep-2009 | All Recent SEC Filings |
2-Sep-2009
Quarterly Report
Forward-looking Statements
Certain written and oral statements set forth below or made by Hastings
Entertainment, Inc. (the "Company," "Hastings," or "Hastings Entertainment")
with the approval of an authorized executive officer constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. The words "believe," "expect," "intend," "anticipate," "project,"
"will" and similar expressions identify forward-looking statements, which
generally are not historical in nature. All statements which address operating
performance, events or developments that we expect or anticipate will occur in
the future, including statements relating to the business, expansion,
merchandising and marketing strategies of Hastings, industry projections or
forecasts, inflation, effect of critical accounting policies including lower of
cost or market for inventory adjustments, the returns process, rental asset
depreciation, store closing reserves, impairment or disposal of long-lived
assets, revenue recognition, and vendor allowances, sufficiency of cash flow
from operations and borrowings under our revolving credit facility and
statements expressing general optimism about future operating results, are
forward-looking statements. Such statements are based upon our management's
current estimates, assumptions and expectations, which are based on information
available at the time of the disclosure, and are subject to a number of factors
and uncertainties, including, but not limited to, consumer appeal of our
existing and planned product offerings, and the related impact of competitor
pricing and product offerings; overall industry performance and the accuracy of
our estimates and judgments regarding trends; our ability to obtain favorable
terms from suppliers; our ability to respond to changing consumer preferences,
including with respect to new technologies and alternative methods of content
delivery, and to effectively adjust our offerings if and as necessary; the
application and impact of future accounting policies or interpretations of
existing accounting policies; whether our assumptions turn out to be correct;
our inability to attain such estimates and expectations; a downturn in market
conditions in any industry relating to the products we inventory, sell or rent;
the extremely challenging times that the U.S. and global economies are currently
experiencing, the conditions of which have had and will continue to have an
adverse impact on spending by Hastings' current retail customer base and
potential new customers, and the possibility that general economic conditions
could deteriorate further; volatility of fuel and utility costs; acts of war or
terrorism inside the United States or abroad; unanticipated adverse litigation
results or effects; and other factors which may be outside of our control; any
of which could cause actual results to differ materially from those described
herein. We undertake no obligation to affirm, publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements of the Company and the related notes thereto
appearing elsewhere in this quarterly report on Form 10-Q.
General
Incorporated in 1972, Hastings is a leading multimedia entertainment retailer.
We operate entertainment superstores that buy, sell, trade, and rent various
home entertainment products, including books, music, software, periodicals, new
and used CDs, DVDs, video games, video game consoles, and electronics. We also
offer consumables and trends products such as apparel, t-shirts, action figures,
posters, greeting cards, and seasonal merchandise. As of July 31, 2009, we
operated 151 superstores principally in medium-sized markets located in 21
states, primarily in the Western and Midwestern United States. We also operate a
multimedia entertainment e-commerce web site offering a broad selection of
books, software, video games, DVDs and music. We have one wholly-owned
subsidiary, Hastings Internet, Inc. References herein to fiscal years are to the
twelve-month periods that end on January 31st of each following calendar year.
For example, the twelve-month period ending January 31, 2010, is referred to as
fiscal 2009, and the twelve-month period ended January 31, 2009 is referred to
as fiscal 2008.
Critical Accounting Estimates
The preparation of the financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. We
believe
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 the income tax
provision and the resulting tax liabilities and in the recoverability of
deferred tax assets that arise from temporary differences between the tax and
financial statement recognition of revenue and expense. We record deferred tax
assets and liabilities for future income tax consequences that are attributable
to differences between financial statement carrying amounts of assets and
liabilities and their income tax bases. We base the measurement of deferred tax
assets and liabilities on enacted tax rates that we expect will apply to taxable
earnings in the year when we expect to settle or recover those 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, cancellations, and the vesting period and contractual life of the option.
• Risk-free interest rate - The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life of the option.
Our stock price volatility and expected option lives involve management's best
estimates at that time, both of which impact the fair value of the option
calculated under the Black-Scholes pricing model and, ultimately, the expense
that will be recognized over the vesting period of the option.
We recognize compensation expense only for the portion of options that are
expected to vest. Therefore, we apply estimated forfeiture rates that are
derived from historical employee termination behavior. If the actual number of
forfeitures differs from those estimated by management, additional adjustments
to compensation expense may be required in future periods.
In addition to stock options, we award performance-based stock awards. The grant
date fair value of performance-based stock awards is equal to the average of the
opening and closing stock price on the day on which they are granted.
Compensation expense is recognized for these awards if management deems it
probable that the performance conditions will be met. Management must use their
judgment to determine the probability that a performance condition will be met.
If actual results differ from management's assumptions, future results could be
materially impacted.
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 Six Months Ended
July 31, July 31,
2009 2008 2009 2008
Merchandise revenue 83.1 % 82.6 % 82.9 % 82.4 %
Rental revenue 16.9 17.4 17.1 17.6
Total revenues 100.0 100.0 100.0 100.0
Merchandise cost of revenue 68.6 69.5 68.4 69.4
Rental cost of revenue 34.8 34.8 35.3 34.2
Total cost of revenues 62.9 63.5 62.7 63.2
Gross profit 37.1 36.5 37.3 36.8
Selling, general and administrative expenses 37.4 35.3 36.1 34.2
Pre-opening expenses - - - -
Operating income (loss) (0.3 ) 1.2 1.2 2.6
Other income (expense):
Interest expense (0.2 ) (0.3 ) (0.3 ) (0.3 )
Other, net - - - -
Income (loss) before income taxes (0.5 ) 0.9 0.9 2.3
Income tax expense (benefit) (0.2 ) 0.4 0.4 0.9
Net income (loss) (0.3 )% 0.5 % 0.5 % 1.4 %
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Summary of Superstore Activity
Three Months Ended Six Months Ended Year Ended
July 31, July 31, January 31,
2009 2008 2009 2008 2009
Beginning number of stores 153 153 153 153 153
Openings - - - - 2
Closings (2 ) (1 ) (2 ) (1 ) (2 )
Ending number of stores 151 152 151 152 153
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Financial Results for the Second Quarter of Fiscal Year 2009 Revenues. Total revenues for the second quarter decreased approximately $8.5 million, or 6.7%, to $117.2 million compared to $125.7 million for the second quarter of fiscal 2008. The following is a summary of our revenues results (dollars in thousands):
Three Months Ended July 31,
2009 2008 (Decrease)
Percent of Percent of
Revenues Total Revenues Total Dollar Percent
Merchandise revenue $ 97,366 83.1 % $ 103,860 82.6 % $ (6,494 ) -6.3 %
Rental revenue 19,826 16.9 % 21,806 17.4 % (1,980 ) -9.1 %
Total revenues $ 117,192 100.0 % $ 125,666 100.0 % $ (8,474 ) -6.7 %
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Comparable-store revenues ("Comp"):
Total -8.1 %
Merchandise -7.7 %
Rental -10.1 %
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Below is a summary of the Comp results for our major merchandise categories:
Three Months Ended July 31,
2009 2008
Hardback Café 17.2 % 6.5 %
Electronics 3.3 % 25.7 %
Consumables 3.0 % 10.4 %
Trends 0.8 % 13.6 %
Books -1.7 % -1.1 %
Movies -8.1 % 2.6 %
Music -15.6 % -11.7 %
Video Games -20.9 % 4.6 %
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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.
Hardback Café Comps increased 17.2% for the quarter, compared to the second
quarter in the prior year, primarily as a result of the opening of an additional
five cafés in existing stores during the quarter and increased sales of
specialty café drinks, mugs and baked goods. Electronics department Comps
increased 3.3% for the quarter, primarily due to strong sales of third party
gift cards, hardware including digital converter boxes and Blu-ray DVD players
and accessories for iPods and MP3 players, partially offset by lower sales of
refurbished iPods during the quarter. Consumable Comps increased 3.0% for the
quarter, primarily resulting from increased sales of assorted candies and gums.
Trends Comps increased 0.8% during the quarter. Strong sales of novelty items,
including barware, magnets and gag gifts, and increased sales of sports
memorabilia, action figures, children's toys and t-shirts were offset by lower
sales of Webkinz plush products and greeting cards. Books Comps decreased 1.7%
for the quarter, primarily as a result of lower sales of new hardbacks, new
trade paperbacks and magazines, partially offset by strong sales of used and
value books. Movie Comps decreased 8.1% for the quarter, primarily due to lower
sales of new and used DVDs and lower sales of DVD boxed sets, partially offset
by increased sales of Blu-ray DVDs. Music Comps decreased 15.6% for the quarter
due to lower sales of new CDs, resulting directly from a continued industry
decline and reduced footprint in thirty-eight stores. Merchandise Comps,
excluding the sale of new music, decreased 5.7% for the quarter. Video Game
Comps decreased 20.9% for the quarter, primarily due to lower sales of video
game consoles and lower sales of older generation video games, partially offset
by increased sales of used video games for the Nintendo, XBOX 360 and Sony
Playstation 3.
Rental Comps decreased 10.1% for the quarter, primarily as a result of fewer
rentals of DVDs and increased promotions offered during the current quarter,
partially offset by increased rentals of Blu-ray movies and video games.
Comparable promotional coupons increased significantly, which decreased Rental
Comps by 2.1%. DVD rentals were lower due to fewer titles released with gross
box office revenues in the range of $20 million to $80 million, which typically
represent our strongest rentals. The decrease in Rental Comps has been driven by
fewer titles released in the first six months of fiscal 2009 as well as the
de-valuing of the price of a rental movie primarily as a result of the growth of
rental kiosks renting movies for a dollar per day. We also implemented a
promotion where thousands of titles in our stores now rent for $0.99 per day,
which has lowered rental revenues in the short-term. As a result of this
promotion, we are seeing a significant increase in units rented along with
growth in new customer membership sign-ups. Rental Video Game Comps increased
6.9% for the quarter while Rental Video Comps decreased 12.2%.
Gross Profit - Merchandise. For the second quarter, total merchandise gross
profit dollars decreased approximately $1.1 million, or 3.5%, to $30.6 million
from $31.7 million for the same period last year, primarily as a result of lower
merchandise revenues, partially offset by increased margin rates. As a
percentage of total merchandise revenue, merchandise gross profit increased to
31.4% for the quarter compared to 30.5% for the same period in the prior year
resulting from improved inventory management.
Gross Profit - Rental. For the second quarter, total rental gross profit dollars
decreased approximately $1.3 million, or 9.2%, to $12.9 million from
$14.2 million for the same period in the prior year, primarily due to lower
rental revenues. As a percentage of total rental revenue, rental gross profit
remained constant at 65.2% for the quarter when compared to the same period in
the prior year.
Selling, General and Administrative Expenses ("SG&A"). As a percentage of total
revenue, SG&A increased to 37.4% for the second quarter compared to 35.3% for
the same quarter in the prior year due to deleveraging resulting from lower
revenues. SG&A decreased approximately $0.4 million during the quarter, or 0.9%,
to $43.9 million compared to $44.3 million for the same quarter last year. In
accordance with our management incentive programs, no bonuses were earned for
the first six months of fiscal 2009, which represents the majority of the
decrease in SG&A from the prior year. Increases in store occupancy costs
associated with the operation of new, expanded and relocated stores and
increased advertising costs were offset by reductions across most expense
categories resulting from improved expense management.
Interest Expense. For the second quarter, interest expense decreased
approximately $0.2 million, or 40%, to $0.3 million, compared to $0.5 million
during fiscal 2008 resulting primarily from lower interest rates. The average
rate of interest charged for the quarter decreased to 2.53% compared to 4.02%
for the same period in the prior year.
Financial Results for the Six Months Ended July 31, 2009
Revenues. Total revenues for the six months ended July 31, 2009 decreased
approximately $14.7 million, or 5.7%, to $242.9 million compared to
$257.6 million for the same period in fiscal 2008. Included in fiscal 2008 was
approximately $2.0 million in revenues resulting from an additional day of sales
due to leap year. Excluding this extra day of sales, total revenues for the six
months ended July 31, 2009 decreased approximately $12.7 million, or 5.0%. The
following is a summary of our revenues results (dollars in thousands):
Six Months Ended July 31,
2009 2008 (Decrease)
Percent of Percent of
Revenues Total Revenues Total Dollar Percent
Merchandise revenue $ 201,462 82.9 % $ 212,177 82.4 % $ (10,715 ) -5.1 %
Rental revenue 41,423 17.1 % 45,425 17.6 % (4,002 ) -8.8 %
Total revenues $ 242,885 100.0 % $ 257,602 100.0 % $ (14,717 ) -5.7 %
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Comparable-store revenues ("Comp"):
Fiscal
2009
2009 2008 (excludes leap day)
Total -7.0 % 2.3 % -6.2 %
Merchandise -6.4 % 2.2 % -5.7 %
Rental -9.6 % 3.0 % -8.7 %
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Below is a summary of the Comp results for our major merchandise categories:
Six Months Ended July 31,
2009
2009 2008 (excludes leap day)
Hardback Café 12.7 % 10.4 % 13.5 %
Electronics 4.5 % 26.5 % 5.3 %
Consumables 3.8 % 11.5 % 4.8 %
Trends 2.8 % 23.8 % 3.6 %
Books -0.8 % 2.0 % -0.1 %
Movies -6.8 % 2.8 % -6.1 %
Video Games -15.4 % 16.4 % -14.7 %
Music -15.4 % -14.0 % -14.7 %
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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 in fiscal 2008. Hardback Café Comps increased 13.5% for the period, compared to the same period in the prior year, primarily as a result of the opening of an additional five cafés in existing stores during the period, and increased sales of specialty café drinks. Electronics Comps increased 5.3% for the period, primarily due to . . .
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