Operations and Summary of Significant Accounting Policies (Policies)

12 Months Ended

Jan. 31, 2014

General

(a) General

Hastings Entertainment, Inc. (the “Company,” “Hastings,” or “Hastings Entertainment”) operates a chain of retail stores in 19 states, primarily in the Western and Midwestern United States. Revenues are generated from the sale of new and used books, music, DVDs, video games, and video game consoles, and new software, periodicals, consumables, lifestyles and trends products. In addition, our revenues include the rental of DVDs, Blu-ray DVDs, and video games.

Basis of Consolidation

(b) Basis of Consolidation

The consolidated financial statements present the results of Hastings and its wholly-owned subsidiary. All inter-company transactions and balances have been eliminated in consolidation.

Basis of Presentation

(c) Basis of Presentation

We operate in one reportable segment. Our fiscal years ended January 31, 2014, 2013 and 2012 are referred to as fiscal 2013, 2012 and 2011, respectively.

Reclassifications

(d) Reclassifications

Certain prior period amounts have been reclassified to conform to the current presentation.  

Cash and Cash Equivalents

(e) Cash and Cash Equivalents

We consider all debit and credit card receivables totaling approximately $1.5 million and $1.2 million at January 31, 2014 and 2013, respectively, from MasterCard, Visa, Discover, and American Express to be cash equivalents. All balances related to debit and credit card receivables typically settle within five days. We utilize a cash management process under which a book cash overdraft may exist for our primary disbursement accounts. These overdrafts represent un-cleared checks in excess of cash balances in bank accounts at the end of the reporting period and have been reclassified to accounts payable on the consolidated balance sheets. We transfer cash on an as-needed basis to fund clearing checks.

Revenue Recognition

(f) Revenue Recognition

Merchandise and rental asset revenues are recognized at the point of sale or rental or at the time merchandise is shipped to the customer. Additionally, revenues are presented net of estimated returns and exclude all sales taxes. An allowance has been established to provide for expected merchandise returns.

We reduce our rental revenue through reserves for the estimated utilization of early return credits received by renters for early return of rentals. The reserve is relieved upon the redemption of these early return credits.

We provide our customers with the opportunity to trade in used DVDs, video games, CDs and books in exchange for cash consideration or store credit in the form of a gift card. Used merchandise inventory is recorded at a cost equal to the cash offer to the customer. If a customer chooses store credit, a gift card is issued for the amount of the cash offer plus a premium. Premiums associated with gift cards issued as a result of trade-in transactions are recorded as a reduction of revenue in the period in which the related gift cards are redeemed.

Gift Cards and Breakage Revenue

(g) Gift Cards and Breakage Revenue

We sell gift cards through each of our stores and through our web site www.goHastings.com. The gift cards we sell have no stated expiration dates or fees and are subject to potential escheatment rights in some of the jurisdictions in which we operate. Gift card liabilities are recorded as deferred revenue at the time of sale of such cards with the costs of designing, printing and distributing the cards recorded as expense as incurred. Revenue from sales of gift cards is recognized when the gift card is redeemed by the customer, or the likelihood of a gift card being redeemed by the customer is remote (gift card breakage). Gift card breakage revenue is recognized as gift cards are redeemed, based upon an analysis of the aging and utilization of gift cards, our determination that the likelihood of future redemption is remote and our determination that such balances are not subject to escheatment laws applicable to our operations. For fiscal 2013, 2012 and 2011, we recorded approximately $0.3 million, ($0.1) million and $0.8 million, respectively, of revenue related to gift card breakage. During fiscal 2012, we discontinued recognition of gift card breakage for our Colorado stores per state escheat laws and we decreased the overall gift card breakage percentage, causing a negative amount for the fiscal year. Unredeemed gift cards, net of estimated gift card breakage, approximated $11.9 million at January 31, 2014 and $11.6 million at January 31, 2013.

Merchandise Inventories

(h) Merchandise Inventories

Merchandise inventories are recorded at the lower of cost, which approximates the first-in, first-out (“FIFO”) method, or market. Amounts are presented net of an allowance for shrinkage and obsolescence.

Expenses included in cost of revenues include cost of product purchased from vendors; rental asset depreciation expense; revenue-sharing payments; shrinkage; inventory markdowns and write-offs; freight charges; receiving costs; inspection costs; and internal transfer costs. In addition, we include in cost of revenues all expenses associated with our distribution center, including freight, warehouse personnel costs, supplies, maintenance, depreciation, occupancy, property tax, and utility costs, in addition to costs associated with our returns center, including vendor refused product, handling charges, return fees, freight, return center personnel costs, supplies, maintenance, depreciation, rent and utilities. We include occupancy costs for retail locations in Selling, General and Administrative (“SG&A”) expenses.

We transfer rental assets that have been converted to previously viewed titles for sale, from ‘Rental Assets’ to ‘Merchandise Inventories.’ The transfer to ‘Merchandise Inventories’ is recorded at the time of conversion, which is the first date the product is made available for sale. During fiscal 2013, 2012, and 2011, $4.4 million, $5.2 million, and $10.3 million, respectively, were transferred from rental assets to merchandise inventory at the lower of net book value or market.

Merchandise inventory owned by us is generally returnable based upon return agreements with our merchandise vendors. We continually return merchandise to vendors based on, among other factors, current and projected sales trends, overstock situations, authorized return timelines or changes in product offerings. At the end of any reporting period, in order to appropriately match the costs associated with the return of merchandise with the process of returning such merchandise, returns expense accruals are required for inventory that has been returned to vendors, is in the process of being returned to vendors, or has been identified to be returned to vendors. These costs can include freight, valuation and quantity differences, and other fees charged by a vendor. To accrue for such costs and estimate this allowance, we utilize historical experience adjusted for significant estimated or contractual modifications. Certain adjustments to the allowance can have a material effect on the financial results of an annual or interim period. There were no material adjustments in fiscal 2013, 2012, or 2011.

Property and Equipment

(i) Property and Equipment

Property and equipment are recorded at cost and depreciated using the straight-line method, except for rental assets, which are depreciated using an accelerated depreciation method. The cost of property and equipment includes the purchase price and all direct incremental expenditures necessary to render the asset suitable for its intended use and location.Furniture, fixtures, equipment and software are depreciated over their estimated useful lives of three to five years. Leasehold improvements are amortized over the shorter of the related lease term or their estimated useful lives.

Expenditures for maintenance, repairs and renewals that do not materially extend the original useful lives of assets are charged to expense as incurred.

We evaluate underperforming 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.

Rental Asset Depreciation

(j) Rental Asset Depreciation

Rental assets, except for initial purchases for new stores, are depreciated using an accelerated method over six months or nine months. The initial purchases of rental assets for new stores are depreciated over 36 months using the straight-line method. Rental assets, which include DVDs, Blu-rays, and video games, are depreciated to salvage values ranging from $4 to $15. Rental assets purchased for less than established salvage values are not depreciated.

Financial Instruments

(k) Financial Instruments

Our financial instruments include cash and cash equivalents, available for sale investments related to our non-qualified supplemental executive retirement plan, accounts payable, and long-term debt. The fair value of cash and cash equivalents and accounts payable approximates carrying values due to their short-term duration. See Note 7 Fair Value Measurements for discussion of the fair value of the available for sale investments and long-term debt.

Stock Based Compensation

(l) Stock Based Compensation

Determining the amount of stock-based compensation expense 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 and the vesting period and contractual life of the option.

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

· Expected dividend yield – The estimated rate based on the stock’s current market price and forecasted dividend payout.

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

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

In addition to stock options, we award restricted stock units. The grant date fair value of restricted stock units is equal to the average of the opening and closing stock price on the day on which they are granted.

Advertising Costs

(m) Advertising Costs

Advertising costs for newspaper, television and other media are expensed as incurred. Advertising expenses, net of reimbursement allowances from vendors, for fiscal years 2013, 2012, and 2011 were $4.4 million, $6.0 million, and $7.2 million, respectively.

We receive payments and credits from vendors pursuant to cooperative advertising programs and display allowance agreements. During fiscal years 2013, 2012, and 2011, we received a total of approximately $6.2 million, $6.6 million, and $6.7 million, respectively, for such payments and credits. To the extent such payments are a reimbursement for a specific incremental and identifiable cost such amounts are recorded as a reduction in SG&A expenses at the time the associated advertisement is publicly released. The remainder of these payments and allowances are recorded as a reduction of merchandise inventory and the cost of rental assets and recognized in income as the related product is sold or rented.

Earnings Per Share

(n) Earnings Per Share

Basic earnings per share is computed by dividing net earnings by the weighted-average number of common shares outstanding during the period. Diluted earnings per share is similarly computed, but includes the dilutive effect of stock-based awards.

Use of Management Estimates

(o) Use of Management 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.

Impact of Recently Issued Accounting Standards

(p) Impact of Recently Issued Accounting Standards

During February 2013, the Financial Accounting Standards Board (“FASB”) issued ASU 2013-02: Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, which requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. generally accepted accounting principles (“GAAP”) to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or expense in the same reporting period.  

In July 2013, the Financial Accounting Standards Board issued ASU No. 2013-11: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, which requires unrecognized tax benefits to be presented as a decrease in a net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of ASU 2013-11 is not expected to have a material impact on the Company’s consolidated financial statements.

Income Taxes

We follow the provisions of ASC 740, Income Taxes, which clarifies the accounting and disclosure for uncertainty in income taxes. Below is a reconciliation of the beginning and ending amount of unrecognized tax benefits relating to uncertain tax positions, which are recorded in our Consolidated Balance Sheets.