e10vq

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 2009


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-24381

HASTINGS ENTERTAINMENT, INC.

(Exact name of registrant as specified in its charter)


Texas (State or other jurisdiction of incorporation or organization)		75-1386375 (I.R.S. Employer Identification No.)

3601 Plains Boulevard, Amarillo, Texas (Address of principal executive offices)		79102 (Zip Code)

(806) 351-2300
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at April 30, 2009
Common Stock, $.01 par value per share		9,729,134 shares

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

HASTINGS ENTERTAINMENT, INC.

Consolidated Balance Sheets
April 30, 2009 and January 31, 2009
(Dollars in thousands, except par value)


	April 30,			January 31,
	2009			2009
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	3,754		$	7,449
Merchandise inventories, net		150,917			147,957
Deferred income taxes		10,660			11,180
Prepaid expenses and other current assets		10,791			11,224

Total current assets		176,122			177,810
Rental assets, net of accumulated depreciation of $22,250 and $22,647 at April 30, 2009 and January 31, 2009, respectively		13,295			15,463
Property, equipment and improvements, net of accumulated depreciation of $181,687 and $177,266 at April 30, 2009 and January 31, 2009, respectively		54,620			56,585
Deferred income taxes		3,461			2,434
Intangible assets, net		391			391
Other assets		1,051			1,020

Total Assets	$	248,940		$	253,703


Liabilities and Shareholders’ Equity
Current liabilities:
Trade accounts payable	$	69,919		$	61,823
Accrued expenses and other liabilities		34,479			40,614

Total current liabilities		104,398			102,437
Long term debt		35,270			44,507
Other liabilities		5,551			4,723

Shareholders’ equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued		—			—
Common stock, $.01 par value; 75,000,000 shares authorized; 11,944,544 shares issued and 9,729,134 shares outstanding at April 30, 2009; 11,944,544 shares issued and 9,766,818 shares outstanding at January 31, 2009		119			119
Additional paid-in capital		36,702			36,651
Retained earnings		81,653			79,951
Accumulated other comprehensive loss		(41	)		(67	)
Treasury stock, at cost 2,215,410 shares and 2,177,726 shares at April 30, 2009 and January 31, 2009, respectively		(14,712	)		(14,618	)

Total Shareholders’ Equity		103,721			102,036

Total Liabilities and Shareholders’ Equity	$	248,940		$	253,703

See accompanying notes to unaudited consolidated financial statements.

HASTINGS ENTERTAINMENT, INC.

Unaudited Consolidated Statements of Earnings
For the Three Months Ended April 30, 2009 and 2008
(Dollars in thousands, except per share amounts)


	Three Months Ended April 30,
	2009			2008
Merchandise revenue	$	104,096		$	108,317
Rental revenue		21,597			23,619

Total revenues		125,693			131,936

Merchandise cost of revenue		70,994			74,952
Rental cost of revenue		7,713			7,971

Total cost of revenues		78,707			82,923


Gross profit		46,986			49,013

Selling, general and administrative expenses		43,898			43,694
Pre-opening expenses		2			2


Operating income		3,086			5,317

Other income (expense):
Interest expense		(295	)		(472	)
Other, net		18			17


Income before income taxes		2,809			4,862

Income tax expense		1,107			1,873


Net income	$	1,702		$	2,989


Basic income per share	$	0.17		$	0.29


Diluted income per share	$	0.17		$	0.28


Weighted-average common shares outstanding:
Basic		9,729			10,362
Dilutive effect of stock awards		29			296


Diluted		9,758			10,658

See accompanying notes to unaudited consolidated financial statements.

HASTINGS ENTERTAINMENT, INC.

Unaudited Consolidated Statements of Cash Flows
For the Three Months Ended April 30, 2009 and 2008
(Dollars in thousands)


	Three Months Ended
	April 30,
	2009			2008
Cash flows from operating activities:
Net income	$	1,702		$	2,989
Adjustments to reconcile net income to net cash provided by operating activities:
Rental asset depreciation expense		3,610			4,037
Purchases of rental assets		(4,459	)		(8,363	)
Property and equipment depreciation expense		4,850			4,867
Deferred income taxes		(507	)		(224	)
Loss on rental assets lost, stolen and defective		202			297
Loss on disposal of other assets		169			188
Non-cash stock-based compensation		51			164
Changes in operating assets and liabilities:
Merchandise inventories		(145	)		11,011
Prepaid expenses and other current assets		433			658
Trade accounts payable		12,775			(10,563	)
Accrued expenses and other current liabilities		(6,135	)		(954	)
Excess tax benefit from stock option exercises		—			(39	)
Other assets and liabilities, net		823			—

Net cash provided by operating activities		13,369			4,068


Cash flows from investing activities:
Purchases of property, equipment, and improvements		(3,054	)		(3,490	)

Net cash used in investing activities		(3,054	)		(3,490	)


Cash flows from financing activities:
Borrowings under revolving credit facility		124,060			137,441
Repayments under revolving credit facility		(133,297	)		(135,371	)
Purchase of treasury stock		(94	)		(1,294	)
Change in cash overdraft		(4,679	)		(1,466	)
Proceeds from exercise of stock options		—			94
Excess tax benefit from stock option exercises		—			39

Net cash used in financing activities		(14,010	)		(557	)


Net increase (decrease) in cash and cash equivalents		(3,695	)		21
Cash and cash equivalents at beginning of period		7,449			3,982

Cash and cash equivalents at end of period	$	3,754		$	4,003

See accompanying notes to unaudited consolidated financial statements.

Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)

1. Basis of Presentation

The accompanying unaudited consolidated financial statements of Hastings Entertainment, Inc. and its subsidiary (“Hastings,” the “Company,” “we,” “our,” or “us”) have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with instructions in Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such principles and regulations of the Securities and Exchange Commission. All adjustments, consisting of normal recurring adjustments, have been made which, in the opinion of management, are necessary for a fair presentation of the results of interim periods. The results of operations for such interim periods are not necessarily indicative of the results that may be expected for a full year because of, among other things, seasonality factors in the retail business. As is the case with many retailers, a significant portion of our revenues, and an even greater portion of our operating earnings, is generated in the fourth fiscal quarter, which includes the holiday selling season. The unaudited consolidated financial statements contained herein should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

The balance sheet at January 31, 2009 has been derived from the audited consolidated financial statements at that date but does not include all of the information and notes required by U.S. generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Our fiscal year ends on January 31 and is identified as the fiscal year for the immediately preceding calendar year. For example, the fiscal year that will end on January 31, 2010 is referred to as fiscal year 2009.

Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)

2. Stock Based Compensation

Compensation expense for all stock option awards is measured at fair value on the date of the grant and such cost is recognized over the service period for awards that are expected to vest. We use the Black-Scholes valuation model in order to determine the fair value of stock option grants on the date of grant. The fair value of non-vested performance-based restricted stock grants is based on the number of shares granted and the average of the opening and closing stock price on the day on which they are granted. The determination of performance-based restricted stock awards that are expected to ultimately vest requires significant estimates, and to the extent that actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period that estimates are revised. Actual results and future changes in estimates may differ substantially from the current estimates.

As of April 30, 2009, we had 399,971 shares available to grant options or performance based restricted stock shares.

Stock Options

Under our incentive stock plans, options may be granted to directors, officers and associates with an exercise price equal to the fair market value of our common stock on the date of grant. Stock option grants generally vest ratably over five years and expire within ten years after the date of grant. Shares issued upon exercise of options are issued from treasury shares.

A summary of information with respect to stock option plans for the three months ended April 30, 2009, and changes during the period then ended, is presented below.


				Weighted-average
	Options			exercise price
	(in actual shares)			(in dollars)
Outstanding at January 31, 2009		961,445		$	5.14
Granted		8,500			3.53
Exercised		—			—
Expired		(35,480	)		6.70


Outstanding at April 30, 2009		934,465		$	5.06

There were no stock options exercised during the three months ended April 30, 2009. The total intrinsic value of stock options exercised for the three months ended April 30, 2008 was approximately $101,000. The total fair value of stock options granted for the three months ended April 30, 2009 was approximately $14,000. There were no stock options granted during the three months ended April 30, 2008.

As of April 30, 2009, we had a total of 273,249 option shares outstanding and unvested with a weighted average exercise price of $5.13; and as of April 30, 2008, we had a total of 138,383 option shares outstanding and unvested with a weighted average exercise price of $8.52, respectively.

Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)

At April 30, 2009, the options outstanding, the related weighted-average exercise price, the weighted-average remaining contractual life, and the aggregate intrinsic value for the ranges of exercise prices are shown in the table below.


					Weighted-
			Weighted-average		average	Aggregate intrinsic
	Options		exercise price		remaining	value
	(in shares)		(in dollars)		contractual life	(in dollars)
Range: $1.33 to $4.99
Options outstanding and exercisable at April 30, 2009		291,720	$	3.25	2.82 years	$	96,889
Options outstanding and unexercisable at April 30, 2009		138,500	$	1.83	8.78 years	$	242,181

Range: $5.00 to $9.99
Options outstanding and exercisable at April 30, 2009		363,301	$	6.38	4.60 years		—
Options outstanding and unexercisable at April 30, 2009		121,888	$	8.29	7.99 years		—

Price: $10.00 to $10.64
Options outstanding and exercisable at April 30, 2009		6,195	$	10.64	3.61 years		—
Options outstanding and unexercisable at April 30, 2009		12,861	$	10.64	3.61 years		—

At April 30, 2009, the number of options exercisable was 661,216, the weighted-average exercise price per share of those options was $5.04, and the total intrinsic value of those options was $96,889.

Performance-based Restricted Stock Awards

Performance-based restricted stock awards may be granted to eligible directors, officers, and associates, with a grant date fair value equal to the average of the opening and closing stock price on the day on which they are granted. These awards have specific performance conditions that must be met before the shares will be issued. Once issued, the shares typically vest ratably over two years from the date the performance conditions are achieved. Compensation expense for these awards is recognized from the date of grant through the vesting date, once it is deemed probable that the performance conditions will be met.

A summary of information with respect to performance based restricted stock awards for the three months ended April 30, 2009, and changes during the period then ended is presented below:


				Weighted-average grant
	Awards			date fair value
	(in shares)			(in dollars)
Outstanding at January 31, 2009		175,000		$	8.50
Granted		—			—
Vested		(23,750	)		5.37
Cancelled and expired		—			—


Outstanding at April 30, 2009		151,250		$	8.99

Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)

The performance conditions related to performance-based stock awards covering 47,500 shares were met during fiscal 2007, and performance-based stock awards covering 23,750 of these shares vested during the first quarter of fiscal 2009. We recognized approximately $8,000 of stock compensation expense related to the remaining performance-based stock awards covering 23,750 shares during the three months ended April 30, 2009.

As of April 30, 2009, we had total unrecognized compensation expense related to all unvested performance-based stock awards of approximately $1.3 million. If the performance conditions for these awards are met, the related expense is expected to be recognized over a weighted average period of 2.02 years. Of this amount, approximately $1.2 million is related to performance-based stock awards for which we currently estimate it is not probable that the performance conditions will be met, and therefore no compensation expense has been recognized.

We had performance-based stock awards covering a total of 151,250 shares with a weighted average grant date fair value of $8.99 per share and performance-based stock awards covering a total of 283,330 shares with a weighted average grant date fair value of $8.23 per share, that were unvested as of April 30, 2009 and 2008, respectively.

3. Store Closing Reserve

From time to time and in the normal course of business, we evaluate our store base to determine if we need to close one or more stores. Such evaluations include, among other factors, current and future profitability, market trends, age of store and lease status.

Amounts in Accrued Expenses and Other Liabilities include accruals for the estimated fair value of future minimum lease payments and other costs attributable to closed or relocated stores, net of estimated sublease income. Expenses related to store closings are included in Selling, General and Administrative expenses in our consolidated statements of earnings.

The following tables provide a rollforward of reserves that were established for these charges for the three months ended April 30, 2009 and 2008.


Balance at January 31, 2009	$	32
Changes in estimates		10
Additions to provision		—
Cash outlay		(30	)

Balance at April 30, 2009	$	12


Balance at January 31, 2008	$	377
Changes in estimates		(32	)
Additions to provision		—
Cash outlay		(71	)

Balance at April 30, 2008	$	274

As of April 30, 2009, the reserve balance, which is net of estimated sublease income, is expected to be paid within the current fiscal year.

Hastings Entertainment, Inc
Notes to Unaudited Consolidated Financial Statements
(Tabular amounts in thousands, except per share data or unless otherwise noted)

5. Fair Value Measurements

Effective February 1, 2008, we adopted SFAS 157, Fair Value Measurements (“SFAS 157”) and its related amendments for financial assets and liabilities measured at fair value on a recurring basis. In February 2008, The FASB issued FASB Statement Position No. 157-2, Effective Date of FASB Statement No. 157, which delayed for one year the effective date of SFAS 157 for non-financial assets and liabilities measured at fair value on a non-recurring basis. Effective February 1, 2009, we adopted the provisions of SFAS 157 for non-financial assets and liabilities. SFAS 157 defines fair value, establishes a market-based hierarchy for measuring fair value and expands disclosures about fair value measurements. SFAS 157 is applicable whenever another accounting pronouncement requires or permits assets and liabilities to be measured at fair value, but does not require any new fair value measurements. The adoption of FAS 157, for both financial and non-financial assets and liabilities, had no significant impact on our results of operations, financial position or cash flows.

The fair-value hierarchy established in FAS 157 prioritizes the inputs used in valuation techniques into three levels as follows:

	•		Level 1 — Observable Inputs — quoted prices in active markets for identical assets and liabilities;

	•		Level 2 — Observable inputs other than the quoted prices in active markets for identical assets and liabilities — includes quoted prices for similar instruments, quoted prices for identical or similar instruments in inactive markets, and amounts derived from valuation models where all significant inputs are observable in active markets; and

	•		Level 3 — Unobservable inputs — includes amounts derived from valuation models where one or more significant inputs are unobservable and require us to develop relevant assumptions.

At April 30, 2009 and January 31, 2009, we had approximately $0.7 million and $0.5 million, respectively, in assets which are carried at fair value on a recurring basis. We have no assets or liabilities that are measured at fair value on a non-recurring basis. These assets consist of available-for-sale investments held in a trust related to our non-qualified supplemental executive retirement plan (“SERP”). The fair value of these investments was determined using Level 1 inputs.

6. Litigation and Contingencies

We are involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our financial position, results of operations or cash flows.

7. Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS No. 141R, Business Combinations, which requires, among other things, the acquiring entity in a business combination to recognize the full fair value of the assets acquired, liabilities assumed and any non-controlling interest as of the acquisition date; the immediate expense recognition of transaction costs; and accounting for restructuring plans separately from the business combination. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. This standard will have an impact only if we enter into a business combination.

ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-looking Statements

Certain written and oral statements set forth below or made by Hastings Entertainment, Inc. (the “Company,” “Hastings,” or “Hastings Entertainment”) with the approval of an authorized executive officer constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “intend,” “anticipate,” “project,” “will” and similar expressions identify forward-looking statements, which generally are not historical in nature. All statements which address operating performance, events or developments that we expect or anticipate will occur in the future, including statements relating to the business, expansion, merchandising and marketing strategies of Hastings, industry projections or forecasts, inflation, effect of critical accounting policies including lower of cost or market for inventory adjustments, the returns process, rental asset depreciation, store closing reserves, impairment or disposal of long-lived assets, revenue recognition, and vendor allowances, sufficiency of cash flow from operations and borrowings under our revolving credit facility and statements expressing general optimism about future operating results, are forward-looking statements. Such statements are based upon our management’s current estimates, assumptions and expectations, which are based on information available at the time of the disclosure, and are subject to a number of factors and uncertainties, including, but not limited to, consumer appeal of our existing and planned product offerings, and the related impact of competitor pricing and product offerings; overall industry performance and the accuracy of our estimates and judgments regarding trends; our ability to obtain favorable terms from suppliers; our ability to respond to changing consumer preferences, including with respect to new technologies and alternative methods of content delivery, and to effectively adjust our offerings if and as necessary; the application and impact of future accounting policies or interpretations of existing accounting policies; whether our assumptions turn out to be correct; our inability to attain such estimates and expectations; a downturn in market conditions in any industry relating to the products we inventory, sell or rent; the extremely challenging times that the U.S. and global economies are currently experiencing and the possibility that general economic conditions could deteriorate further, the conditions of which have had and will continue to have an adverse impact on spending by Hastings current retail customer base and potential new customers; volatility of fuel and utility costs; acts of war or terrorism inside the United States or abroad; unanticipated adverse litigation results or effects; and other factors which may be outside of our control; any of which could cause actual results to differ materially from those described herein. We undertake no obligation to affirm, publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with the unaudited consolidated financial statements of the Company and the related notes thereto appearing elsewhere in this report on Form 10-Q.

General

Incorporated in 1972, Hastings is a leading multimedia entertainment retailer. We operate entertainment superstores that buy, sell, trade, and rent various home entertainment products, including books, music, software, periodicals, new and used CDs, DVDs, video games, video game consoles, and electronics. We also offer consumables and trends products such as apparel, t-shirts, action figures, posters, greeting cards, and seasonal merchandise. As of April 30, 2009, we operated 153 superstores primarily in medium-sized markets located in 21 states, primarily in the Western and Midwestern United States. We also operate a multimedia entertainment e-commerce web site offering a broad selection of books, software, video games, DVDs and music. We have one wholly-owned subsidiary, Hastings Internet, Inc. References herein to fiscal years are to the twelve-month periods that end on January 31st of each following calendar year. For example, the twelve-month period ending January 31, 2010, is referred to as fiscal 2009, and the twelve-month period ended January 31, 2009 is referred to as fiscal 2008.

Critical Accounting Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We believe

the following critical accounting estimates comprise our more significant estimates and assumptions used in the preparation of our financial statements. Our significant estimates and assumptions are reviewed, and any required adjustments are recorded, on a monthly or quarterly basis.

Lower of Cost or Market for Merchandise Inventory. Our merchandise inventories are recorded at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. As with any retailer, economic conditions, cyclical customer demand and changes in purchasing or distribution can affect the carrying value of inventory. As circumstances warrant, we record the lower of cost or market inventory adjustments. In some instances, these adjustments can have a material effect on the financial results of an annual or interim period. In order to determine such adjustments, we evaluate the age, inventory turns and estimated fair value and returnability of merchandise inventory by product category and record an adjustment if estimated market value is below cost.

Rental Asset Depreciation. We have established rental asset depreciation policies that match rental product costs with the related revenues. These policies require that we make significant estimates, based upon our experience, as to the ultimate revenue and the timing of the revenue to be generated from our rental product. We utilize an accelerated method of depreciation because it approximates the pattern of demand for the product, which is higher when the product is initially released by the studios for rental and declines over time. In establishing salvage values for our rental product, we consider the sales prices and sales volume of our previously rented product and other used product.

We currently depreciate the cost of our rental assets on an accelerated basis over six months or nine months, except for rental assets purchased for the initial stock of a new store, which are depreciated on a straight-line basis over 36 months. Rental assets, which include DVDs, Books on CD, and Video Games, are depreciated to salvage values ranging from $4 to $10. Rental assets purchased for less than established salvage values are not depreciated.

We also review the carrying value of our rental assets to ensure that estimated future cash flows exceed the carrying value. We periodically record adjustments to the value of previously rented product primarily for estimated obsolescence or excess product based upon changes in our original assumptions about future demand and market conditions. If future demand or actual market conditions are less favorable than our original estimates, additional adjustments, including adjustments to useful lives or salvage values, may be required. We continually evaluate the estimates surrounding the useful lives and salvage values used in depreciating our rental assets. Changes to these estimates resulting from changes in consumer demand, changes in customer preferences or the price or availability of retail products may materially impact the carrying value of our rental assets and our rental margins.

The costs of rental product purchased pursuant to revenue-sharing arrangements, which are recorded in rental cost of sales on the consolidated statements of earnings, typically include a lower initial product cost with a percentage of the net rental revenues to be shared with studios over an agreed period of time. Any up-front costs exceeding the designated salvage value are amortized on an accelerated basis and revenue-sharing payments pursuant to the applicable arrangement are expensed as the related revenue is earned. Additionally, certain titles have performance guarantees. We analyze titles that are subject to performance guarantees and recognize an estimated expense for under-performing titles throughout the applicable period based upon our analysis of the estimated shortfall. We revise these estimates on a monthly basis, based on actual results.

Impairment or Disposal of Long-Lived Assets. We evaluate under-performing stores on a quarterly basis to determine whether projected future cash flows over the remaining lease term are sufficient to recover the carrying value of the fixed asset investment in each individual store. If projected future cash flows are less than the carrying value of the fixed asset investment, an impairment charge is recognized if the estimated fair value is less than the carrying value of such assets. The carrying value of leasehold improvements as well as certain other property and equipment is subject to impairment write-down.

Income Taxes. In determining net income for financial statement purposes, we make certain estimates and judgments in the calculation of tax expense and the resulting tax liabilities and in the recoverability of deferred tax assets that arise from temporary differences between the tax and financial statement recognition of revenue and expense. We record deferred tax assets and liabilities for future income tax consequences that are attributable to differences between financial statement carrying amounts of assets and liabilities and their income tax bases. We base the measurement of deferred tax assets and liabilities on enacted tax rates that we expect will apply to taxable

earnings in the year when we expect to settle or recover those temporary differences. We recognize the effect on deferred tax assets and liabilities on any change in income tax rates in the period that includes the enactment date.

The tax benefit from an uncertain tax position is recognized only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has greater than fifty percent likelihood, on a cumulative basis, of being realized upon ultimate settlement. We recognize interest and penalties relating to any uncertain tax positions as a component of income tax expense.

Share-Based Compensation. Determining the amount of share-based compensation to be recorded in the statement of earnings requires us to develop estimates that are used in calculating the grant-date fair value of stock options. In determining the fair value of stock options, we use the Black-Scholes valuation model, which requires us to make estimates of the following assumptions:

	•		Expected volatility — The estimated stock price volatility is derived based upon our historical stock prices over the expected life of the option.

	•		Expected life of the option — The estimate of an expected life is calculated based on historical data relating to grants, exercises, and cancellations, as well as the vesting period and contractual life of the option.

	•		Risk-free interest rate — The risk-free interest rate is based on the yield on zero-coupon U.S. Treasury securities for a period that is commensurate with the expected life of the option.

Our stock price volatility and option lives involve management’s best estimates at that time, both of which impact the fair value of the option calculated under the Black-Scholes pricing model and, ultimately, the expense that will be recognized over the life of the option.

We recognize compensation expense only for the portion of options that are expected to vest. Therefore, we apply estimated forfeiture rates that are derived from historical employee termination behavior. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.

In addition to stock options, we award performance-based stock awards. The grant date fair value of performance-based stock awards is equal to the average of the opening and closing stock price on the day on which they are granted. Compensation expense is recognized for these awards if management deems it probable that the performance conditions will be met. Management must use their judgment to determine the probability that a performance condition will be met. If actual results differ from management’s assumptions, future results could be materially impacted.

Financial Results for the First Quarter of Fiscal Year 2009

Revenues. Total revenues for the first quarter decreased approximately $6.2 million, or 4.7%, to $125.7 million compared to $131.9 million for the first quarter of fiscal 2008. Included in fiscal 2008 was approximately $2.0 million in revenues resulting from an additional day of sales due to leap year. Excluding this extra day of sales, total revenues for the first quarter decreased approximately $4.2 million, or 3.2%. The following is a summary of our revenues results (dollars in thousands):


	Three Months Ended April 30,
	2009					2008
			Percent of					Percent of			(Decrease)
	Revenues		Total			Revenues		Total			Dollar			Percent
Merchandise revenue	$	104,096		82.8	%	$	108,317		82.1	%	$	(4,221	)		-3.9	%
Rental revenue		21,597		17.2	%		23,619		17.9	%		(2,022	)		-8.6	%

Total revenues	$	125,693		100.0	%	$	131,936		100.0	%	$	(6,243	)		-4.7	%

Comparable-store revenues (“Comp”):


	Fiscal
				2009
	2009			(excludes leap day)
Total		-5.9	%		-4.4	%
Merchandise		-5.1	%		-3.7	%
Rental		-9.3	%		-7.6	%

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


	Three Months Ended April 30,
							2009
	2009			2008			(excludes leap day)
Hardback Café		8.5	%		14.2	%		10.0	%
Electronics		5.5	%		26.8	%		7.1	%
Trends		5.1	%		36.8	%		6.6	%
Consumables		4.5	%		12.5	%		6.4	%
Books		0.2	%		5.6	%		1.7	%
Movies		-5.7	%		3.2	%		-4.3	%
Video Games		-10.4	%		29.8	%		-9.1	%
Music		-15.2	%		-16.0	%		-13.9	%

Stores included in the Comps calculation are those stores that have been open for a minimum of 60 weeks. Also included are stores that were remodeled or relocated during the comparable period. Sales via the internet are included and closed stores are removed from each comparable period for the purpose of calculating Comps. The following discussion of merchandise and rental Comp sales excludes the additional day of sales due to leap year.

Hardback Café Comps increased 10.0% primarily as a result of an additional four cafés open, in existing stores, during the quarter compared to the same period in the prior year and increased sales of specialty café drinks and mugs. Electronics Comps increased 7.1% for the quarter primarily due to strong sales of digital converter boxes, third-party gift cards and Blu-ray DVD players, partially offset by lower sales of portable electronic devices, including MP3 players. Trends Comps increased 6.6% for the quarter primarily due to strong sales of apparel and action figures, partially offset by lower sales of plush products and greeting cards. Key drivers in the apparel category included t-shirts, sports apparel, and bags. Consumables Comps increased 6.4% for the quarter, primarily due to strong sales of seasonal candy as well as candy and snacks cross-merchandised on our video rental wall. Book Comps increased 1.7% for the period. Strong sales of used and value books, as well as strong sales of new hardbacks were offset by lower sales of magazines. Strong performers during the quarter included the Twilight Saga

Series by Stephenie Meyer and The Shack by William P. Young. Movie Comps decreased 4.3% for the quarter, primarily resulting from lower sales of new DVDs, partially offset by increased sales of Blu-ray DVDs and Used DVDs. Video Game Comps decreased 9.1% primarily due to lower sales of older generation video games and lower sales of video game consoles, partially offset by increased sales of used video games for the Microsoft XBOX 360, Sony Playstation 3, and Nintendo Wii. Music Comps decreased 13.9% for the quarter due to lower sales of new and used CDs, resulting directly from a continued industry decline as well as reduced footprint in thirty-one stores. Merchandise Comps, excluding the sale of music, decreased 1.3% for the quarter.

Rental Comps decreased 7.6% for the first quarter, primarily due to fewer rentals of new DVDs and increased promotions offered during the current quarter, partially offset by increased rentals of Blu-ray movies and video games. Rental Video Game Comps increased 4.3% for the period while Rental Movie Comps decreased 9.0%.

Gross Profit — Merchandise. For the first quarter, total merchandise gross profit dollars decreased approximately $0.3 million, or 0.9%, to $33.1 million from $33.4 million for the same period in the prior year primarily due to lower revenues, partially offset by increased margin rates. As a percentage of total merchandise revenue, merchandise gross profit increased to 31.8% for the quarter compared to 30.8% for the same period in the prior year, primarily resulting from lower markdown expense and costs to return product, partially offset by increased shrinkage expense.

Gross Profit — Rental. For the first quarter, total rental gross profit dollars decreased approximately $1.7 million, or 10.9%, to $13.9 million from $15.6 million for the same period in the prior year primarily due to lower rental revenues partially offset by lower rental shrinkage expense. As a percentage of total rental revenue, rental gross profit decreased to 64.3% for the quarter compared to 66.3% for the same period in the prior year primarily as a result of lower rental revenues.

Selling, General and Administrative Expenses (“SG&A”). As a percentage of total revenue, SG&A increased to 34.9% for the first quarter compared to 33.1% for the same quarter in the prior year, primarily as a result of lower revenues. SG&A increased approximately $0.2 million during the quarter, or 0.5%, to $43.9 million compared to $43.7 million for the same quarter last year.

Liquidity and Capital Resources

We generate cash from operations from the sale of merchandise and the rental of products, most of which is received in cash and cash equivalents. Our primary sources of working capital are cash flows from operating activities, including trade credit from vendors, and borrowings under our revolving credit facility, with the most significant source in the first quarter of fiscal 2009 and 2008 being cash flow from operating activities. Other than our principal capital requirements arising from the purchasing, warehousing and merchandising of inventory and rental products, opening new stores and expanding or reformatting existing stores and updating existing and implementing new information systems technology, we have no anticipated material capital commitments, except for the stock buyback programs discussed more fully in Item 2 of Part II of this Quarterly Report on Form 10-Q. We believe our cash flow from operations and borrowings under our revolving credit facility will be sufficient to fund our ongoing operations, new stores, store expansions, and store reformations for the next twelve months.

At April 30, 2009, total outstanding debt was approximately $35.3 million. We project our outstanding debt level will be in the range of $49.5 million to $52.5 million by the end of fiscal 2009. At April 30, 2009, we had approximately $49.1 million in excess availability, after the $10 million availability reserve, under the Facility (as defined below).

Consolidated Cash Flows

Operating Activities. Net cash provided by operating activities totaled approximately $13.4 million for the three months ended April 30, 2009, compared to $4.1 million for the three months ended April 30, 2008. Net earnings for the quarter were approximately $1.7 million compared to net earnings of $3.0 million for the same period in fiscal 2008. Merchandise inventories increased $0.1 million for the quarter, compared to a decrease of $11.0 million during the same period in fiscal 2008, primarily due to the timing of merchandise returns resulting from lower inventory levels at the beginning of the quarter as compared to

the prior year. Trade accounts payable increased approximately $12.8 million for the quarter compared to a decrease of $10.6 million in the same period of fiscal 2008 resulting from increased large deal purchases during the first quarter of fiscal 2009. Merchandise inventories, net of trade payables, decreased approximately $5.1 million for the quarter, compared to an increase of $4.7 million during the same period in the prior year. Accrued expenses and other liabilities decreased approximately $6.1 million during the quarter compared to a decrease of $1.0 million during the same period in fiscal 2008, primarily driven by the timing of payments of federal income taxes.

Investing Activities. Net cash used in investing activities decreased approximately $0.4 million from $3.5 million for the three months ended April 30, 2008, to $3.1 million for the three months ended April 30, 2009.

Financing Activities. Cash provided by or used in financing activities is primarily associated with borrowings and payments made under our revolving credit facility (described below under “Capital Structure”). For the three months ended April 30, 2009, cash used in financing activities was approximately $14.0 million compared to $0.6 million for the three months ended April 30, 2008, primarily resulting from net repayments to our credit facility during the quarter of approximately $9.2 million compared to net borrowings of $2.1 million for same period in the prior year. Changes in our cash overdraft position increased from a use of $1.5 million for the three months ended April 30, 2008 to a use of $4.7 million for the three months ended April 30, 2009, due to the timing of payments issued to vendors during the period. The Company purchased approximately $0.1 million of treasury stock during the three months ended April 30, 2009 compared to $1.3 million during the three months ended April 30, 2008.

Capital Structure. We have a syndicated secured Loan and Security Agreement with Bank of America (the “Facility”). The amount outstanding under the Facility is limited by a borrowing base predicated on (i) eligible inventory, as defined in the Facility, and (ii) certain rental assets, net of accumulated depreciation less specifically defined reserves and is limited to a ceiling of $100 million, less a $10 million availability reserve. We can borrow at various interest-rate options based on the prime rate or London Interbank Offered Rate (“LIBOR”), plus applicable margin depending upon the level of our minimum availability. The borrowing base under the Facility is limited to an advance rate of 65% of eligible inventory and certain rental assets, which can be adjusted to reduce availability under the Facility. The lender may increase specifically defined reserves to reduce availability in the event of adverse changes in our industry or our financial condition, that are projected to impact the value of our assets pledged as collateral. The lender must exercise reasonable judgment and act in good faith with respect to any changes in the specifically defined reserves. The Facility contains no financial covenants, prohibits the payment of dividends and includes certain other debt and acquisition limitations, allows for the repurchase of up to $27.3 million of our common stock and requires a minimum availability of $10 million at all times. The Facility is secured by substantially all of the assets of the Company and our subsidiary and is guaranteed by our subsidiary. Unless the Facility is amended and the maturity extended, the Facility matures on August 29, 2011. At April 30, 2009, we had $49.1 million in excess availability, after the $10 million availability reserve, under the Facility. We expect to have $24.0 to $27.0 million in excess availability, after the $10 million availability reserve and outstanding letters of credit, at January 31, 2010. However, excess availability may be reduced in the future as changes in the borrowing base occur or the lenders increase availability reserves. The average rates of interest being charged under the Facility for the three months ended April 30, 2009, and the fiscal year ended January 31, 2009 were 3.0% and 4.0%, respectively.

We utilize standby letters of credit to support certain insurance policies. The aggregate amount of the letters of credit at April 30, 2009, was approximately $0.9 million, which reduces the excess availability under the Facility.

At April 30, 2009, our minimum lease commitments for the remainder of fiscal 2009 were approximately $17.8 million. Total existing minimum operating lease commitments for fiscal years 2009 through 2025 was approximately $172.6 million as of April 30, 2009.

Contractual obligations and off-balance sheet arrangements. We have contractual obligations associated with ongoing business and financing activities, which will result in cash payments in future periods. These obligations include long-term debt, operating leases and certain revenue-sharing agreements. As of April 30, 2009, other than operating leases and standby letters of credit, we had not entered into any off-balance sheet arrangements or third-

party guarantees, nor does our business ordinarily require us to do so. At April 30, 2009, there have been no material changes in our contractual obligations or off-balance sheet arrangements from those reported in our Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

Seasonality

As is the case with many retailers, a significant portion of our revenues, and an even greater portion of our operating profit, is generated in the fourth fiscal quarter, which includes the holiday selling season. As a result, a substantial portion of our annual earnings has been, and will continue to be, dependent on the results of the fourth quarter. Less than satisfactory net sales for such period could have a material adverse effect on the Company’s financial condition or results of operations for the year and may not be sufficient to cover any losses that may have been incurred in the first three quarters of the year. We experience reduced video rental activity in the spring because customers spend more time outdoors. Major world or sporting events, such as the Super Bowl, the Olympic Games, or the World Series, also have a temporary adverse effect on revenues. Future operating results may be affected by many factors, including variations in the number and timing of superstore openings, the number and popularity of new book, music and video titles, the cost of the new release or “best renter” titles, changes in comparable-store revenues, competition, marketing programs, increases in the minimum wage, weather, special or unusual events, and other factors that may affect our operations.

ITEM 3 — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

In the ordinary course of our business, we are exposed to certain market risks, primarily changes in interest rates. Our exposure to interest rate risk consists of variable rate debt based on the lender’s base rate or LIBOR plus a specified percentage, at our option. The annual impact on our results of operations of a 100 basis point interest rate change on the April 30, 2009, outstanding balance of the variable rate debt would be approximately $0.4 million. After an assessment of these risks to our operations, we believe that the primary market risk exposures (within the meaning of Regulation S-K Item 305) are not material and are not expected to have any material adverse impact on our financial position, results of operations or cash flows for the next fiscal year.

ITEM 4 — CONTROLS AND PROCEDURES.

ITEM 4T — CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-15(e) and 15d-15(e), were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to provide reasonable assurance that the information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and such information is accumulated and communicated to management as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

Management has implemented a process to monitor and assess both the design and operating effectiveness of internal control over financial reporting. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

There has not been any change in our internal control over financial reporting during our fiscal quarter ended April 30, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1 — LEGAL PROCEEDINGS.

ITEM 1A — RISK FACTORS.

Our Annual Report on Form 10-K for the fiscal year ended January 31, 2009 includes a detailed discussion of our risk factors. Since that time, there have been no material changes to our risk factors.

ITEM 2 — UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

A summary of our purchases of shares of common stock for the three months ended April 30, 2009 is as follows:

ISSUER PURCHASES OF EQUITY SECURITIES

Approximate dollar

Total number of

value of shares that

Average

shares purchased

may yet be

Total number

price

as part of publicly

purchased under

of shares

paid per

announced plans

the plans or

Period

purchased (1)

or programs

programs (2)

February 1, 2009 through February 28, 2009

1,134

1.90

1,134

N/A

March 1, 2009 through March 31, 2009

17,650

2.27

17,650

N/A

April 1, 2009 through April 30, 2009

18,900

2.70

18,900

N/A

Total

37,684

2.47

37,684

5,614,471


(1)		All share purchases were open-market purchases made under a repurchase plan publicly announced in a press release dated September 28, 2001. Our Board of Directors initially authorized the repurchase of up to $5.0 million worth of our common stock, and prior to fiscal 2008 the Board of Directors had approved additional increases of $17.5 million. On December 8, 2008, the Board approved an additional increase in such limitation of $5.0 million. Each such authorization to increase amounts was publicly announced in a press release. The repurchases satisfied the conditions of the safe harbor of Rule 10b-18 under the Exchange Act.

(2)		A total of 3,457,633 shares have been purchased under the repurchase plan at a total cost of approximately $21.7 million, or approximately $6.27 per share.

ITEM 6 — EXHIBITS.

The following exhibits are filed herewith or incorporated by reference as indicated as required by Item 601 of Regulation S-K. Any exhibits designated by an asterisk are management contracts and/or compensatory plans or arrangement required to be filed as exhibits to this report on Form 10-Q.


Exhibit
Number			Description of Documents
3.1	(1	)	Third Restated Articles of Incorporation of the Company.
3.1	(3	)	Amended and Restated Bylaws of the Company.
4.1	(2	)	Specimen of Certificate of Common Stock of the Company.
4.2	(1	)	Third Restated Articles of Incorporation of the Company (see 3.1 above).
4.3	(3	)	Amended and Restated Bylaws of the Company (see 3.1 above).
31.1	(4	)	Principal Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
31.2	(4	)	Principal Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
32.1	(4	)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, dated March 18,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.

(2)		Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A, dated May 19,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.

(3)		Previously filed as an exhibit to the Company’s Form 8-K (File No. 000-24381) filed on January 17, 2008 and incorporated herein by reference.

(4)		Filed herewith.

INDEX TO EXHIBITS


Exhibit
Number			Description of Documents
3.1	(1	)	Third Restated Articles of Incorporation of the Company.
3.1	(3	)	Amended and Restated Bylaws of the Company.
4.1	(2	)	Specimen of Certificate of Common Stock of the Company.
4.2	(1	)	Third Restated Articles of Incorporation of the Company (see 3.1 above).
4.3	(3	)	Amended and Restated Bylaws of the Company (see 3.1 above).
31.1	(4	)	Principal Executive Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
31.2	(4	)	Principal Financial Officer Certification Pursuant to Exchange Act Rule 13a-14(a)/15d-14(a).
32.1	(4	)	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


(1)		Previously filed as an exhibit to the Company’s Registration Statement on Form S-1, dated March 18,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.

(2)		Previously filed as an exhibit to the Company’s Registration Statement on Form S-1/A, dated May 19,1998 (File No. 333-47969) and with a corresponding exhibit number herein and are incorporated herein by reference.

(3)		Previously filed as an exhibit to the Company’s Form 8-K (File No. 000-24381) filed on January 17, 2008 and incorporated herein by reference.

(4)		Filed herewith.


		Page

PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements.

	Consolidated Balance Sheets as of April 30, 2009 (Unaudited), and January 31, 2009		3

	Unaudited Consolidated Statements of Earnings for the Three Months Ended April 30, 2009 and 2008		4

	Unaudited Consolidated Statements of Cash Flows for the Three Months Ended April 30, 2009 and 2008		5

	Notes to the Unaudited Consolidated Financial Statements		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		12

Item 3.	Quantitative and Qualitative Disclosures about Market Risk.		19

Item 4.	Controls and Procedures.		19

Item 4T.	Controls and Procedures		19

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings.		20

Item 1A.	Risk Factors.		20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		20

Item 6.	Exhibits.		21

SIGNATURES			22

INDEX TO EXHIBITS			23
EX-31.1
EX-31.2
EX-32.1


	Three Months Ended April 30,
	2009		2008
Shares of common stock underlying options		820		173

Exercise price range per share	$	2.66 to $10.64	$	7.22 to $13.00


	HASTINGS ENTERTAINMENT, INC
Date: June 2, 2009	/s/ Dan Crow
	Dan Crow
	Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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	Three Months Ended
	April 30,
	2009			2008
Merchandise revenue		82.8	%		82.1	%
Rental revenue		17.2			17.9

Total revenues		100.0			100.0

Merchandise cost of revenue		68.2			69.2
Rental cost of revenue		35.7			33.8

Total cost of revenues		62.6			62.9


Gross profit		37.4			37.1

Selling, general and administrative expenses		34.9			33.1
Pre-opening expenses		—			—


Operating income		2.5			4.0

Other income (expense):
Interest expense		(0.2	)		(0.3	)
Other, net		—			—


Income before income taxes		2.3			3.7

Income tax expense		0.9			1.4


Net income		1.4	%		2.3	%


	Three Months Ended				Year Ended
	April 30,				January 31,
	2009		2008		2009
Beginning number of stores		153		153		153
Openings		—		—		2
Closings		—		—		(2	)

Ending number of stores		153		153		153