This isn't Hastings Entertainment (NASDAQ:HAST) at its finest.

This morning's quarterly report proved a mixed bag for the multimedia retailer. Sales held steady over the holidays, inching 1.6% higher to $174.2 million, but an unattractive sales mix nibbled away at profit margins. Earnings for the seasonally significant quarter fell to $0.45 a share, after last year's $0.61-per-share showing.

Hastings held up well on the surface. Comps were up 1.1%, as a result of a 1.6% same-store improvement in merchandise that was weighed down by a 1.7% dip in its rental business. The company's DVD rental business often draws comparisons to stand-alone specialists like Blockbuster (NYSE:BBI) and Movie Gallery (NASDAQ:MOVI) -- or the pending threat of popularity of mail-based services like Netflix (NASDAQ:NFLX) and Blockbuster's Total Access -- but that's not fair. Hastings doesn't have all of its eggs in the loaned disc market. In fact, rentals accounted for just 17% of the company's sales over the past year. And the weakness is due more to a slowdown on the video game software rental side than the more conventional celluloid rental business.

The diversity of Hastings as a retail concept is best seen by taking a closer look at how the company's comps held up during the quarter by category.

Q4 Comps





Video Sales


Video Games




However, even that breakdown doesn't go far enough. Sure, music sales were off, but the freefall in CD sales would have been worse if the company hadn't been selling more Apple (NASDAQ:AAPL) iPods. The uptick in video games was actually related to console sales, as holiday shoppers snapped up PS3, Wii, and DS Lite systems as soon as they hit the stores. As any GameStop (NYSE:GME) investor knows, this is a low-margin business; the real markups come on the software side. And the catchall "sidelines" category reflects the company's move to start selling prepaid phone cards, as well as some unlikely drivers, like a boost in the sale of action figures.

Is the market upset about the bottom-line results? Sure. They were expecting $0.52 a share. The company isn't happy, either. CEO John Marmaduke singled out flawed merchandising initiatives, promising a shakeup in senior management to get it right next time.

As for Hastings, the valuation is certainly intriguing if you believe that its multimedia retail concept will survive through the digital delivery revolution. It is trading at 15 times trailing earnings, but just 11 to 12 times Marmaduke's guidance for forward profitability.

Before you say "that's cheap," let's consider the outlook. Marmaduke has been wrong in the past. Back in November, he figured that his company would have a strong holiday season, ultimately reaping between $0.65 and $0.70 per share in fiscal 2006. The company ultimately earned just $0.44 a share. So investors may want to wait until Hastings proves that it can, in fact, grow earnings this year. In other words, don't rush yourself into making a Hastings decision.

For more on the entertainment enablers, check out:

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Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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