Business Viability Assessment: Hastings Entertainment

2012
Business Viability
Assessment
HASTINGS ENTERTAINMENT
TEMI VASCO

Table of Contents
Executive Summary...................................................................................................................................... 1
Industry and Firm Analysis........................................................................................................................... 1
Industry Analysis ....................................................................................................................................... 2
Industry Definition................................................................................................................................ 3
Dominant economic features .............................................................................................................. 3
Competition and five forces analysis.................................................................................................... 3
Companies in the strongest and weakness positions .......................................................................... 3
Industry driving forces ......................................................................................................................... 3
Strategic moves of rivals ...................................................................................................................... 3
Industry key success factors ................................................................................................................ 3
Attractiveness of industry .................................................................................................................... 3
Competitive/Firm Analysis........................................................................................................................ 2
Financial Health .................................................................................................................................... 3
Trend Analysis.................................................................................................................................. 3
Comparison to Industry Standards .................................................................................................. 3
Evaluating the Ratios ....................................................................................................................... 3
Common Sense Evaluation of the Data ........................................................................................... 3
Areas of Good Performance ....................................................................................................... 3
Areas of Concern......................................................................................................................... 3
Possible Causes of the Areas of Concern.................................................................................... 3
Possible Actions to Solve the Problems...................................................................................... 3
Overall Financial Health Assessment............................................................................................... 3
SWOT Analysis ...................................................................................................................................... 3
Competitiveness of prices and costs .................................................................................................... 3
Company’s competitive position ......................................................................................................... 3
Issues faced ......................................................................................................................................... 3
Conclusions................................................................................................................................................... 4
Environment ......................................................................................................................................... 6
Market Position..................................................................................................................................... 6
Financial Health .................................................................................................................................... 6
Problems and Opportunities................................................................................................................. 6

Sustainable Competitive Advantage..................................................................................................... 6
Recommendations................................................................................................................................ 6

Part I. Executive Summary
Hastings Entertainment, Inc. (“Hastings or the “Company”), founded in 1968, is a leading multimedia
entertainment retailer that combines the sale of new and used books, videos, video games and CDs, as
well as trends and consumer electronics merchandise, with the rental of videos and video games in a
superstore format. Hastings currently operates 138 superstores and 3 concept stores primarily in
medium-sized markets throughout the United States. The company also operates www.gohastings.com,
an e-commerce Internet Web site that makes its products available to its customers. Hastings is a
publicly traded company on NASDAQ under the symbol HAST and operates primarily in the Specialty
Retail segment for Music, Video, Games, Books and Stationery (2007 NAICS 4512).
The industry is segmented by product content type and/or delivery method into the Hard-copy/
Traditional format and Electronic/Digital format segments. The market enjoys fierce competition with
moderate threat of new competition and bargaining power of customers and suppliers, coupled with a
strong threat of substitutes. The three dominant market players include Barnes & noble, Inc., Family
Christian Stores Inc., and Follett Corporation, all of who have survived by maintain competitive prices,
offering products for sale via the internet, embracing customer preference for Electronic format
products and building customer loyalty or create switching costs.
Although relatively attractive, there are few wildly successful new entrants into the traditional market
segment, mainly due to the economies of scale available to large established players, the learning curve
for developing strong relationships and reputations with publishers and producers, and the need to
compete across E-reader and MP3 or Video player platforms when venturing into the Electronic Format
segment. However, proliferation of internet stores can lead to moderate profits due to lower overhead.
The traditional segment is expected to have moderate growth comparable to the inflation rate, while
the electronic format segment is expected to grow rapidly.
The traditional segment is expected to have moderate growth comparable to the inflation rate, while
the electronic format segment is expected to grow rapidly. The growth in the electronic format segment
is fueled by the expansion of the internet and e-commerce, increasing use of subscription services and
technological change and other market innovation including smart phone and tablet applications. The
growth in the traditional segment is hampered by industry specific issues related to changes in the
Studio Distribution Window and pricing policies regarding video and video game rentals.
Within the industry framework, the company is well positioned by maintaining competitive prices,
expanding its internet presence, creating a mobile-device website and apps for e-book reading and
MP3s playing. Also positive is the company’s reinvestment of previous earnings into operations, higher
working capital than industry and value provision in regularly buying back its shares thereby increasing
shareholders’ relative stake in the company. All these positives are offset by poor financial performance
in profitability and cost management and operating efficiency.
Recommendations for improving financial performance include: increasing sales by bundling the free
apps with currently sold electronics and creating a store app for customers for ease of use, improving
profitability by finding creative means of reducing costs, specifically selling, general and administrative

expenses, and reducing the company’s risk profile by issuing additional common stock, stop
repurchasing its shares on the open market to improve liquidity or repay current debt.

Part II. A. Industry Analysis and Firm Analysis
A. Industry Analysis: Retail Specialty – Music, Video, Games, Books and Stationery (2007 NAICS
4512).
The market is consolidated with music, video, book and stationery stores accounting for 51% of the
market’s value, followed by discount stores and general merchandise retailers with 23%, Hypermarket,
Supermarket and Discounters with 14% and other independent retailers with the remaining 14%.
Players range from independent bookstores to large chains, such as Barnes and Noble, and large
internet retailers, such as Amazon. (MarketLine, 2012)
1. What are the industry’s dominant economic features?
a. Market size.
In 2007, the book store industry consisted of 15,631 participating establishments that generated
approximately $21.3 Billion in sales receipts for the year. Sales in 2011 estimated $22.4 Billion and are
expected to reach $23.3Billion in 2016, a forecasted growth of 4%.
b. Scope of competitive rivalry (local, regional, national, global, etc.)
Industry participants include national store operators, regional chains, specialty retailers and
independent single store operators, discount stores, warehouse and mail order clubs and mass
merchandisers. In addition, the Internet is a significant channel for retailing most of the product
categories i.e. books, music, video, games and stationery. Finally, there are companies engaged in the
business of selling books, music and movies via electronic means, including the digital music downloads,
in-home video streaming and the e-book transmission to e-readers. Hence, the scope of rivalry is local,
regional, national and global.
c. Market growth rate and position on the industry lifecycle.
In this analysis, the industry is segmented by the product delivery format: hard-copy or traditional and
electronic or digital. The traditional industry formats include hard or soft paperbacks, Compact Discs,
DVDs, Blu-ray discs, video game discs, etc., while the electronic industry formats include eBooks, MP3s,
Video Streaming, etc. The traditional format segment of industry is matured, poised to experience a
moderate growth rate at 4% in the near future, which approximates the rate of inflation. However, the
electronic format segment is in the growth phase and is poised for exponential sales increases. The e-
book industry, reported to have reached $1.9Billion in sales in 2011 is poised to reach approximately
$5Billion by 2016 and the sale of digital music grew by 8% to $5.2Billion in 2011, with similar future
growth expected.
d. Number of rivals and their relative size.

In 2007, the four largest firms owned 4,393 establishments with sales totaling $12.7Billion, representing
60% of the market. The second four largest establishments owned 661 establishment with sales of
$1.9Billion (8.9% of the market). The remaining 30% of the market were shared by the other firms.
e. Number of buyers and their relative size.
Buyers constitute the average consumer looking for entertainment via books, movies, video games and
other personal entertainment items. They number in the millions, are small, with little bargaining
power. However, the availability of price information over the internet now allows for more efficient
comparison shopping, and their willingness to buy at the lowest price without brand loyalty applies
pressure on industry prices. (MarketLine 2012)
f. Types of distribution channels used.
Music, Video, Books and Stationery Retailers form the leading distribution channel in the United States
books market, accounting for a 51.4% share of the total market's value. Discount Stores and General
Merchandise Retailers account for a further 22.6% of the market. Another channel increasingly used is
the internet. Net sales revenue for content distributed online was $2.82 billion in 2010, a three-year
overall growth of 55.2 percent. Net unit sales by publishers to online channels grew 68.6 percent, to 276
million in 2010. (MarketLine 2012)
g. Pace of change and product innovation.
Hard-copy Books, music and video games are increasingly bought online rather than in traditional
bookshops. In addition, electronic format products such as e-books, online-games, and MP3s are
attractive and many retailers now sell these products along with products in the traditional format.
For example, e-books grew from 0.6% of the total trade market share in 2008 to 6.4%in 2010, which
translates to a 1,274.1% increase.
In the electronic formats, it is now possible to sell selected music tracks or Singles based on customer
requirements, as opposed to selling a whole album, just so the customer can get the one song the
desire. According to the International Federation of the Phonographic Industry (IFPI), Digital Singles
sales increased by 8% compared to 3.2% increase of digital and traditional albums. (see presentation)
h. Are the products of rivals highly differentiated, weakly differentiated or essentially the same?
The products are essentially the same. The content of each book, video game or music does not change
from store to store.
i. Are economies of scale important?
Yes, economies of scale are important. With the pressure on competitive pricing, the need to hold costs
to a minimum is important for profitability and economies of scale go a long way to help in this area.
j. Are key players concentrated in one location or are they spread over many locations such as Silicon
Valley for the semiconductor industry or various countries for computer programming?

Key players are spread over many locations to be close to the customer base. Alternatively, several have
an established online presence that is present both nationally and globally.
k. Are learning curves important?
Yes. With intense competition, the most successful entrants into the market are those that have
developed strong relationships and reputations with publishers and/or producers. This is the step that
often presents significant difficulties for new players entering the market as relationships and/or
reputations take time to build, along with industry expertise that can only be gained through
experience. (Industry Profile: Books, p 12)
l. Capital requirements and ease of exit and entry.
Capital requirements to enter the traditional market may not be prohibitive for setting up one shop and
there are no formal barriers to entry. However, to compete effectively in the market, establishing a
chain can be very expensive and achieving the necessary economies of scale to be profitable requires
purchasing in bulk. In addition, licensing media costs for promotions can be expensive.
Finally, large players in the industry have established several eReader or MP3 player platforms to further
service and sell content to their customers. Although there are little switching costs between platforms,
new players would have to compete within this framework as well. The platforms are copyrighted
and/or patented, so that new entrants would have to develop their own. The cost for developing such
software and hardware would be prohibitive for the small business. There are few barriers to exit the
industry and several notable players have already withdrawn in large geographic segments, e.g.
blockbuster closed down almost 600 stores in Texas.
m. Whether industry profitability is above/below par.
Industry profitability is at par in the traditional format segment, while the electronic format has above
par profitability. According to MarketLine, the United States retail bookstore market reached a value of
$22.4 billion in 2011 and is predicted to reach $233 billion by 2016, an increase of 4% which is
comparable to the inflation rate for the country. On the other hand, e-books are currently estimated to
have a 1.6 billion market are forecasted to exceeds $5 billion by 2016, an increase of 212.5% (Wolf, p 1).
2. What is the competition like and how strong are Porter’s five competitive forces?
Threat of new competition
Consumers show a willingness to switch to whichever retailer presents the best offer and there is little
brand loyalty to publishers or suppliers. Consumers show loyalty to authors instead. The costs
associated with establishing a retail chain can be prohibitive. Even setting up an internet retail operation
needs developing strong relationships and reputations with publishers, which can be difficult for the
newcomer. Growth in the US books market in recent years has fluctuated between moderate growth
and decline. With stagnant growth predicted for coming years, the market does not look particularly
attractive to potential new entrants, who may face increased rivalry from already established

competitors. Hence, there is an increasing tendency to sell books online instead of in traditional
bookshops. Overall the risk of new entrants is assessed as moderate.
Threat of substitute products or services
Substitutes for traditional books, music, videos and games have arisen in the form of electronic formats,
and they currently represent a growing proportion of distribution. The benefits include instantaneous
delivery, less (re)production expenses and eco-friendliness. However, electronic format purchases
require an electronic device or special software to display or play it. There is a cost associated with
acquiring such a device, and there is concern that the book format might not be readable by future
electronic devices (obsolescence). More traditional substitutes include second hand books and
magazines. Finally, books, music and videos are not considered essential items and are therefore in the
luxury category. Consumers can easily put off or negate their purchasing desire to save money. Overall,
the threat of substitutes for this market is strong, but is mitigated in cases when retailers stock these
substitutes
Bargaining power of customers (buyers)
Buyers within the US book market are numerous, small and with little financial muscle. This weakens
their power. Across genres, much fiction tends to be similar although there exists some differentiation
as content is copyrighted. Moreover, although many retailers stock similar titles within similar fiction
sections, not all retailers stock the same academic or professional books. In these instances, the
consumer’s choice of retailer is limited. This weakens their power as buyers. However, their power is
increased by willingness and ability to switch to whichever retailer offers the best price as switching
costs are negligible.
Books are not classified as essential items, and as such may be considered a luxury. However, in the case
of professional or academic texts, which may be considered essential to buyers, buyer power is
minimized. Brand loyalty does not tend to be towards publishers or retailers, although authors may
command a certain amount of brand loyalty. One exception is some prestigious retailers that exist in
areas such as academic publications, as they stock specific books that are not readily available. Another
exception is some publishing houses which publish literary classics. Buyer power is assessed as
moderate.
Bargaining power of suppliers
Suppliers within the book market vary greatly in size. There exist large publishers, providing books for
many segments of the market, alongside smaller ones who focus on specific areas such as academia.
Despite limited differentiation between printing companies, their reputations are important and long-
standing contractual relationships are often observed with publishers. A growing alternative to printers
is the paperless e-book, which has seen strong growth in recent years, although it is not currently a
major market. Supplier power is strengthened by the backwards integration of some larger publishers,
who often have their own printing operations, thereby reducing their dependence on external services.
It is not unusual for either printers or publishers to integrate into the other, as their activities are highly

connected. However, publishers are unlikely to forward integrate into retail operations, thereby
increasing their reliance on players to market and sell their products. With brand loyalty directed
towards authors, rather than publishers, supplier power is increased through an end-consumer demand
on retailers. Supplier power is assessed as moderate in this market.
Intensity of competitive rivalry
With the exception of author or artist recognition, the market tends to suffer from a lack of brand
awareness. Consequently, competition to attract best-selling authors and artists is high, both among
publishers and retailers, who look to get them in store to do book signings and autographs. Rivalry is
intensified by low switching costs for buyers and relatively high storage costs due to a need for quick
stock turnover, particularly for fictional bestsellers, as well as textbooks and guidebooks that are
updated yearly. With the increasing popularity of internet retail, the ease of expansion serves to
increase competition as players compete over consumers who are more easily aware of price and stock.
On the other hand, fixed costs and exit barriers are low as retail space can be sold to other businesses
and stock could be sold to other market players; thus minimizing rivalry. The traditional market is
mature and has fluctuated between moderate growth and decline in recent years has meant that
retailers compete for limited revenues. For the industry, the intensity of competitive rivalry is
considered to be strong.
3. What are the driving forces of the industry?
The most important driving forces are:
The internet and e-commerce.
The retailing of hard-copy books, music and video over the Internet is both competitive and lucrative.
This is poised to increase even further as it becomes easier for smaller, individual sellers to list products
for sale on the Internet. Most retailers have expanded their web presence to offer products via the web,
including in-store promotions as well.
Increasing use of Subscription Services
Music and Video subscription is transforming the way people experience and pay for videos, tracks and
albums. It is also a fast-expanding business model. Digital channels have overtaken physical formats to
become the dominant revenue stream in the US music market. In 2011, subscription services made
groundbreaking moves to achieve mass-market reach, most notably through their integration with
Facebook, which has propelled music subscription into the environment of social networks. Examples
include Pandora, Spotify, Netflix, Game Fly and so on.
Exit of a major firm.
Borders Group Inc., owner of the Borders Book Stores filed for bankruptcy in February 16, 2011. In
accordance with the bankruptcy, the firm closed 399 of its stores and chose to liquidate. Prior to this
event, the store had approximately 10% market share with sales of approximately $2.1Billion.
Unfortunately, the sales did not provide an indication of the costs required to maintain its operations.

The company cited "the rapidly changing book industry, e-reader revolution and turbulent economy, as
the main cause of the bankruptcy. The survivors are now seeking to fill in the vacuum left by the
company and have learned the lesson of embracing the e-reader revolution as an integral part of their
operations.
Technological Change
Advances in technologies such as video-on-demand, rental video subscriptions or mailers and electronic
book readers, amd certain changes in consumer behavior driven by these or other technologies and
methods of delivery have had a negative effect on the traditional brick-and-mortar retail specialty store.
The e-reader revolution and the increase use of the iPod and other portable MP3 and video playing
devices have altered the way merchandise is advertised, sold and delivered. Major players now deploy
their own e-reader, or music and video players as part of their android or apple applications. These
advances unlike sales of hard-copy products over the internet are focused on digital and portable
content.
Marketing Innovation
With the increased use of smart phones, many retailers now provide android or apple store applications
for free as a means of providing advertising and pricing information directly to their customers. Many
also deploy their own e-reader, or music and video players as part of their android or apple applications
in electronics sold within their stores
Other industry-specific driving force
Profitability is dependent on the ability to enter into and maintain arrangements with Movie Studios
that effectively balance copy depth and cost considerations. Each type of arrangement provides
different advantages and challenges and the ability to negotiate preferred terms under revenue sharing
agreements for the procurement of DVD or video game titles is crucial to operations. For example, after
the initial theatrical release of a movie, Studios generally make their movies available exclusively to in-
store video retailers (for rental and retail, including mass merchant retailers) for specified period of
time, usually between 45 to 60 days (referred to as the “Distribution Window”). Should the in-store
video retailer distribution window (i) no longer be the first distribution channel following the theatrical
release, (ii) have a shortened length or (iii) no longer be as exclusive if released movies Are made
available earlier on these other forms of non-theatrical movie distribution, the impact on the specialty
retail industry would be severe.
In addition Studio pricing policies regarding video rental have changed in recent years. Historically studio
pricing was higher during initial release from the beginning of the in-store video distribution release,
effectively until rental demand subsided. Then the Studios would reduce pricing to allow for reasonably
priced sales to customers. Currently, substantially all DVD titles are released at a price to the in-store
video retailer that is low enough to allow for an affordable sales price by the retailer to the consumer
from the beginning of the retail in-store video distribution window, resulting in increasing competition
from other retailers, including mass merchants and online retailers, who are able to purchase DVDs for

sale to consumers at the same time as traditional in-store video retailers, like Hastings, which purchase
DVDs for rental. In addition, some retailers sell movies at lower prices in order to increase overall traffic
to their stores or businesses, and mass merchants may be more willing to sell at lower prices, and in
some instances, below wholesale. This new low-pricing by the studios has put even more pressure on
prices and increased competition. (2011 10-K, p 10).
4. Which companies are in the strongest and weakest positions?
Barnes and Nobles has the strongest position in the market with approximately 41% of market share.
The company operated 1,338 bookstores in 50 states, 647 bookstores on college campuses, operates
one Web ecommerce site, and develops digital content products and software. The company is well
known, having been established as a true bookstore in 1917. Of the 41% in sales the company enjoys,
32% are made through its brick-and-mortar bookstores. The company’s subsidiary arm, Barnes and
Noble College Booksellers, Inc., focuses on college, academic and technical books. 8% of the company’s
market share is from this segment, which has lower price sensitivity. The company also sells books,
music and videos through its online enterprise, Barnsandnobles.com LLC, which enjoys a 2% share of the
market. The company is in good financial health and enjoys a healthy reputation.
Next is the Family Christian Stores Inc., generating approximately 17% of industry market sales. With
nearly 300 locations across the US, Family Christian is the leading specialty retailer of Christian Books,
Music and Supplies. The Company’s sales revenue approximates $2.7Billion annually and employs 4500
people. With a Christian focus, 10% of revenues or sales is donated to support children and widows in
various charitable programs around the world and to fund and organize mission trips to North, Central
and South America.
The third largest firm in the industry is Follett Corporation, with 12% share of the market. A private
specialty retailer, Follett provides universities, libraries and schools a wide range of educational tools
and services. The unit operates more than 800 college bookstores and also distributes college books on
a wholesale basis. In addition to the traditional and digital textbooks, the company offers course
materials, software, library services and many more. The ecommerce operations are conducted through
efollet.com and the websites of Varsity Group, which has virtual bookstores. While financial statements
are not publicly available, the company says it generates up to $2.7Bilion in annual sales and has over
10,000 employees.
The firms with the smallest market share in the industry are Mardel, Inc. and Amazon.com, Inc.
Mardel Inc. opened its first retail location on June 1, 1981 in Oklahoma City. The company maintains
more than 20 retail locations throughout six states and is a supplier of Christian books and educational
products, specializing in Bibles, Books, Movies, Gifts, Music, Kids homeschooling curriculum and crafts.
Mardel Inc. has a market share of 0.2%, with annual sales of $47.9Million. The company employed 750
employees in 2011 and had over 800 employees by mid-2012. A relative newcomer to the industry,
Mardel stores are now in Texas, Colorado and Kansas to name a few.

Amazon.com Inc., a Fortune 500 company, is an online mass retailer that offers one of the world’s
largest collections of books, music and DVDs both in traditional and digital formats. Amazon also offers
online media, electronics and other general merchandise and operates software, music, automotive and
home improvement departments. The company maintained a market share of 0.5%, with annual sales of
$99.5Million within this industry. The company had 800 employees in 2011 and serves clients
throughout the world from its websites. With the explosive growth of Amazons sales of books music and
videos in electronic formats, fermented by the sale of the Kindle platform, Amazon has already reached
sales of $106.4Million as of the September 2012. This growth is expected to be a continuing trend into
2016 due to the company’s competitive prices, primary focus on internet sales, electronic format
products and excellent customer service.
5. What strategic moves are the rivals likely to make?
The rivals are likely to expand their online presence by featuring improved electronic platforms, since
that segment is poised for exponential growth in the next few years. In addition, there will be more of
an emphasis on customer product content and storage to aid with the electronic format growth.
Therefore, many will offer a means for customers to take their electronic content anywhere. With the
increase in cloud computing, it is likely that services like the iCloud and Amazon Cloud Drive will become
even more commonplace. Finally, it is likely that rivals will further reduce switching costs by allowing
their platforms to be compatible with other rivals, so that customers see even less differentiation in the
market.
6. What are the key success factors for the industry?
In order to be successful, the firms in this industry must:
• Maintain competitive prices: with pricing by each company widely available and consumers that
are sensitive to price, building customer perception of value is vital.
• Offer products for sale over the internet, even if they have physical stores or locations: Online
sales are growing at a phenomenal rate and most customers will review store offerings prior to
venturing out to the physical location. Having the store inventory in traditional and electronic
format available for customer review is vital to success.
• Embrace the change in customer preference from hard-copy to electronic format. Companies
that position themselves ahead of the curve will reap great rewards. The trend is not a fad as
some businesses liked to think (e.g. Borders), but a fundamental shift in the way customers
engage the industry.
• Build customer loyalty or create switching costs: Different stores build customer loyalty through
excellent customer service (e.g. Amazon), friendly return terms, loyalty programs (Barnes and
Noble Readers Club Cards) etc. Without some form of customer loyalty building program,
customers are apt to be even more sensitive to price.
7. Is the industry attractive?

The industry is relatively attractive, with modest returns in the traditional format segment, but few
wildly successful new entrants into the market. However, the expansion of the electronic format
segment and proliferation of internet stores might provide more than average returns that might attract
the forward thinking entrepreneur.
Part II.B Competitive/Firm Analysis
1. Financial health of the firm
a. Trend analysis.
Hasting Entertainment, Inc. has fiscal years beginning February 1 and ends January 31 of the next year to
capture the effect of the highest sales period, i.e. Thanksgiving and Christmas and its related standard
return period of 30 days, per Company policy. Hence, references herein to fiscal years are to the twelve-
month periods that end in January of the following calendar year. For example, the twelve-month period
ended January 31, 2012 is referred to as fiscal 2011 or simply 2011.
Hastings has decreasing dollar Revenues and Net Income in the past 5 years, with 2011 being the first
fiscal year to post a Net loss. Along with decreasing dollar sales (9.37%), Inventory and Net Property,
plant and equipment also decreased by 11.77% and 20.82%, respectively. Credit card receivables more
than doubled (225.00%) in the height of the recession in 2010, but returned to levels similar to 2007’s by
2011. The balance sheet shows dollar increases in Cash and short term investment of 5.00%, with a
corresponding decrease in Accounts payable of 32.85% and an increase in prepaid expenses of 38.18%.
Short term and Long term debt both increased by 40.00% and 31.28% respectively, however, dollar
interest expense has decreased by approximately 55.17% since 2007, due to lower interest rates per the
company’s amended Loan and Security Agreement (see Capital Structure discussion below for further
details).
The horizontal common-sized income statement show confirm the decreasing Net Revenues, which
outpaced decreasing Cost of revenue of 8.45% and resulted in lowering Gross Profit by 10.97% by 2011.
In addition, Selling, general and administrative costs increased 2.88% over the 5 years under review.
When viewed as a percentage of sales in vertical analysis, we note an increasing trend in Cost of revenue
(0.6%) and Selling general and administrative costs (4.4%). The company also incurred Impairments
charges for assets held for use and abandoned lease expense in relation to closing several stores in 2011
(2011 10-K, p20), representing 0.14% and 0.48% of total sales. Such expenses were not incurred in the
base year of analysis.
As a result of declining sales and increasing selling general and administrative costs, coupled with the
unusual expenses noted, Net Profit to Net Sales and Gross Profit Margin declined by 0.05% and 0.1%
respectively. In contrast to declining profitability ratios, the increase in cash and investments over the
past five years resulted in higher Current and Quick Ratios by 0.53% and 0.09%, respectively. The
Company also experienced improving trends in certain activity ratios, specifically Inventory Turnover
and Inventory to Working Capital, which increased by 0.09 times and declined by 0.61%, respectively.
Both are a direct result of the decrease in inventory levels in the past five years. Also, the lower

proportion of receivables to assets has resulted in decreasing Receivables to Working Capital ratio by
0.01% and the Receivables Turnover declined 42.75 times over the past five years mainly due to the
decline in sales.
The Company also shows some promise in increased efficiency in utilizing its assets and equity as
evidenced by higher Net Sales to Total Assets, Net Sales to Fixed Assets, Net Sales to Owners’ Equity,
Net Sales to Inventory and Sales per Employee, which increased by 0.10%, 1.20%, 0.39%, 0.09% and
11.0%.
The increase in Long-Term Liabilities to Working Capital and Net Sales to Working Capital by 0.07% and
declined by 1.80%, respectively, by 2011 were largely affected by the 2010 amendment and restatement
of the Company’s Loan and Security Agreement (see Capital structure discussion below for more
details). Coupled with decreasing Sales per Square Feet of 2.82%, despite a decline of 6.90% in selling
square footage since 2007, we can see that inefficiencies exist in utilizing working capital and selling
space.
Finally, the capital structure ratios show an increasing trend for debt. Since 2007, the Debt to Owners
Equity and Debt to Total Assets have increased by 0.10% and 0.08%, respectively. In contrast, Current
Liabilities to Owners Equity and Fixed Assets to Owners Equity have declined by 0.21% and 0.04%
respectively. This is a direct result of the decreased fixed assets and increasing debt levels due to the
July 2010 amendment and restatement of the company’s Loan and Security Agreement with Bank of
America. The amendment increased the debt limit from $100M to $115M, lowered the interest rates,
allowed for the payment of dividends, which was previously prohibited and extends the maturity date of
the Loan from August 2011 to July 2014 (2011 10-K, p48). The higher risk profile of the company is also
compounded by stock repurchases. As part of its stock repurchase program, the company has purchased
approximately $10.1M worth of its own stock from the market in the past 5 years, resulting in an 89.4%
increase in Treasury Stock.
b. Comparison to industry standards.
Hastings’ balance sheet compares unfavorable with industry standards with 8.94% lower Cash and
Equivalents, 3.00% lower Other Current Assets and 28.34% higher Inventory. The Company has 1.65%
higher Accounts Payable and 4.00% lower Fixed Assets when compared to industry standards. Offsetting
these negatives are 8.47% lower Receivables and 0.68% lower Total liabilities when compared to
industry, resulting in Owners’ Equity that is 0.73% higher than the industry.
Profits before tax are 4.26% lower than industry average, with higher cost of revenues (9.41%) resulting
in gross profits lower by 9.41% when compared with industry standards. Interest Coverage is 12.32%
lower than industry standards due to the company’s lower profitability, although it renegotiated its Loan
Agreement at lower interest rates. The Company successfully manages its overhead costs as evidenced
by its 4.47% lower operating costs when compared to the industry.
When compared to the industry, Hastings has consistently lower profitability ratios, especially with its
first Net loss in 2011. Although the Company is also more liquid that average with 0.31% higher Current

ratio, we note a 0.25% lower Quick ratio after removing the effect of inventory 28.34% higher than
industry. When examining activity ratios, the company consistently outperforms the industry in Working
Capital and Receivables related ratios. The company has 0.37% lower Receivables to Working Capital
and 0.01% lower Inventory to Working Capital than industry average, as industry Working Capital
averages 23.80% of Total Assets, compared to Hastings 41.42% of Total Assets. Consistent with superior
efficiency, the Accounts Receivable Turnover is exponentially higher than the industry due to lower
receivable levels. However, we see lower efficiency in the Inventory Turnover rate, which is lower by
0.83 times, due to 28.34% higher levels in Inventory when compared to industry.
In addition, the Company’s Net Sales to Total Assets and Net Sales to Owners’ Equity are higher than the
industry average by 0.20% and 0.43%, respectively. In contrast, Long Term Liabilities to Working Capital
is 0.24% higher than industry average as well. Also, Net Sales to Fixed Assets, Inventory and Working
capital are lower than industry average by 0.57%, 1.88% and 3.89%, respectively.
Also, while the Company has a poorer (higher) Fixed Assets to Owners’ Equity ratio than the industry as
industry participants generally rent fixed assets, its Current Liabilities and Debt when compared to
Owners’ Equity are 0.11% and 1.23% lower than the industry norm, respectively, as the company has
higher leverage than industry average. This difference in capital structure accounts for the 0.06% higher
Debt to Total Asset ratio, since the lower levels of fixed assets were financed with more debt when
compared to industry.
c. Evaluating the Ratios.
There were non-meaningful ratios for unusual income statement items in the Horizontal Analysis and
several ratios significantly varied from industry averages: net profit ratios, Inventory and Receivables
Turnover ratios and Working Capital related ratios.
When considering horizontal analysis, two unusual items like impairment charges for assets held for use
and the 2012 abandoned lease expense were not incurred in the base year and therefore did not
provide meaningful ratios for analysis.
Accounts receivable turnover was approximately 5.11 times higher than industry due to the minute
amount of receivables the company holds when compared to the industry. It is important to note that
the company considers (and classifies) such receivables as cash equivalents since they are generally
received within 5 days. Such practice differs from general industry practices and presentation.
Finally, the Company has a capital structure that utilizes higher levels of Long Term Debt (23.64% of
Total Assets) when compared to the industry (10.20% of Total Assets). As a result, industry Working
Capital is significantly lower than the companies. Hence, the lower Receivables to Working Capital and
Inventory to Working Capital may not be a true representation of higher efficiency and activity on the
company’s part, being skewed by the difference in capital structure.
d. Common Sense Analysis of the Data
i. Areas of concern.

The company does not compare favorably to industry when comparing profitability and Fixed Assets to
Owners Equity. The latter is not a significant concern since it is a product of the different capital
structure from the industry, where there is a mix of rented and owned facilities, compared to Hastings
that leases all sites for its stores (2011 10-K, p 14). Hence, the focus must be spent determining the root
cause of lagging profitability when compared to Industry. Net Profit when compared to Owners’ Equity,
Net Sales and Total Assets lag behind industry norms by 0.26%, 0.04% and 0.08%, respectively, while
Gross Profit Margin is 0.09% less than Industry.
When looking at historical performance, the Company shows decline in Account Receivable Turnover,
and Revenues, along with increasing Debt. With 2011 receivables at similar levels to 2007, the decrease
in the Account Receivable Turnover can be confidently attributed to declining Revenues. The steady
decline in the company’s revenue from year to year, i.e. 1.64% in 2009, 1.35% in 2010, 1.86% in 2011
and 4.51% 2012, shows an alarming trend.
Increasing debt signals a higher risk profile for the company, although the Debt to Total Asset ratio is still
well below industry standards. The higher debt levels resulting from the Amended Loan and Security
Agreement are likely a result of the cheaper cost of financing obtained in 2010. However, while it might
be tempting to think that the lower rate is a result of improved credit worthiness of the company or
increased liquidity, we must bear in mind that it might simply be a factor of the recession, where
interest rates are lowered to encourage consumer spending.
Income Taxes has also increased in 2011 due to a valuation allowance for tax assets that the company
has determined would be more likely unrealizable. This increased the company’s effective tax rate by
9.8%. As such the ratio calculation utilized Net profit before taxes in all calculations to eliminate the
effect of such non-operating decisions.
Finally, Several expenses have increased over the past 5 years, including Advertising Expense, Rent
Expense and total Selling general and administrative expense, which increased 14.3%, 8.8% and 4.36%,
respectively when compared to decline in sales of 9.4%. Total Selling general and administrative expense
is also on an increasing trend of 2.88% over the 5 years, although operating expenses are lower than
industry standards by 4.47%.
ii. Areas of good performance.
There has been improvement in Receivables to Working Capital mainly as a result of increasing working
capital since receivables as of 2011 were at similar levels when compared to 2007. The increase in
working capital (11.83%) is partly due to amendment to the Loan and Security Agreement discussed
previously. There has also been improvement in the Inventory Turnover and Inventory to Working
Capital, mainly as a result of the decline in Inventory levels as the company improves its inventory
control.
The company has also has better than industry average Current ratio, with both the Current and Quick
ratios on an increasing trend from 2007 to 2011. The improved liquidity is likely a result of the extended
maturity of debt and higher borrowing levels extended to the company beginning July 2010.

Activity rates comparing Net Sales to Total Assets, Fixed Assets, Owner’s Equity and Inventory all show
positive trends for the past 5 years. Coupled with increased Sales per employee by 11.0% since 2007 and
a higher Net Sales to Total Assets when compared to Industry averages, all signals point to increased
efficiency in the company’s utilization of its assets to produce revenue.
When reviewing the capital structure, we note that Fixed Assets to Owners’ Equity declined from 2007,
indicating that the percentage of fixed assets financed by equity is growing, offsetting the increase in
risk profile from acquiring more debt. Finally, Current Liabilities to Owners’ Equity also decreased during
the five years providing some comfort. While this might be due to the company paying off short-term
debt, indicating less risk, it is also likely an effect of the extension on the maturity of debt due to the
amendment of the Loan and Security Amendment as previously discussed.
iii. Possible causes of the areas of concern
The lower Gross Profit Margin could be a result of not inadequate mark-ups as the competitive
environment will not allow appropriate pricing levels and not passing on price increases from suppliers
in order to obtain a low-cost advantage.
Declining Net Profit Margin could be a result of increasing operating expenses, which are above industry
averages, as is the case with Advertising, Rent expense and other Selling general and administrative
expense or the declining revenues level due to the changing competitive environment, including e-
commerce, hyper-competitors like Barnes & Nobles or Amazon.com and the consumer shift toward
digital delivery of entertainment. Another cause could be ineffective promotion since the company is
spending more on advertising costs but still experiencing declining sales.
iv. Possible actions could solve the problems
As consumers spending patterns shift toward digital delivery of content and internet retailers, Hastings
is offering products through its Internet web site. The company is also focused on shifting its business
model more toward lifestyle products, so as to become less dependent on entertainment products.
Some examples of lifestyle products include tablet expansions for reading, watching movies and playing
games and phone app products to be used with your smart phone for fun, health and fitness.
Currently, the company offers the READMOR and LISTENMOR apps on several platforms to its reading
and music loving customers as a means of browsing, finding and buying digital content directly from the
company. Further expansion into digital content delivery arena can help the company increase sales
without sacrificing margin.
Hastings should also look into creative ways of promoting the Company and reduce the advertising
dollars that it currently spends. In addition, the Company should review its rent expenses to determine
areas where it can save money. The company might choose to build some (if not all) of its new stores
should it be determined to be less costly than paying rent in perpetuity in the long run.
The Company can improve its capital structure by paying off its loans on a fast track or pressing forward
with its stock repurchase plan. This would not necessarily adversely impact the company’s liquidity, and

might increase the public’s desire to hold Company stock, especially since it is no longer restricted on
issuing dividends to its shareholders.
Overall Assessment
The Company has poorer profitability, overloaded inventory and is inefficient when compared to
industry in most regards except in its use of working capital and receivables. In addition, it carries levels
of debt far higher than the industry average resulting in an increased risk profile. With higher cost of
sales than average, the company is currently struggling financially. It is necessary for the company to
increase sales or decrease costs in order to improve its financial viability.
2. Company resource strengths, weaknesses, external opportunities, and threats (SWOT) analysis?
Internal
Strengths
Well-Established Planer
Innovation
Strong Retail Channels
Weaknesses
Poor Profitability
Declining Efficiency
External
Opportunities
Expansion Plans
Growing e-Retail Market
Threats
Intense Competition
Rising Piracy Market
Stringent Government Regulations
Strength – Well Established Player
A pioneer in multimedia home entertainment, Hastings sells, rents, and trades items for home
entertainment, including new and used books, CDs, videos, and video games through a network of
superstores. The stores, which are usually located in medium-size communities with populations of less
than 250,000, also sell consumer electronics such as video game consoles and DVD players, magazines,
and a variety of items ranging from T-shirts to posters to guitar strings. The company also operates
www.gohastings.com, an online retail site (Business Insights, p1). As of March 31, 2012, Hastings
operated 138 superstores principally in medium-sized markets located in 19 states, primarily in the
Western and Midwestern United States (2011 10-K, p1). The company’s extensive new and used product
selection, low pricing strategy, ability to trade-in and excellent customer service enable Hastings to
become the market's destination entertainment store. Such strong foothold increases customers’
confidence in Hastings product offerings, and enables it to establish its brand image in whichever locality
it operates.
Strength - Innovation
Hastings has survived by innovation through the years. In 2008, the company focused initially on music
sales (30% of total sales) with books and video rentals lagging behind at 25 percent and 21 percent,
respectively. By 2006, the company had shifted focus to video games, electronics and trend products,
such as T-shirts, sports merchandise, posters, stationery, and licensed movie memorabilia, and had

introduced its Hardback Coffee Café and other consumable items. At that time, music represented only
20 percent, books had dropped to 22 percent, and rentals to 17 percent.
The company survived by continuing to innovate. Between 2006 and 2008, it also expanded the area of
consumer electronics o include not only Blu-ray players, digital converter boxes, and musical
instruments and introduced a children's department, which included categories ranging from children's
books to toys, games, clothing, and starter musical instruments. In 2008 the company saw increases in
revenues from books (23 percent of sales), videos (22 percent), video games (from 9 percent in 2006 to
11 percent), trends (from 4 percent to 5 percent) and electronics (from 3 percent to 4 percent).
As the economy weakened, the company's total revenues dropped, despite cost cuttings that included
layoffs. In 2009, the company introduced a revamped gohastings.com web site, which offered
enhancements such as social networking and digital downloads. (Business insights, p5) To take
advantage of the shift in customer preference for entertainment in digital format, the company created
and released its electronic reader and MP3 listening applications (READMOR and LISTENMOR) to
customers free of charge.
Having been a pioneer in offering multimedia entertainment and embracing changes in technology and
customer preferences, locating in markets underserved by other media retailers, conducting extensive
research, and continuing to evolve to serve its communities, Hastings can regain success by continued
innovation.
Strength - Strong Retail Channels
Hastings conducts its business operations through its retail stores as well as through online channels.
The online activity is carried out under its e-commerce website www.gohastings.com, through which the
company offers its products and services to a wide customer base across the US. Hastings stores average
approximately 21,000 square feet of sales space, with newer stores generally ranging in size from 20,000
to 30,000 square feet of sales space. Such strong market penetration helps the company to serve to the
needs of a diverse customer base, thereby increasing its top-line.
Weakness – Poor Profitability Results
Hastings reported weak financial performance in the fiscal year 2011, as compared to that in the
previous fiscal year. The company reported operating and net loss of -$11.6M and -$17.6M respectively
in the fiscal year 2011, as against an operating and net income of $18.0M and $10.2M respectively in
fiscal year 2007. Its weak financial performance was also underscored by declining profitability ratios,
namely, operating margin and return on equity (ROE). The company's operating margin was -2.34% for
2011, as compared to operating margin of 3.29% in 2007, which may indicate inefficient cost
management or a weak pricing strategy by the company. Hastings’ ROE was -0.15% for fiscal year 2011,
as against an ROE of 0.15% in 2007, indicating that the company failed in using the shareholders' money
efficiently and that it is generating lower returns.
Weakness - Declining Efficiency (Poor when compared to the market)

Hastings reported a fall in its efficiency ratios in the fiscal year ended January 2012. The decline in these
ratios assumes significance as these ratios help analyze the use of assets and liabilities by the company
internally. It reported Fixed Asset Turnover ratio of 9.53 times in 2011, as against 8.32 times in 2007,
and Working Capital Employed Turnover ratio of 5.31 times in 2011 as against 7.11 in 2007.
Opportunities - Expansion Plans
Geographical and business expansion can provide significant growth opportunities for Hastings.
Although the company plans to close three underperforming stores during fiscal 2012, it has identified
potential locations for future stores in under-served, medium-sized markets that meet its new-market
criteria beyond 2012. Since management intends to continue its expansion plans in the future, these
new stores will help Hastings expand its operations, better serve its customer base and once
operational, enable Hastings to gain a larger market share in the US.
Opportunity - Growing e-Retail Market
Apart from sales through retail stores, Hastings also commercializes its products through online stores,
capitalizing on the benefits of the rising popularity of web-based stores. With the increase in interactive
methods and limitless content, retail e-commerce is growing at a faster rate. According to Internet
World Stats as of June 30, 2012, the Internet penetration by the North American population stood at
78.6% with a growth rate of more than 153.3% since 2000. Online retail sales increased 15.1% in the
Second quarter of 2012 over that in the previous year, accounting for 4.7% of total retail spending in the
quarter, up from 4.2% a year ago (ecommerce stats, p1). Such a web-based store concept provides
consumers the convenience of shopping from home, which enables them to do away with the time
consuming journey and save on the transportation cost. With established presence in the online retail
market, the company can capitalize on the huge growth opportunity.
Threat - Intense Competition
The company’s areas of operations are subject to intense competition. Hastings operates in the US
through its stores and also offers products through online sales. It faces stiff competition across these
fronts. The company competes with other online retailers, and local and regional retailers operating
through national and regional chains, who offer similar products as Hastings. Some of the major
competitors of the company include Barnes & Noble, Inc; Borders Group, Inc; Amazon.com, Inc; Wal-
Mart Stores, Inc; and Target Corporation among others. Intense competition could force the company to
invest heavily in advertising and promotion campaigns, which would lead to increased expenditure.
Threat - Rising Piracy Market
With the rise of Internet, the piracy market has been flourishing. This is principally because it is cheaper
and offers the customers the luxury of getting the latest blockbusters in the most convenient way.
Though legal downloading of some books is being offered by few websites sanctioned by the publishing
houses, there are many illegal websites that offer their customers an unlimited access to such products
at a nominal fee. There are also many file transferring and sharing services offered by operators like

Napster and Kazaa among others which offer its online community members free unlimited download of
most of the latest books. With global annual sales of around $500 billion, the sales of counterfeit goods
are expected to cross $2 trillion in sales by 2026. Such pirated products will have a major effect on
Hastings’ revenues.
Threat - Stringent Government Regulations
Hastings is subject to various regulations governing the internet, e-commerce and electronic devices in
addition to general business regulations and laws. This include regulations related to taxation, privacy,
data protection, pricing, content, copyrights, electronic device certification, electronic waste, consumer
protection, the provision of online payment services, the design and operation of websites, and the
characteristics and quality of products and services. Currently, the US Supreme Court decisions restrict
the imposition of obligations to collect state and local sales and use taxes with respect to sales made
over the Internet. But, a number of states and the US Congress have been considering initiatives, which
may limit the Supreme Court’s position regarding sales and use taxes on Internet sales. If these
initiatives are successful, the company may be required to collect sales and use taxes in additional states
or change its business practices. The imposition of taxes by state and local governments may create
administrative burden on Hastings. Such existing and future regulations may reduce the demand for the
company’s products and services and increase its operating cost, thus impeding growth.
Also, In March 2010, Congress passed, and the President signed, the Patient Protection and Affordable
Care Act, which will have a significant impact on health care providers, insurers and others associated
with the health care industry. The exact impact of this comprehensive act is unknown at present, but it
could result in increased healthcare and administrative costs to the company.
3. Are the company’s prices and costs competitive?
The Company’s pricing strategy is to offer value to their customers by maintaining low prices that are
competitive with or lower than the prices charged by other retailers in the market partialy from (i) its
ability to purchase a majority of their products directly from publishers, studios and manufacturers as
opposed to purchasing from distributors, (ii) its proprietary information systems utilized to make more
precise and targeted purchases and pricing decisions for each store and (iii) its consistent focus on
maintaining low occupancy and operating costs. (2011 10-K, p3)
In support of the success of its pricing strategy, Hastings has been able to maintain gross margins fairly
consistently in the past 5 years, although they are below industry average, which shows that there is
room for improvement. Unfortunately, the failure of the company’s low cost strategy is evidenced by
the increased general and administrative costs in the past 5 years. In addition, Hastings has also incurred
unusual expenses including impairment of assets held for use since and, more recently, the abandoned
lease expense related to stores closed in 2011. (2011 10-K, p60).
4. How strong is the company’s competitive position? (A useful tool is to compare each firm on the
industry key success factors. Also useful is a complete evaluation of the firm’s resource base
compared to its rivals. That is, compare SWOTs.)

There are several key success factors for the industry: maintain competitive prices, offer products for
sale over the internet, embrace the change in customer preference from hard-copies to electronic
format and build customer loyalty or create switching costs.
The company has taken several steps in the right direction. Hastings has maintained its gross margin
within a 1% variance in the past five years. Ensuring that costs remain low and finding ways to reduce
cost of sales and general and administrative expense is necessary for the company to remain
competitive and effectively execute its strategy as a low cost retailer.
The company also maintains and is expanding its internet presence through its e-commerce web site,
www.goHastings.com, which enables customers to access over 800,000 unique new and used
entertainment products, contemporary gifts and exceptional merchandise pricing. During 2011, the
company launched a mobile version for the website that makes it easy for customers to quickly find an
item or browse major categories and promotional offers for all departments from their mobile device..
Both the computer and mobile phone based sites integrate seamlessly with Hastings stores, allowing
customers to look up specific store information, store hours, unique store events, and to check online to
see if an item is in stock at their local store(2011 10-K, p3).
Various channels are used to market the website: Affiliate/partner website links, customer semiweekly
email notification of promotions, special offers and events and social media including Facebook and
Twitter. While the results of social media and e-mail notifications are hard to track, the company had
approximately 759,000 customers clicked on an affiliate link and 6.4% of those visits resulted in sales
totaling approximately $1.3 million in fiscal year 2011. In addition, Hastings Facebook page currently has
over 200,000 fans and the company has 3,421 followers on Twitter. Other website marketing channels
employed include comparison shopping engines, display advertisement (on various online websites),
pay-per-click, referrals, and search engine optimization. (2011 10-K, p4)
The company has also embraced the shift in customer preference for entertainment in digital format by
adding electronic books ("eBooks") and MP3s to the website product selection. To accompany the
addition of eBook and MP3 products, the company also introduced their free READMOR and
LISTENMOR applications. READMOR allows customers to access hundreds of thousands of best-selling
books in a digital format while LISTENMOR allows customers to discover, sample and purchase Digital
Music available on www.goHastings.com. Designed to meet the changing demands of customers for
digital entertainment, the READMOR and LISTENMOR applications can be downloaded to customers'
favorite Apple or Android devices.
Finally, Hastings is the first chain to allow customers to trade in their physical books at their stores for
credit they can use to purchase digital content from their website. Trading in unwanted entertainment
media for cash or credit results in additional visits and customer loyalty. In addition, using the READMOR
and LISTENMOR apps to build an e-book or MP3 library creates a switching cost for customers since
moving the content for use in another application takes additional time and effort.
5. Based on your complete analysis, what competitive issues does the company face? (This is a
summary of both the industry and competitive analysis.)

The company has taken steps to take advantage of the changes in technology and embraced the
customers shift in preference to digital content. However, the competitive issue that the company faces
relates to distinguishing its offering in the market place and maintaining or regaining its low cost
strategy. With its poor profitability results and low cash status compared to the industry and
competitors, the company is in a precarious position should it not be able to acquire an inflow of cash to
sustain its expansion strategy, both in its physical stores, over the internet and in electronic format.

Part III. Conclusions
Environment
With moderate buyer power due to low switching costs and their ability to compare price via the
internet, moderate supplier power due to author brand loyalty which is pressured by end-consumer
demand on retailers, moderate risk of new entrants and stagnant forecasted growth, the market for
traditional format products is pretty static. The traditional format segment of industry is matured,
poised to experience a moderate growth rate at 4% in the near future, which approximates the rate of
inflation.
However, the scope of publishing and producers has expanded to include a variety of media formats and
entertainment forms, such as the e-books, periodicals, websites or blogs, MP3s, etc, which represent
significant indirect competition to established traditional channels, although at present they represent a
relatively small proportion of distribution. The small size of the segment is poised for change as books
are increasingly bought online rather than in traditional bookshops and more people prefer their music
in digital format. The e-book industry, reported to have reached $1.9Billion in sales in 2011 is poised to
reach approximately $6Billion by 2016 and the sale of digital music grew by 8% to $5.2Billion in 2011,
with similar future growth expected. Hence, the trends indicate a decline in brick-and-mortar store sales
offset by increase in internet sales and electronic format products.
Market Position
While the company’s market share is small compared to the dominant firms in the industry, it is well
positioned to capture the digital format market, both for books and music, which is expected to have
exponential growth by 2016. E-book sales are expected to grow by 215.78% by 2016, digital music by at
least 8% and the traditional format segment of industry by 4% in the near future. With stores located
close to or at its target markets, internet e-commerce website and the sales through the READMOR and
LISTENMOR applications, the company should be able to meet the needs of customers who prefer their
purchases in either hard-copy and digital formats.
Financial Health
On the positive note, the Company has 0.73% higher owner’s equity and 17.62% working capital (as a
percentage of total assets) and 0.31% higher current ratio when compared to industry. In addition,
Hastings has consistently retained profits, which puts it in a strong position to invest for the future, by
buying new machinery, investing in R&D or a number of other options.
However, this is offset by 6.36% higher debt and 28.34% inventory levels and 8.94% lower cash than
industry average. We also see lower profitability than industry when comparing Net Profit to Owner’s
Equity, Net Sales, Total Assets (0.26%, 0.04%, 0.08%) , and lower Gross Profit margin 0.09%. The
company also has declining efficiency ratios as evidenced by 0.57%, 1.88% and 3.89% lower Net Sales to
Fixed Assets, Inventory and Working Capital, respectively.

The poor financial position of the firm is also burdened with a capital structure higher than average.
While Hastings has not announced any intention to improve its capital structure by paying off its high
debt levels, the company has a strong history of delivering increased value for shareholders in the form
of stock buybacks as part of its Stock Repurchase Program. These have helped improve financial metrics
and increase each shareholders’ relative ownership stake in the company, due to fewer shares
outstanding and holding the same number of shares.
(http://www.vuru.co/analysis/HAST/dividendsBuybacks)
The company closed 7 stores in the 2011 fiscal year and has announced that it will close 3 more in 2012.
This will result in lower revenue in the immediate future, which will decrease cost of sales as well.
However, the trend for increasing selling, general and administrative costs (as a percentage of revenue)
is poised to continue as the company has given no indication of any future action on its part to further
reduce expenses. Hence, we can expect poor or static future profitability unless the Company takes
immediate and consistent action to expand sales and lower cost of operations.
Problems and Opportunities:
The company faces the challenge of making itself profitable in the future and reducing its risk profile
since it has more debt than average. The company has already made efforts to decrease its selling
general and administrative expenses which decreased by $4.1M or 4.6%, to $84.3 million for the six
months ended July 2012 compared to $88.4 million for the same period last year. The decrease is mainly
attributable to operating fewer stores in the 2012 fiscal year. Therefore the company must seek other
means of reducing its costs and reduce controllable expenses through innovation, which can be very
difficult to achieve.
Opportunities abound for the company in geographical expansion and the growing e-Retail Market.
Once the company has overcome its challenges in lowering its costs or increasing sales to become
profitable and reduce its debt, geographical and business expansion can be expected to provide
significant growth opportunities, although it requires significant capital investment. In addition, retail e-
commerce sales increased 15.1% in the Second quarter of 2012 over that in the previous year,
accounting for 4.7% of total retail spending in the quarter, up from 4.2% a year ago (ecommerce stats,
p1). E-books, MP3s and other digital entertainment content are poised for exponential growth through
2016. These opportunities provide a means for the company to further increase its revenues and
improve profitability.
Sustainable Competitive Advantage:
Hastings has a unique merchandising strategy, combining books, periodicals, movies, video games,
trends, music, electronics and consumables. Its unique merchandising combination is supplemented by
its video and video game rental business and the ability of its customers to buy, sell, and trade used
products. In addition, the specific merchandise mix within its core product categories is continually
refined to reflect changing trends and new technologies and is tailored to match the local demographic
profiles and customers' needs. The company uses its proprietary purchasing, inventory management,
selection, and database management systems to profile customer preferences at the store level. All

these factors create a store environment that appeals to a broad customer base within its targeted
medium-sized markets.
Recommendations:
With its efforts to capture the digital format market and remain relevant to its target market, the
company has very few items for recommendation:
1. Bundle the READMOR and LISTENMOR applications: The company currently does loads these
applications on every NextBook 7 tablet that it sells, but it should do more. For all electronic
devices purchased from Hastings, it should include these applications thereon. Bundling the
applications onto the electronic products gives their customers an automatic means of buying
digital content from the company should they desire. This would hopefully improve sales
revenue.
2. Create a store application for other products: The company should create a store application for
use on mobile phones or tablets so that customers can purchase other items on their mobile
devices. The company has already taken the fist step by creating a mobile website, however
most of mass retailer competitors have applications for free available to customers. I would
recommend that the company include their store application on all mobile devices that it sells.
These of reviewing products and purchasing them over mobile devices should result in
additional sales.
3. Improve profitability: Hastings must improve its profitability either by reducing costs, increasing
revenues or increasing its prices. As a low price retailer, the third option would be the last
resort; however the company must find a means to obtain greater economies of scale, either by
partnering with other retailers or improving efficiencies within its current operations. Rent,
Advertising and Selling, general and administrative costs have increased by 0.9%, 0.3% and 4.4%
in five years. The company might also reduce warehousing costs by reducing the amount of
inventory held on hand by moving to a Just-In-Time supply chain method. The company must
find means of reducing expenses to attain a profitable status.
4. Reduce Risk profile: The weak balance sheet that the company has when compared to industry
is a direct result of higher debt and lower liquidity than average. The company may choose to
reduce its debt, increase its equity by issuing additional common stock, or stop repurchasing its
shares on the open market to increase its cash to improve liquidity. Either of these options
would improve the balance sheet which is also overloaded with inventory when compared to
industry average.

Appendix
I. Balance Sheets (In Millions)
As of January 31, 2008 2009 2010 2011 2012
Cash and Short Term Investments 4.0 7.4 8.9 6.1 4.2
Total Receivables, Net - - - - -
Total Inventory 171.6 148.0 148.1 146.6 151.4
Prepaid Expenses 11.0 11.2 10.1 11.7 15.2
Other Current Assets, Total 3.4 11.2 7.8 6.0 -
Total Current Assets 190.0 177.8 174.9 170.5 170.8
Property/Plant/Equipment - Gross 252.6 272.0 272.9 279.3 288.6
Accumulated Depreciation (186.8) (199.9) (212.1) (224.5) (236.5)
Property/Plant/Equipment - Net 65.8 72.0 60.8 54.7 52.1
Intangibles, Net 0.4 0.4 0.4 0.4 0.2
Other Long Term Assets, Total 4.0 3.5 2.7 4.0 2.4
Total Assets 260.2 253.7 238.8 229.7 225.5
Accounts Payable 76.4 61.8 58.1 60.6 51.3
Accrued Expenses 12.9 12.1 14.5 13.2 12.4
Notes Payable/Short Term Debt 1.0 1.0 0.6 0.6 1.4
Current Portion - Long Term Debt/Capital
Leases - - - - -
Other Current liabilities, Total 22.7 27.5 13.0 12.3 12.3
Total Current Liabilities 113.0 102.4 86.2 86.7 77.4
Total Long Term Debt 40.6 44.5 38.2 31.8 53.3
Other Liabilities, Total 4.8 4.7 6.3 6.5 8.7
Total Liabilities 158.4 151.7 130.6 125.0 139.4
Preferred Stock - Non Redeemable, Net - - - - -
Common Stock, Total 37.2 36.8 37.0 36.8 36.3
Treasury Stock - Common (11.3) (14.6) (15.8) (20.8) (21.4)
Other Equity, Total - (0.1) - 0.1 0.1
Retained Earnings (Accumulated Deficit) 75.9 80.0 86.9 88.6 71.0
Total Equity 101.8 102.0 108.2 104.7 86.1
Total Liabilities & Shareholders’ Equity 260.2 253.7 238.8 229.7 225.5

II. Income Statements (In Millions, except per share items)
As of January 31, 2008 2009 2010 2011 2012
Total Revenue 547.7 538.7 531.3 521.1 496.4
Cost of Revenue, Total 352.5 346.7 336.5 333.7 322.7
Gross Profit 195.1 192.0 194.8 187.4 173.7
Total Selling/General/Administrative Expenses 177.1 181.9 181.8 183.4 182.2
Impairment-Assets Held for Use - 0.8 1.6 0.7 0.7
Other Unusual Expense (Income) - - - - 2.4
Unusual Expense (Income) - 0.8 1.6 0.7 3.1
Total Operating Expense 529.7 529.5 519.9 517.8 508.0
Operating Income 18.0 9.3 11.4 3.2 (11.6)
Interest Expense, Net Non- Operating (2.9) (2.0) (1.0) (1.0) (1.3)
Interest/Investment Income - Non- Operating - - - - -
Interest Income (Expense) - Non-Operating
Total (2.9) (2.0) (1.0) (1.0) (1.3)
Other, Net 0.1 0.2 1.9 0.2 0.3
Income Before Tax 15.2 7.5 12.3 2.4 (12.7)
Total Income Tax 5.0 3.4 5.4 0.7 4.9
Net Income 10.2 4.1 6.9 1.7 (17.6)
Basic Earnings Per Share 0.95 0.40 0.72 0.19 (2.05)
Diluted Earnings Per Share 0.93 0.39 0.71 0.18 (2.05)
Supplemental Information
Employees 2,131.0 2,048.0 2,036.0 1,889.0 1,740.0
Credit Card Receivables 1.2 2.9 3.9 1.5 1.2
Depreciation 32.8 34.9 31.2 29.2 28.1
Advertising Costs 6.3 7.4 7.8 7.7 7.2
Benefits-Pension 0.6 0.6 0.5 0.6 0.4
Rent Expense 25.0 26.0 26.7 26.7 27.2

III. Balance Sheets (Vertical Analysis)
As of January 31, 2008 2009 2010 2011 2012 Industry
Cash and Short Term Investments 1.54 2.92 3.73 2.66 1.86 10.80
Total Receivables, Net - - - - - 9.00
Total Inventory 65.95 58.34 62.02 63.82 67.14 38.80
Other Current Assets, Total 1.31 4.41 3.27 2.61 - 3.00
Total Current Assets 73.02 70.08 73.24 74.23 75.74 61.50
Accumulated Depreciation (71.79) (78.79) (88.82) (97.74) (104.88)
Property/Plant/Equipment – Net 25.29 28.38 25.46 23.81 23.10 27.10
Intangibles, Net 0.15 0.16 0.17 0.17 0.09 5.30
Other Long Term Assets, Total 1.54 1.38 1.13 1.74 1.06 6.10
Total Assets 100.00 100.00 100.00 100.00 100.00 100.00
Accounts Payable 29.36 24.36 24.33 26.38 22.75 21.10
Notes Payable/Short Term Debt 0.38 0.39 0.25 0.26 0.62 7.70
Current Portion - Long Term
Debt/Capital Leases - - - - -
Other Current liabilities, Total 8.72 10.84 5.44 5.35 5.45 8.90
Total Current Liabilities 43.43 40.36 36.10 37.74 34.32 37.70
Total Long Term Debt 15.60 17.54 16.00 13.84 23.64 10.20
Other Liabilities, Total 1.84 1.85 2.64 2.83 3.86 14.60
Total Liabilities 60.88 59.80 54.69 54.42 61.82 62.50
- - - - -
Treasury Stock – Common (4.34) (5.75) (6.62) (9.06) (9.49)
Other Equity, Total - (0.04) - 0.04 0.04
Total Equity 39.12 40.20 45.31 45.58 38.18 37.50
Total Liabilities & Shareholders’ Equity 100.00 100.00 100.00 100.00 100.00 100.00

IV. Income Statements (Vertical Analysis)
As of January 31, 2008 2009 2010 2011 2012 Industry
Total Revenue 100.00 100.00 100.00 100.00 100.00 100.00
Cost of Revenue, Total 64.36 64.36 63.34 64.04 65.01 55.60
Gross Profit 35.62 35.64 36.66 35.96 34.99 44.40
Total Selling/General/Administrative
Expenses 32.34 33.77 34.22 35.19 36.70
Impairment-Assets Held for Use - 0.15 0.30 0.13 0.14
Other Unusual Expense (Income) - - - - 0.48
Unusual Expense (Income) - 0.15 0.30 0.13 0.62
Total Operating Expense 96.71 98.29 97.85 99.37 102.34 41.80
Operating Income 3.29 1.73 2.15 0.61 (2.34) 2.60
Interest Expense, Net Non- Operating (0.53) (0.37) (0.19) (0.19) (0.26)
Interest Income (Expense) - Non-Operating
Total (0.53) (0.37) (0.19) (0.19) (0.26)
Other, Net 0.02 0.04 0.36 0.04 0.06 0.90
Income Before Tax 2.78 1.39 2.32 0.46 (2.56) 1.70
Total Income Tax 0.91 0.63 1.02 0.13 0.99
Net Income 1.86 0.76 1.30 0.33 (3.55)
Depreciation 5.99 6.48 5.87 5.60 5.66
Rent Expense 4.56 4.83 5.03 5.12 5.48

V. Balance Sheets (Horizontal Analysis)
As of January 31, 2008 2009 2010 2011 2012
Cash and Short Term Investments 100.00 185.00 222.50 152.50 105.00
Total Receivables, Net - - - - -
Total Inventory 100.00 86.25 86.31 85.43 88.23
Other Current Assets, Total 100.00 329.41 229.41 176.47 -
Total Current Assets 100.00 93.58 92.05 89.74 89.89
Accumulated Depreciation 100.00 107.01 113.54 120.18 126.61
Property/Plant/Equipment - Net 100.00 109.42 92.40 83.13 79.18
Intangibles, Net 100.00 100.00 100.00 100.00 50.00
Other Long Term Assets, Total 100.00 87.50 67.50 100.00 60.00
Total Assets 100.00 97.50 91.78 88.28 86.66
Accounts Payable 100.00 80.89 76.05 79.32 67.15
Notes Payable/Short Term Debt 100.00 100.00 60.00 60.00 140.00
Current Portion - Long Term Debt/Capital Leases - - - - -
Other Current liabilities, Total 100.00 121.15 57.27 54.19 54.19
Total Current Liabilities 100.00 90.62 76.28 76.73 68.50
Total Long Term Debt 100.00 109.61 94.09 78.33 131.28
Other Liabilities, Total 100.00 97.92 131.25 135.42 181.25
Total Liabilities 100.00 95.77 82.45 78.91 88.01
Treasury Stock – Common 100.00 129.20 139.82 184.07 189.38
Other Equity, Total - - - - -
Total Equity 100.00 100.20 106.29 102.85 84.58
Total Liabilities & Shareholders’ Equity 100.00 97.50 91.78 88.28 86.66

VI. Income Statements (Horizontal Analysis)
As of January 31, 2008 2009 2010 2011 2012
Total Revenue 100.00 98.36 97.01 95.14 90.63
Cost of Revenue, Total 100.00 98.35 95.46 94.67 91.55
Gross Profit 100.00 98.41 99.85 96.05 89.03
Total Selling/General/Administrative Expenses 100.00 102.71 102.65 103.56 102.88
Unusual Expense (Income) - - - - -
Total Operating Expense 100.00 99.96 98.15 97.75 95.90
Operating Income 100.00 51.67 63.33 17.78 (64.44)
Interest Expense, Net Non- Operating 100.00 68.97 34.48 34.48 44.83
Interest Income (Expense) - Non-Operating Total 100.00 68.97 34.48 34.48 44.83
Other, Net 100.00 200.00 1,900.00 200.00 300.00
Income Before Tax 100.00 49.34 80.92 15.79 (83.55)
Total Income Tax 100.00 68.00 108.00 14.00 98.00
Net Income 100.00 40.20 67.65 16.67 (172.55)
Employees 100.00 96.11 95.54 88.64 81.65
Depreciation 100.00 106.40 95.12 89.02 85.67
Rent Expense 100.00 104.00 106.80 106.80 108.80

VII. Financial Ratios (in percentages except otherwise noted)
2008 2009 2010 2011 2012
Industry
Average
Profitability
Net Profit to Owners' Equity 0.15 0.07 0.11 0.02 (0.15) 0.12
Net Profit to Net Sales 0.03 0.01 0.02 0.00 (0.03) 0.02
Net Profit to Total Assets 0.06 0.03 0.05 0.01 (0.06) 0.02
Gross Profit Margin 0.36 0.36 0.37 0.36 0.35 0.44
Liquidity
Current Ratio 1.68 1.74 2.03 1.97 2.21 1.90
Acid Test (Quick Ratio) 0.16 0.29 0.31 0.28 0.25 0.50
Activity
Receivables to Working Capital 0.02 0.04 0.04 0.02 0.01 0.38
Accounts Receivable Turnover ratio 456.42 185.76 136.23 347.40 413.67 80.90
Inventory to Working Capital 2.23 1.96 1.67 1.75 1.62 1.63
Inventory Turnover Rate 2.08 2.17 2.27 2.26 2.17 3.00
Collection Period * * * * *
Net Sales to Total Assets 2.10 2.12 2.22 2.27 2.20 2.00
Net Sales to Fixed Assets 8.32 7.48 8.74 9.53 9.53 10.10
Net Sales to Owners' Equity 5.38 5.28 4.91 4.98 5.77
Net Sales to Inventory 3.19 3.64 3.59 3.55 3.28
Net Sales to Working Capital 7.11 7.14 5.99 6.22 5.31 9.20
Long-term Liabilities to Working Capital 0.59 0.65 0.50 0.46 0.66 0.43
Working Capital 29.59 29.72 37.14 36.48 41.42 23.80
Sales per Employee $ 257,015 $263,037 $260,953 $275,860 $285,287 316,828
Sales per Sq. Ft* $175 $172 $171 $172 $170
Total selling square footage at end of
period 3,134,912 3,137,692 3,065,477 3,017,739 2,918,708
Capital Structure
Interest Coverage 6.21 4.65 11.40 3.20 (8.92) 3.40
Debt to Owners' Equity 0.17 0.19 0.19 0.17 0.27 1.50
Current Liabilities to Owners' Equity 1.11 1.00 0.80 0.83 0.90 1.01
Fixed Assets to Owners' Equity 0.65 0.71 0.56 0.52 0.61 0.50
Debt to Total Asset 0.16 0.18 0.16 0.14 0.24 0.18
Market Value***
Book value per share 9.79 10.41 11.39 12.03 10.37
Market value per share 8.74 2.52 4.24 5.54 1.62
Market/book ratio 0.89 0.24 0.37 0.46 0.16 3.31
Earnings per share 0.95 0.40 0.72 0.19 (2.05)
Earnings per share growth 111.11 (57.89) 80.00 (73.61) (1,178.95) 37.83
Price earnings ratio 9.20 6.30 5.89 29.16 (0.79) 21.45
Price/cash ratio 3.69 0.91 1.51 2.05 (2.99) 14.06

Dividend yield - - - - - 0.02
Notes:
1. The credit policies of the firm are unknown; therefore Average Credit Sales is not calculated.
2. Unless otherwise noted, industry average data were obtained from the 2011 RMA Industry
Studies for Retail-Book Stores (NAICS 451211) with sales greater than $25M.
* Excludes sales for gift card breakerage.
**Market Value section data were obtained from OneSource Business Database for Retail (Specialty).

Risk Management Association (“RMA”) Annual Statement Studies Financial Ratio Benchmarks

(Source: www.onesource.com)
Industry Sector S&P 500
Valuation Ratios
P/E Excluding Extraordinary (TTM) 21.45 26.53 19.68
P/E High Excluding Extraordinary - Last 5 Yrs 25.00 28.03 32.79
P/E Low Excluding Extraordinary - Last 5 Yrs 10.32 11.18 10.71
Beta 1.18 0.91 1
Price/Revenue (TTM) 1.27 2.87 2.57
Price/Book (MRQ) 3.31 4.17 3.67
Price to Tangible Book (MRQ) 3.85 6.61 5.21
Price to C ash Flow Per Share (TTM) 14.06 14.95 14.22
Price to Free C ash Flow Per Share (TTM) 24.90 25.61 26.26
Dividends
Dividend Yield 1.57% 2.91% 2.26%
Dividend Per Share - 5 Yr Avg 0.64 1.96 1.99
Dividend 5 Yr Growth -21.00% -1.39% 0.08%
Payout Ratio (TTM) 8.41% 11.60% 25.98%
Growth Rates (%)
Revenue (MRQ) vs Qtr 1 Yr Ago 12.43% -0.77% 15.58%
Revenue (TTM) vs TTM 1 Yr Ago 10.84% -4.27% 17.69%
Revenue 5 Yr Growth 9.32% 23.25% 8.97%
EPS (MRQ) vs Qtr 1 Yr Ago 30.89% 12.66% 19.49%
EPS (TTM) vs TTM 1 Yr Ago 37.83% 17.36% 32.55%
EPS 5 Yr Growth 10.63% 8.65% 9.86%
Capital Spending 5 Yr Growth -3.85% -14.30% -2.04%
Financial Strength
Quick Ratio (MRQ) 0.61 0.63 1.24
Current Ratio (MRQ) 2.11 0.97 1.79
LT Debt/Equity (MRQ) 0.51 1.48 0.64
Total Debt/Equity (MRQ) 0.58 1.73 0.73
Interest C overage (TTM) 13.9 4.20 13.8
Profitability Ratios (%)
Gross Margin (TTM) 37.85% 37.46% 45.21%
Gross Margin - 5 Yr Avg 37.91% 39.96% 44.91%
EBITD Margin (TTM) 12.91% 8.34% 24.43%
EBITD Margin - 5 Yr Avg 11.51% 13.48% 22.84%
Operating Margin (TTM) 10.63% 10.36% 20.63%
Net Profit Margin (TTM) 5.93% 4.44% 13.65%
Net Profit Margin - 5 Yr Avg 5.06% 2.82% 12.10%
Effective Tax Rate (TTM) 36.81% 29.02% 28.45%
Effective Tax rate - 5 Yr Avg 36.54% 28.67% 29.92%
Management Effectiveness (%)
Return on Assets (TTM) 8.25% 0.41% 8.54%

Return on Assets - 5 Yr Avg 7.58% 3.69% 8.40%
Return on Investment (TTM) 9.88% 3.14% 7.90%
Return on Investment - 5 Yr Avg 8.99% 4.63% 8.27%
Return on Equity (TTM) 15.46% -2.30% 19.72%
Return on Equity - 5 Yr Avg 12.04% 14.07% 20.06%
Efficiency
Revenue/Employee (TTM) 316,828.32 764,536.05 927,613.77
Net Income/Employee (TTM) 17,978.12 144,529.55 116,121.92
Receivables Turnover (TTM) 35.53 16.95 13.25
Inventory Turnover (TTM) 3.95 17.44 14.53
Asset Turnover (TTM) 1.64 1.00 0.93
Derived/Calculated Ratios
Inventory/Working Capital 1.35
Receivables to Working Capital 0.94
LT Debt to Working Capital 6.56
Total Debt/Total Assets 0.37
*TTM = Trailing Twelve Months
*MRQ = Most Recent Quarter

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