The past few months have been difficult for Hastings
As in the previous quarter, sales of video games led the way, with a sharp 30.6% gain in same-store sales. Demand for the company's miscellaneous items -- shoes, T-shirts, jewelry, and anything else that doesn't fit into one of its major product categories -- was also strong, with a mid-teens rise in sideline comps. However, the good news essentially ends there, as DVD sales took a nosedive and music sales remained weak. The book department turned in the worst performance, with a 3.4% decline in comps that trailed behind a thin 0.7% drop at Borders
While total merchandise revenues climbed nearly 4%, those generated by movie rentals continue to slip lower. Hastings' rental business seems to be dying a slow, painful death amid online rental competition from Motley Fool Stock Advisor recommendation Netflix
Unfortunately, while rentals represent only one-fifth of Hastings' revenues, they are far more profitable -- gross margins above 60% vs. just 27% for retail merchandise -- and accounted for precisely half of last quarter's gross profits. With that portion of the business dwindling, Hastings will need to find ways to squeeze more earnings from its merchandise sales. To that end, expenses related to integrating a new warehouse management system, which have weighed on results in prior quarters, now appear to be largely in the past.
Despite recent weakness, the company looks poised to get back on track. Earnings over each of the next three quarters are forecast to show healthy year-over-year gains, with total fiscal 2005 earnings expected to advance by double digits to between $0.55 and $0.58. Keep in mind that this is a micro cap, with a market capitalization of just $65 million, so do your own due diligence and be prepared for volatility. But for savvy small-cap value investors willing to overlook the razor-thin margins, Hastings shares -- which trade at an attractive PEG ratio of 0.7 and a microscopic enterprise value/EBITDA of just 1.8 -- may deserve a spot on the watch list.
Fool contributor Nathan Slaughter owns none of the companies mentioned.