hast

Analyst: Victor Sula, Ph.D.Initial Report

February 25th, 2009

Hastings Entertainment Inc. (Nasdaq: HAST) 1


February 25th, 2009

Background

MARKET DATA

Symbol

Current Price

Low/ High 52 weeks

Average Volume (3m)

Market Capitalization

Shares Outstanding

Source: Yahoo Finance, Analyst Estimates

HAST

$2.03

$1.26 - $8.91

24,638.7

$20.31 Mn

10.01 Mn

Revenues, $ Mn.

Gross margin

Operating margin

Net margin

Diluted EPS, $

548.3

34.4%

2.0%

0.9%

$0.44

547.7

35.6%

3.3%

1.9%

$0.93

534.1

35.0%

1.3%

0.8%

$0.41

Hastings Entertainment Inc. (the “Company,” or “HAST”) is a multime-dia entertainment retailer that operates 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, as well as consumables and trends products such as apparel, T-shirts, action figures, posters, greeting cards and sea-sonal merchandise.

The Company is operating approximately 153 superstores mainly in medi-um-sized markets located in 20 states, primarily in the Western and Mid-western United States. HAST stores average approximately 20,000 square feet of sales space. The Company is also operating a multimedia entertain-ment e-commerce Web site offering a broad selection of books, software, video games, DVDs and music.

2/23/09

volume

3.25

3.00

2.75

2.50

2.25

2.00

1.75

1.50

1.25

200

150

100

50

0

© BigCharts.com

HAST daily

Dec 09 Feb

Mill

ions

Share Statistics

(12/23/08)NASDAQ FY 2007 FY 2008 FY 2009E

Analyst: Victor Sula, Ph.D. Initial Report

February 25th, 2009



February 25th, 2009


The Company aims to enhance its position as a leading multimedia entertainment retailer primarily in medium-sized communities by expanding and remodeling existing stores, opening new stores in selected markets and to a lesser extent, offering its products through the Internet. The Company’s strategy is designed to build consumer awareness of the Hastings concept and achieve high levels of customer loyalty and repeat business. The key ele-ments of this strategy are the following:

Superior Multimedia Concept: HAST stores present a wide variety of product categories with individual prod-ucts tailored to local preferences in a dynamic and comfortable atmosphere with exceptional service.

Medium-Sized Market Focus. The Company targets medium-sized markets with populations generally less than 250,000 to capitalize of customized product selection in both new and used products, low pricing strategy, the ability to trade-in and customer service.

Customer-Oriented Format. HAST stores provide an easy-to-shop, open-store atmosphere by offering major product categories in a “store-within-a-store” format. HAST stores position product with customer affinities together in three departments (e.g., books, music/video games/trends and video) that are designed to allow cus-tomers to view the entire store.

Low Pricing. The Company’s pricing strategy is to offer value to the customers by maintaining low prices that are competitive with or lower than the prices charged by other retailers in the market.

Used and Budget-Priced Products. The Company is buying and trading the customers’ and third-party vendors’ CDs, DVDs, videogames and books to sell as used product in order to leverage the value of its offering.

Internet. To augment the store offering, HAST operates an e-commerce Internet Web site (www.gohastings.com), which enables customers to electronically access more than 1.5 million new and used entertainment prod-ucts and unique, contemporary gifts.

Niche business with low prices and increased competitiveness in a crisis environment

HAST is a niche business with a strong competitive advantage in small town markets. The Company’s strategy is to offer low prices that are competitive with or lower than the prices charged by other retailers in the market. HAST’s low pricing structure results from: (1) the ability to purchase a majority of products directly from publishers, studios and manufacturers as opposed to purchasing from distributors; (2) the proprietary information systems that enable manage-ment to make more precise and targeted purchases and pricing for each store; and (3) the focus on maintaining low occupancy and operating costs.

We believe the discount retailer business model will allow the Company to sur-vive in a crisis environment since its offering is more resistant to recession.

Solid revenue base

Over the last decade, HAST revenue has grown from approximately $350 mil-

Investment Highlights


February 25th, 2009



February 25th, 2009


lion to nearly $550 million in FY2007 and FY2008. The growth was primarily driven by the growth of stores num-ber from 100 to 153 by the end of FY2009.

However, the current financial crises and declining consumer spending negatively influenced the Company’s rev-enue, which is likely to decline 2%-3% in FY2009 compared to 2008.

Despite the revenue decline the Company is likely to report positive earning in FY 2009 and 2010.

The declining revenue has significantly altered the Company’s operating margins and made HAST to report losses in Q3 FY2009. Going forward, the management lowered the FY2009 EPS guidance from $0.95-$1 range to $0.5-$0.55. Management citied lower revenue due to decreasing consumer spending and greater expenditures as-sociated with the operation of new, expanded and relocated stores, as well as increased store utility costs.

2009

Revenue, $ Mn

Source : SEC Filings, Fiscal year ending January 31.

Quarterly revenue and operating margin, $ Mn

Source: SEC Filings, Fiscal year ending January 31.


February 25th, 2009



February 25th, 2009


The analyst consensus forecast EPS in the range of $0.41 for FY 2009 and $0.50 for FY 2010.

Decent balance sheet

HAST has a decent balance sheet with cash reserves nearing $4 million and positive operating cash flows. The Company’s main capital requirements arise from the purchasing, warehousing and merchandising of inventory and rental products, opening new stores, expanding/reformatting existing stores, as well as updating existing and implementing new information systems technology.

Despite the fact that HAST has positive operating cash flows, it might use borrowing facilities to fund the open-ing of new stores, relocation and reformatting of existing stores. Despite these efforts the reported revenue was rather flat, which has driven down the price of the Company’s stock.

Income Statement, $ Mn

Source: SEC Filings, Fiscal year ending January 31.

RevenueСost of revenueGross profitSelling, general and administrative expensesOperating profitOther expensesIncome before income taxesNet incomeDiluted EPSGross marginOperating MarginNet Margin

376.2238.4137.8129.8

8.0260.5

5.8

4.40.40

36.6%2.1%1.2%

371.9235.7136.2134.0

2.2257.5

0.8

0.00.00

36.6%0.6%0.0%

-1.1%-1.1%-1.2%3.2%

-72.9%-1.1%

-85.6%

-100.2%-100.0%

0.0%-1.5%-1.2%

122.377.944.443.6

0.885.3

0.1

0.10.01

36.3%0.7%0.1%

114.373.041.346.0

-4.779.2-5.1

-3.7-0.36

36.1%-4.1%-3.2%

-6.5%-6.3%-7.1%5.4%

n/m-7.1%

n/m

n/mn/m

-0.2%-4.8%-3.3%

9 months FY 2008

9 months FY 2009

% Chg Q3 FY2008

Q3 FY2009

% Chg

Balance Sheet, $ Mn

Source: SEC Filings

Total current assets:Cash and cash equivalentsMerchandise inventories, netDeferred income taxesPrepaid expenses and other current assetsOther assetsTotal Assets

Current liabilitiesLong term debtOther liabilitiesTotal Shareholders’ Equity

190.04.0

171.63.4

11.070.2

260.2

113.040.6

4.8101.8

213.64.2

188.59.8

11.076.9

290.5

128.658.9

4.698.4

31-Jan-08 31-Oct-08


February 25th, 2009


Expansion of the Internet sales

HAST’s proprietary goShip system allows it to list selected stores’ inventory on goHastings.com and Amazon Marketplace. Orders are sourced to approximately 110 of the Company’s stores and generally shipped within 72 hours. This has allowed HAST to leverage its store inventory to a wider group of customers. This increases store revenue and enhances the performance of the product inventory.

HAST is traded with discount to peer group valuation multiples, mainly due to the fact that management has significantly lowered the guidance for FY 2009 ended January 31. In addition, the disappointing results for Q3 FY2009, with significant loses and increased debt, have caused the market to imply that the Company might have liquidity problems.

However, we consider these problems as temporary and driven mainly by the recession environment. HAST is a well-established regional discount retailer with more than 40 years of history, solid geographical presence and store base, and significant pricing advantages that position its business model as recession resistant. Moreover, comparing to our peer group selection HAST shares seems very cheap and could offer significant upside poten-tial. As a result we rate HAST as a “Speculative Buy.”

Compariative analysis

Source: Yahoo Finance!

Blockbuster Inc.Barnes & Noble Inc.Conns Inc.Best Buy Co. Inc. Trans World Entert. Corp.Median

Hastings Entertainment Inc.

BBIBKS

CONNBBY

TWMC

HAST

1.0616.6513.3127.89

0.89

2.03

204921299

11,53028

20

3.3111.4011.6810.65

n/m11.02

4.06

n/a14.87

8.8111.67

n/m11.67

n/a

0.040.180.340.260.030.18

0.04

n/a0.180.320.240.030.21

0.04

0.321.461.142.62

-1.56

0.5

n/a1.121.512.39

-1.44

n/a

n/m-23%32%-9%-8%

-8.2%

22%

Company Name12/23/08

Tickersymbol

Price perShare, $

Mrkt. Cap.$ Mn

P/E EPS, $2008 2008 20092009 2009 2010 %chg

Investment sentiment


February 25th, 2009


Disclaimer

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To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information).

We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www.finra.org.

All decisions are made solely by the analyst and independent of outside parties or influence.

I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report.

Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant posi-tions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

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