Hastings Entertainment, Inc. Reports Results for the Third Quarter of Fiscal 2013

AMARILLO, Texas, Nov. 25, 2013 /PRNewswire/ -- Hastings Entertainment, Inc.  (NASDAQ: HAST), a leading multimedia entertainment retailer, today reported results for the three and nine months ended October 31, 2013.  Net loss was approximately $6.2 million, or $0.76 per diluted share, for the three months ended October 31, 2013 compared to a net loss of approximately $8.0 million, or $0.98 per diluted share, for the three months ended October 31, 2012.  Net loss was approximately $12.5 million, or $1.54 per diluted share, for the nine months ended October 31, 2013 compared to net loss of $10.5 million, or $1.28 per diluted share, for the nine months ended October 31, 2012. 

"As we have previously disclosed, one of our strategic initiatives is the introduction of new product categories which includes consumer electronics, music electronics and accessories, vinyl, hobby, recreation and lifestyle and tablets," said John H. Marmaduke, Chief Executive Officer and Chairman.  "The majority of these products are included in our Electronics category which had a comparable sales increase of 12.2% for the third quarter of fiscal 2013 which is on top of a 16.7% comparable sales increase for the third quarter of fiscal 2012. Several of the remaining new categories are included in our Trends department which had an 11.9% increase for the third quarter of fiscal 2013 which is on top of a 6.6% increase for the third quarter of fiscal 2012. This was driven by the stores that were reset during fiscal 2012 and thirty-nine stores reset by the end of September for the current nine month period. The Electronic and Trends departments in these reset stores had significant increases in revenues when compared to the rest of our superstores that have not had a reset.  We are greatly encouraged by the performance of these new products.  Revenues for Music, Books and Rental continue to be impacted by the popularity of digital delivery, rental kiosks and subscription based services. Book revenues continue to be impacted by the decline in sales of the Fifty Shades trilogy. I am pleased with the performance of our Rental Comps for the third quarter of fiscal 2013. With a relatively strong release schedule combined with certain initiatives we have taken to increase Rental revenues, our Rental Movie Comps only decreased 3.0% which compares to a decrease of 7.8% for the first six months of fiscal 2013. We also saw an 8.6% increase in Video Game sales for the third quarter of fiscal 2013 which was driven by the strong release of Grand Theft Auto V."

"In order to reduce our SG&A expenses in light of our lower revenue base, we underwent a restructuring of our corporate store support center which included staff reduction, department consolidation and the termination of four of our eight corporate officers.  The total cost of this restructuring was approximately $1.4 million which we recognized during the first quarter of fiscal 2013. Additionally, we have closed ten underperforming stores thus far in fiscal 2013.  For the nine months ended October 31, 2013 we have reduced selling, general and administrative expenses by approximately $8.2 million excluding the restructuring charge.

"During the third quarter of fiscal 2013 we began to see momentum in our total revenue comps with a decrease of 2.2% which compares to 4.7% for the third quarter of fiscal 2012. Additionally, with the current and expected future success of our new product categories, along with the expected launch of new game consoles in the fourth quarter of our current fiscal year as well as an expected stronger release schedule for games and movies, we are encouraged with our earnings prospects for the fourth quarter of fiscal 2013."

Financial Results for the Third Quarter of Fiscal Year 2013

Revenues.  Total revenues for the third quarter decreased approximately $6.6 million, or 6.6%, to $94.7 million compared to $101.3 million for the third quarter of fiscal 2012.  As of October 31, 2013, we operated 10 fewer Hastings superstores, as compared to October 31, 2012.  The following is a summary of our revenues results (dollars in thousands):

Below is a summary of the Comp results for our major merchandise categories:

Electronics Comps increased 12.2% for the quarter primarily due to increased sales in hardware categories, such as televisions, speaker systems, tablets and tablet accessories, home entertainment, gadgets and turntables.  Wireless accessories experienced strong sales growth due to multiple iPhone models releasing this quarter.  Strong growth was also realized in expanding categories such as connected TV, home security and app enhanced accessories.  Trends Comps increased 11.9% for the quarter primarily due to increased sales in action figures, barware, licensed and branded products, and recreational and lifestyle products.  Licensed and branded products for which we experienced strong sales during the quarter were Minecraft and Duck Dynasty.  The Trends department also includes recreation and lifestyles products whose growth was driven by the addition of hobby products to reset stores as well as growth in the existing categories of skateboards, disc golf, exercise accessories and airsoft products.  Video Games Comps increased 8.6% during the quarter due to a strong release schedule primarily led by the release of Grand Theft Auto V.  Movies Comps increased 1.5% for the quarter primarily due to increased sales of Blu-ray movies, DVD boxed-sets and used DVDs, partially offset by a decrease in previously viewed films.  Consumables Comps were flat for the quarter primarily due to increased sales of seasonal candies offset by a decrease in fountain drinks.  Hardback Café Comps decreased 1.0% for the quarter primarily due to the closing of five Hardback Cafés which operated in comp stores.  Book Comps decreased 11.7% for the quarter due to a weaker release schedule for new books and a decrease in trade paperback sales, as compared to the third quarter of fiscal 2012, which included strong sales from the Fifty Shades trilogy.  Music Comps decreased 14.4% primarily due to a significant reduction in retail space in the 45 stores that were reset in fiscal 2013 as well as the increasing popularity of digital delivery.

Rental Comps decreased 4.2% for the third quarter, primarily resulting from fewer rentals of traditional DVDs and video games, partially offset by an increase in rentals of Blu-ray movies. Rental Movie Comps decreased only 3.0% for the quarter primarily due to a stronger release schedule.  We continue to be affected by competition from rental kiosks and subscription-based rental services. Rental Video Game Comps, which continue to be affected by the longevity of the current console cycle, decreased 14.9%.

Gross Profit – Merchandise.  For the third quarter, total merchandise gross profit dollars decreased approximately $1.2 million, or 4.4%, to $26.1 million from $27.3 million for the same period in the prior year, primarily due to a decrease in revenue, partially offset by increased margin rates.  The decrease in revenue was primarily attributed to operating fewer superstores this quarter compared to the same quarter in the prior year.  As a percentage of total merchandise revenue, merchandise gross profit increased to 31.6% for the quarter compared to 31.1% for the same quarter in the prior year, primarily due to lower freight expense, lower expense to return products and slightly lower shrinkage.

Gross Profit – Rental.  For the third quarter, total rental gross profit dollars decreased approximately $1.0 million, or 11.4%, to $7.8 million from $8.8 million for the same period in the prior year, primarily due to a decrease in revenue partially attributed to operating fewer superstores this quarter compared to the same quarter in the prior year. As a percentage of total rental revenue, rental gross profit decreased to 64.2% for the quarter compared to 66.4% for the same quarter in the prior year, primarily due to an increase in revenues under revenue sharing agreements which generally have lower margins when compared to traditional agreements, partially offset by a decrease in shrink expense.

Selling, General and Administrative Expenses ("SG&A").  As a percentage of total revenue, SG&A decreased to 42.6% for the third quarter compared to 43.4% for the same quarter in the prior year. SG&A decreased approximately $3.7 million during the quarter, or 8.4%, to $40.3 million compared to $44.0 million for the same quarter last year. The decrease results primarily from a $1.3 million reduction in store labor expense, a decrease of $0.9 million in corporate salary expense due to lower bonus payouts and the restructuring that took place in the first quarter of fiscal 2013, a $0.7 million decrease in depreciation expense, a decrease of $0.3 million in store maintenance and a decrease of $0.2 million in store advertising. The decrease in depreciation expense and, to a certain extent, the decrease in store labor expense, are primarily a result of operating fewer superstores this quarter compared to the same period in the prior year.  These reductions were partially offset by a $0.2 million increase in store reset expenses.

Interest Expense.  For both the third quarter of fiscal 2013 and fiscal 2012, interest expense was approximately $0.3 million.  The average rate of interest charged for the third quarter decreased to 2.4% compared to 2.5% for the same period in the prior year.

Income Tax Expense.  During the three months ended October 31, 2013, the Company recorded a discrete tax benefit of approximately $0.5 million from the recognition of a tax position due to a change in state administrative practices.  No discrete items were recorded during the three months ended October 31, 2012.  Primarily as a result of this discrete tax benefit, the effective tax rate for the third quarter was (6.4%).

Financial Results for the Nine Months Ended October 31, 2013

Revenues.  Total revenues for the nine months ended October 31, 2013 decreased approximately $21.3 million, or 6.6%, to $299.6 million compared to $320.9 million for the nine months ended October 31, 2012. The following is a summary of our revenues results (dollars in thousands):

Below is a summary of the Comp results for our major merchandise categories:

Electronics Comps increased 12.7% for the period primarily due to increased sales in hardware categories, such as televisions, Blu-ray and DVD players, speaker docks, tablets and tablet accessories, turntables and wireless accessories.  Strong growth was also realized in expanding categories such as connected TV, home security and app enhanced accessories.  Trends Comps increased 9.9% for the period primarily due to increased sales in action figures, barware, licensed and branded products and recreational and lifestyle products.  Licensed and branded products for which we experienced strong sales during the period were Doctor Who, Walking Dead and Star Wars.  The Trends department also includes recreation and lifestyles products whose growth was driven by the addition of hobby products, pet accessories and outdoor accessories to reset stores as well as the growth in the existing categories of skateboards, disc golf, exercise accessories and airsoft products.   Hardback Café Comps increased 3.0% for the period primarily due to increased sales of iced and hot specialty café drinks and drink add-ons such as extra flavor, whipped cream, soy, etc.  Movies Comps increased 2.6% for the period primarily due to increased sales of new and used Blu-ray movies, DVD boxed-sets and new and used DVDs, partially offset by a decrease in previously viewed DVDs.  Consumables Comps decreased 3.2% for the period primarily due to decreased sales of popcorn, candies and soft drinks.  Video Games Comps decreased 10.9% during the period primarily due to lower sales of new and used video games, partially offset by the strong release of Grand Theft Auto V.  Book Comps decreased 11.8% for the period primarily due to a weaker release schedule for new books and a decrease in trade paperback and hardback sales as compared to fiscal 2012, which included strong sales from the Fifty Shades and Hunger Games trilogies.  Music Comps decreased 12.9% for the period primarily due to lower sales of new and used CDs and the increasing popularity of digital delivery, partially offset by an increase in new vinyl album sales.

Rental Comps decreased 8.0% during the period primarily due to fewer rentals of traditional DVDs and video games, partially offset by an increase in rentals of Blu-ray movies. Rental Movie Comps decreased 6.6% primarily due to competition from rental kiosks and subscription-based services. Rental Video Game Comps, which continue to be affected by the longevity of the current console cycle, decreased 20.2%.

Gross Profit – Merchandise.  For the nine months ended October 31, 2013, total merchandise gross profit dollars decreased approximately $6.1 million, or 6.8%, to $83.5 million from $89.6 million for the same period in the prior year, primarily due to a decrease in revenue which is partially attributed to operating fewer superstores this period compared to the same period in the prior year. As a percentage of total merchandise revenue, merchandise gross profit decreased to 32.1% for the current nine months, compared to 32.4% for the same nine month period in the prior year, primarily due to a shift in mix of revenues by category, partially offset by lower freight and shrink expenses.

Gross Profit – Rental.  For the nine months ended October 31, 2013, total rental gross profit dollars decreased approximately $3.7 million, or 12.7%, to $25.5 million from $29.2 million for the same period in the prior year primarily due to a decrease in revenue which is partially attributed to operating fewer superstores for the same period in the prior year. As a percentage of total rental revenue, rental gross profit decreased to 65.1% for the current nine month period compared to 66.0% for the same nine month period in the prior year, primarily due to an increase in revenues under revenue sharing agreements which generally have lower margins when compared to traditional agreements.  The rate decrease is partially offset by a decrease in depreciation and shrink expense.

Selling, General and Administrative Expenses ("SG&A").  As a percentage of total revenue, SG&A increased to 40.5% for the nine months ended October 31, 2013 compared to 40.0% for the same period in the prior year primarily due to deleveraging resulting from lower revenues. SG&A decreased approximately $6.8 million, or 5.3%, to $121.5 million compared to $128.3 million for the same period last year. The decrease results primarily from a $2.4 million reduction in store labor expense, a decrease of $1.7 million in corporate salary expense due to lower bonus payouts and the restructuring that took place in the first quarter of fiscal 2013, a $1.6 million decrease in depreciation expense, a decrease of $0.9 million in advertising expense, a decrease of $0.4 million in store supplies, and a decrease of $0.3 million in store utilities. The decrease in depreciation expense and, to a certain extent, the decrease in store labor, store supplies and store utility expenses, are primarily a result of operating fewer superstores during this current period this quarter compared to the same nine month period in the prior year.  These reductions were partially offset by a $0.3 million increase in store reset expenses and a $0.2 million increase in store maintenance expense.

Interest Expense.  For the nine months ending October 31, 2013 and 2012 interest expense was approximately $0.9 million, as interest rates for both periods averaged 2.5%. 

Income Tax Expense.  During the nine months ended October 31, 2013, the Company recorded a discrete tax benefit of approximately $0.5 million from the recognition of a tax position due to a change in state administrative practices.  No discrete items were recorded during the nine months ended October 31, 2012. 

As the Company has a net operating loss and a net deferred tax asset, which has been offset by a full valuation allowance at the end of fiscal 2011, there is no tax liability, with the exception of Texas state income tax which is based primarily on gross margin.  The effective tax rate for the current nine months is (2.4%) which is a function of the Texas state income tax combined with the discrete tax benefit mentioned above.  The valuation allowance is approximately $15.2 million as of October 31, 2013.  We reassess the valuation allowance quarterly, and if future evidence allows for a partial or full release of the valuation allowance, a tax benefit will be recorded accordingly.

Store Activity

Since September 10, 2013, when we last reported store activity, we have the following activity to report:

• Store closed in Walla Walla, WA in September
• Store closed in Canyon, TX in October

Safe Harbor Statement

This press release contains "forward-looking statements." Hastings Entertainment, Inc. is including this statement for the express purpose of availing itself of the protections of the safe harbor provided by the Private Securities Litigation Reform Act of 1995 with respect to all such forward-looking statements. These forward-looking statements are based on currently available information and represent the beliefs of the management of the Company. These statements are subject to risks and uncertainties that could cause actual results to differ materially. These risks include, but are 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; unanticipated adverse litigation results or effects; the effects of a continued deterioration in economic conditions in the U.S. or the markets in which we operate our stores; the effect of inclement weather on the ability of consumers to reach our stores; and other factors which may be outside of the company's control. 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. Please refer to the company's annual, quarterly, and periodic reports on file with the Securities and Exchange Commission for a more detailed discussion of these and other risks that could cause results to differ materially.

About Hastings

Founded in 1968, Hastings Entertainment, Inc. is a leading multimedia entertainment retailer that combines the sale of new and used books, videos, video games and CDs, and trends and consumer electronics merchandise, with the rental of videos and video games in a superstore format. We currently operate 127 superstores, averaging approximately 24,000 square feet, primarily in medium-sized markets throughout the United States. We also operate three concept stores, Sun Adventure Sports, with locations in Amarillo, Texas and Lubbock, Texas, and TRADESMART, in Littleton, Colorado.

We operate www.goHastings.com, an e-commerce Internet web site that makes available to our customers new and used entertainment products and unique, contemporary gifts and toys. The site features exceptional product and pricing offers. The Investor Relations section of our web site contains press releases, a link to request financial and other literature and access to our filings with the Securities and Exchange Commission.

SOURCE Hastings Entertainment, Inc.

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