Eyeing a Discount on Hastings

Wouldn't it be great if someone could combine Barnes & Noble (NYSE: BKS  ) , GameStop (NYSE: GME  ) , Blockbuster (NYSE: BBI  ) , and Trans World Entertainment's (Nasdaq: TWMC  ) FYE music? You know, a multimedia superstore where shoppers could rent videos, listen to CDs, peruse the latest video game software, and pick up the new Clive Cussler novel -- all under one roof.

Actually, Hastings (Nasdaq: HAST  ) came up with the concept long ago, and today it operates around 150 such superstores across 20 states. The company released second-quarter numbers this morning that showed strength in some areas, exposed weakness in others, and ultimately disappointed investors, who sent the stock tumbling 12% in morning trading.

Hastings' second-quarter earnings doubled to $0.04 per share, or $500,000, on revenues that rose 6.1% to $122.4 million. Merchandise sales, which represent about 80% of overall revenues, grew 8.8% to $97.4 million. Merchandise same-store sales improved 6.8%, driven primarily by movie sales (up 26.2%), video games (up 9.4%), and music (up 4.8%). Amid difficult comparisons, book sales fell 1.2%, marginally worse than Borders Group's (NYSE: BGP  ) 0.8% decline and Barnes & Noble's 1.4% rise.

The movie rental environment has been even more challenging. W.D. Crotty noted last November that rental revenues were trending lower, and recent results have been even less encouraging. Rental comps declined 5.5% for the quarter, with sales slipping 3.2% to $25 million. Though this division constitutes only one-fifth of the top line, it accounts for 35% of gross profits (based on year-to-date figures), with a substantially higher gross margin of 61.1% vs. 28.8% for merchandise.

Hastings has been swept up in the same movie rental downturn that has plagued the rest of the industry. Blockbuster was hit even harder in the second quarter, with same-store rental revenues falling 6.4% and a slimmer retail product mix to offset weak rental traffic. Though Hastings' website does have about 800,000 products available, it has not yet developed an online rental service to counter Netflix (Nasdaq: NFLX  ) , such as the one Blockbuster recently announced.

Hastings' numbers came up short this morning, but it seems the reaction may have been a tad overdone. The company managed to double its net income despite a fairly difficult operating environment. The company is not without its problems: anemic profit margins, high debt, and flagging video rental demand, just to name a few. Still, Hastings now trades at a significant discount to its $7.80 book value, and after today's correction, some already cheap financial measures -- such as an enterprise value-to-free cash flow ratio of only 2.6 -- will look even more attractive.

Want to read more on movies? See:

Fool contributorNathan Slaughterrarely rents newly released videos, as much of his movie-watching time is devoted to that greatest of all genres -- '80s comedies. He owns none of the companies mentioned.


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