An Entertaining Holiday Pick

With Black Friday fast approaching, multimedia entertainment retailer Hastings (Nasdaq: HAST  ) hopes that shoppers will embrace the convenience of one-stop shopping this holiday season. Anyone with books, video games, music, or movies on their list can quickly find these items under one roof at their nearest Hastings superstore -- though, with only 150 locations scattered around 20 states, it may take some scouting to locate the nearest one.

The company has some momentum entering the pivotal fourth quarter, after reporting a number of third-quarter improvements earlier this week. Net losses were cut in half to $1.8 million from $3.8 million the year before, on revenues that rose 6% to $119.5 million. A solid 6.6% gain in merchandise same-store sales was partially offset by a 5.9% drop in rentals, leaving a net 3.8% increase in third-quarter comps.

The divergence between the retail and the rental categories is nothing new, nor is it specific to Hastings, as many peers in the "rentailing" industry are stuck in the same position. For example, Blockbuster (NYSE: BBI  ) recently posted a 6.3% drop in rental same-store sales, too deep for even an 11.1% jump in comps on the retail side to overcome, resulting in an overall decrease of 3%.

Hastings cited shifting consumer preference for purchasing movies rather than renting them, though online rental services provided by Blockbuster, Netflix (Nasdaq: NFLX  ) , and Wal-Mart (NYSE: WMT  ) have probably played a role as well. Fortunately, rentals represent a mere one-fifth of the company's revenues (vs. 75% at Blockbuster), with the rest coming from faster-growing merchandise sales.

Aside from weakness in the music category, which fell slightly on a same-store basis, there was broad strength elsewhere. Movie sales increased 9.8% for the quarter and have jumped 20% year-to-date, possibly validating management's assertion that there is a pronounced shift under way toward purchasing. My own expanding DVD collection, while not exactly a scientific survey, would seem to bear this out.

Echoing similar observations made recently by Toys "R" Us (NYSE: TOY  ) , video game sales were particularly brisk, and followed up last year's 30.8% same-store sales increase with an even stronger 51.2% improvement. Book sales rose 1.9% -- modest, but respectable given the dearth of bestsellers last quarter. Furthermore, the results stack up well next to Barnes & Noble's (NYSE: BKS  ) 0.9% gain, and Borders' (NYSE: BGP  ) 1.6% decline.

Through the first nine months, Hastings' earnings have swung from a $0.41 loss to a $0.05 gain, and full-year forecasts have just been raised by a nickel to $0.55-$0.58. Furthermore, the shareholder-friendly company has bought back nearly 1 million shares under its current stock repurchase program, at an average price of $4.99 -- a wise use of capital considering the stock topped $8.00 this morning.

Even after the gain, this stock only trades around seven times trailing earnings, with price/sales and EV/FCF ratios of 0.17 and 6.5, respectively. Hastings' relative sprinkling of stores may be out of reach, but its stock is definitely not.

Fool contributor Nathan Slaughter owns none of the companies mentioned.

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