Hastings Wasted

With Thanksgiving fast approaching, retailers far and wide are anxiously awaiting Black Friday, the start of the frenzied holiday shopping season. Cooler weather, enticing promotions, parking lots crammed with early bird shoppers . it's an ideal time for a struggling company like Hastings (NASDAQ:HAST) to lift its sluggish sales out of the doldrums.

However, I seem to recall having a similar amount of optimism this time last year -- misplaced optimism, as it turned out. The one-stop shopping specialist has struggled this year, and those hoping it might gain some traction heading into the critical fourth quarter will be disappointed. Yesterday, the company announced that third-quarter losses widened from $0.14 to $0.24 year over year, while revenues that slipped 4.2% to $114.6 million.

The company's game and movie rental operations continue to deteriorate, faced with competition from online sources like Netflix (NASDAQ:NFLX) and consumers' increasing preference to buy films rather than rent them. For the quarter, rental revenues dropped 10% to $21 million. Unfortunately, the merchandise segment wasn't able to bail the company out this time, as comps for music, books, and video sales all showed a decline. Even the traditionally strong video game department registered a disappointing 9.4% same-store sales drop, though last year's impressive 51% gain made for difficult year-over-year comparisons.

After hearing the news, investors headed quickly for the exits. The stock tumbled 12% to a new 52-week low below the $5 mark. The sharp pullback has made these cheap shares even cheaper:

The format in Hastings' 150 superstores is a bit unconventional. Video game and movie rental sections share space with trade-in counters for used CDs and movies, along with sections for new books, software, DVDs, cassette tapes, stereo equipment, and greeting cards. Look hard enough, and you might even find a Ted Nugent eight-track tape tucked away somewhere.

While the stores are a convenient place to shop, their recent numbers have been less than encouraging. On the positive side, Hastings managed to expand its gross margins more than 200 basis points during the seasonally weak third quarter, and the lone analyst who tracks the company has pegged its long-term growth rate at a respectable 10%.

Still, until the higher-margin rental side of the business shows signs of leveling off and merchandise comps return to positive territory, even Hastings' compelling price tag may not make it worth buying.

Netflix is a Motley Fool Stock Advisor recommendation.

Fool contributor Nathan Slaughter holds no financial position in any of the companies mentioned.