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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended January 31, 2011
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 000-24381
 HASTINGS ENTERTAINMENT, INC.
  Texas
    
    75-1386375(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3601 Plains Boulevard, Amarillo, Texas
    
    79102(Address of principal executive offices)
    
    (Zip Code)
 806) 351-2300
  Title of each class
    
    Name of each exchange on which registeredCommon Stock, $0.01 par value per share
    
    The NASDAQ Stock Market LLC
  Yes o No þ
 Yes o No þ
 Yes þ No o
 Yes o No o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 Yes o No þ
   Class
    
    Outstanding at March 31, 2011Common Stock, $0.01 par value per share
    
    8,711,350 shares
 DOCUMENTS INCORPORATED BY REFERENCE
 Document
    
    Parts Into Which IncorporatedProxy Statement for the Annual Meeting of Shareholders of
    
    Part IIIthe registrant to be held June 8, 2011 (Proxy Statement)




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##### 



HASTINGS ENTERTAINMENT, INC.
Form 10-K Annual Report
For the Fiscal Year Ended January 31, 2011
 INDEX
 PAGEPART IItem 1. Business
    
    
    1Item 1A. Risk Factors
    
    
    8Item 1B. Unresolved Staff Comments
    
    
    12Item 2. Properties
    
    
    13Item 3. Legal Proceedings
    
    
    14Item 4. (Removed and Reserved)
    
    
    14PART IIItem 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    15Item 6. Selected Financial Data
    
    
    17Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    19Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 8. Financial Statements and Supplementary Data
    
    
    34Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    60Item 9A. Controls and Procedures
    
    
    60Item 9B. Other Information
    
    
    61PART IIIItem 10. Directors, Executive Officers and Corporate Governance
    
    
    61Item 11. Executive Compensation
    
    
    61Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    61Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    61Item 14. Principal Accountant Fees and Services
    
    
    61PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    62SIGNATURES
    
    
    67CERTIFICATIONSExhibit 10.38Exhibit 10.39Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1




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PART I
   
 ITEM 1.
    
    BUSINESS.
    1




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Superior Multimedia Concept.
 Minimum
    
    
    MaximumProduct Category
    
    Title Count
    
    
    Title CountBooks
    
    
    17,000
    
    
    
    47,000Rental DVD and Video Games
    
    
    14,000
    
    
    
    25,000Used DVD, Video Games, Music
    
    
    7,000
    
    
    
    32,000Music
    
    
    7,000
    
    
    
    16,000DVD and Video Games
    
    
    6,000
    
    
    
    14,000Trends and Consumables
    
    
    6,000
    
    
    
    17,000Used Books
    
    
    3,000
    
    
    
    45,000Periodicals
    
    
    1,000
    
    
    
    3,000Consumer Electronics
    
    
    1,000
    
    
    
    2,000
  Fiscal YearProduct Category
    
    2010
    
    
    2009
    
    
    2008Books
    
    
    22
    %
    
    
    23
    %
    
    
    23
    %Video
    
    
    22
    %
    
    
    21
    %
    
    
    22
    %Rental
    
    
    16
    %
    
    
    16
    %
    
    
    16
    %Music
    
    
    12
    %
    
    
    13
    %
    
    
    15
    %Video Games
    
    
    12
    %
    
    
    12
    %
    
    
    11
    %Trends
    
    
    7
    %
    
    
    6
    %
    
    
    5
    %Consumables and Hardback Café
    
    
    4
    %
    
    
    4
    %
    
    
    3
    %Electronics
    
    
    3
    %
    
    
    3
    %
    
    
    4
    %Other
    
    
    2
    %
    
    
    2
    %
    
    
    1
    %
  Medium-Sized Market Focus.
  2




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Customer-Oriented Format.
 Low Pricing.
 Used and Budget-Priced Products.
 Internet.
 www.goHastings.com www.goHastings.com
  3




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New Release Allocation.
 Rental Asset Purchasing System.
 Store Replenishment.
 Selection Management .
  4




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Model Stock Calculation/Ordering .
 Inventory Management .
 Used Inventory Management
 Store Systems.
 Warehouse Management.
 Data Center.
 goShip
    5




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6




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Name
    
    Age
    
    PositionJohn H. Marmaduke
    
    63
    
    Chairman of the Board, President and Chief Executive OfficerAlan Van Ongevalle
    
    43
    
    Executive Vice President of MerchandisingDan Crow
    
    64
    
    Vice President of Finance and Chief Financial OfficerScott Voth
    
    49
    
    Vice President of StoresKevin Ball
    
    54
    
    Vice President of MarketingPhil McConnell
    
    48
    
    Vice President, Divisional Merchandise ManagerJohn Hintz
    
    46
    
    Vice President of Information TechnologyVictor Fuentes
    
    44
    
    Vice President, Divisional Merchandise Manager
  John H. Marmaduke
 Alan Van Ongevalle
 Dan Crow
 Scott Voth, .
 Kevin Ball
 Phil McConnell,
 John Hintz
  7




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Victor Fuentes,
  www.sec.gov
 www.gohastings.com
 
 ITEM 1A.
    
    RISK FACTORS.
 CAUTIONARY STATEMENTS
  Our business is highly seasonal.
  Our business is dependent on consumer spending patterns.
   8




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Intense competition from traditional retail sources and the Internet may adversely affect our
business.
  Our business could be negatively impacted if the in-store video retailer distribution window is
reduced or eliminated.
    Our business is subject to changes in current rental video studio pricing policies.
   9




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Our business has been and will continue to be negatively impacted by new technology that provides
alternate methods of video, music and book delivery.
   We rely on certain key personnel.
   10




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Our growth is dependent on our ability to execute our expansion strategy.
   Changes to information technology systems may disrupt the supply chain.
  Our business is dependent upon renewing or entering into new leases on favorable terms.
  We cannot predict the impact of the recent downturn in the financial markets and the resulting
costs or constraints in obtaining financing on our business and financial results.
   11




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Global economic conditions, including recessions or slow economic growth, and continuing credit
market disruptions in the United States, could continue to adversely affect our business and
financial results.
  
    
    consumer demand for our products, including shifting consumer purchasing patterns to
lower-cost options,
    
    the mix of our products sales, and
    
    the ability of certain suppliers to fill our orders for various products or other goods
and services.
  We may see increased costs or lower revenue arising from health care reform .
  
 ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS.
   12




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ITEM 2.
    
    PROPERTIES.
  Name of State
    
    Number of StoresAlabama
    
    
    1Arkansas
    
    
    11Arizona
    
    
    7Colorado
    
    
    4Georgia
    
    
    1Idaho
    
    
    9Indiana
    
    
    1Kansas
    
    
    8Kentucky
    
    
    1Louisiana
    
    
    1Missouri
    
    
    7Montana
    
    
    6Nebraska
    
    
    4New Mexico
    
    
    15Oklahoma
    
    
    12Tennessee
    
    
    7Texas
    
    
    38Utah
    
    
    2Washington
    
    
    7Wyoming
    
    
    3Total
    
    
    145
      Number of Stores
    
    
    OptionsFiscal Year 2011
    
    
    13
    
    
    
    13Fiscal Year 2012
    
    
    19
    
    
    
    19Fiscal Year 2013
    
    
    18
    
    
    
    16Fiscal Year 2014
    
    
    27
    
    
    
    27Fiscal Year 2015
    
    
    19
    
    
    
    18Thereafter
    
    
    49
    
    
    
    47Total
    
    
    145
    
    
    
    140
   13




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ITEM 3.
    
    LEGAL PROCEEDINGS.
  
 ITEM 4.
    
    (REMOVED AND RESERVED).
  14




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
  High
    
    
    Low2010:First Quarter
    
    $
    9.38
    
    
    $
    3.82Second Quarter
    
    $
    8.02
    
    
    $
    5.10Third Quarter
    
    $
    7.55
    
    
    $
    6.35Fourth Quarter
    
    $
    6.87
    
    
    $
    5.212009:First Quarter
    
    $
    3.84
    
    
    $
    1.85Second Quarter
    
    $
    4.61
    
    
    $
    3.25Third Quarter
    
    $
    4.74
    
    
    $
    3.60Fourth Quarter
    
    $
    4.59
    
    
    $
    3.90
     Total number of
    
    
    Approximateshares
    
    
    dollar value ofpurchased as
    
    
    shares that mayTotal number
    
    
    Average
    
    
    part of publicly
    
    
    yet be purchasedof shares
    
    
    price paid
    
    
    announced plans
    
    
    under the plans orPeriod
    
    purchased (1)
    
    
    per share
    
    
    or programs
    
    
    programs (2)November 1 to November 30, 2010
    
    
    24,200
    
    
    $
    6.67
    
    
    
    24,200
    
    
    
    N/ADecember 1 to December 31, 2010
    
    
    80,160
    
    
    
    6.05
    
    
    
    80,160
    
    
    
    N/AJanuary 1 to January 31, 2011
    
    
    42,600
    
    
    
    6.00
    
    
    
    42,600
    
    
    
    N/ATotal
    
    
    146,960
    
    
    $
    6.14
    
    
    
    146,960
    
    
    $
    8,265,089
 (1)
    
    All share purchases were open-market purchases made under a repurchase plan publicly
announced in a press release dated September 28, 2001. Our Board of Directors initially
authorized the repurchase of up to $5.0 million worth of our common stock. To date, the Board
of Directors has approved the repurchase of up to an additional $32.5 million of our common
stock. Each such authorization to increase amounts was publicly announced in a press release.
The repurchases satisfied the conditions of the safe harbor of Rule 10b-18 under the Exchange
Act.(2)
    
    A total of 4,678,640 shares have been purchased under the repurchase plan at a total cost of
approximately $29.2 million, or approximately $6.25 per share.  15




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Comparison of Cumulative Five Year Total Return
 
 Fiscal Years EndedJanuary 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,
    
    
    January 31,2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011Hastings
    
    $
    100.00
    
    
    $
    110.28
    
    
    $
    163.36
    
    
    $
    47.10
    
    
    $
    79.25
    
    
    $
    103.55S&P 500 Index
    
    
    100.00
    
    
    
    112.36
    
    
    
    107.69
    
    
    
    64.52
    
    
    
    83.89
    
    
    
    100.47Nasdaq Composite
Index
    
    
    100.00
    
    
    
    106.86
    
    
    
    103.64
    
    
    
    64.03
    
    
    
    93.13
    
    
    
    117.10
  EQUITY COMPENSATION PLAN INFORMATION
  Number of securities
    
    
    
    
    
    
    Number of securitiesto be issued
    
    
    Weighted-average
    
    
    remaining available forupon exercise of
    
    
    exercise price of
    
    
    future issuance underoutstanding options,
    
    
    outstanding options,
    
    
    equity compensationPlan category
    
    warrants and rights
    
    
    warrants and rights
    
    
    plansEquity
compensation plans
approved by
security holders
    
    
    777,193
    (1)
    
    $
    4.54
    
    
    
    385,262Equity compensation
plans not approved
by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    777,193
    
    
    $
    4.54
    
    
    
    385,262
   16




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ITEM 6.
    
    SELECTED FINANCIAL DATA.
  Fiscal Year(In thousands, except per share and square foot data)
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006Income Statement Data:Merchandise revenue
    
    $
    440,038
    
    
    $
    441,462
    
    
    $
    451,492
    
    
    $
    458,076
    
    
    $
    454,142Rental revenue
    
    
    80,216
    
    
    
    81,374
    
    
    
    87,256
    
    
    
    89,609
    
    
    
    94,190Gift card breakage revenue (1)
    
    
    801
    
    
    
    8,510
    
    
    
    
    
    
    
    
    
    
    
    Total revenues
    
    
    521,055
    
    
    
    531,346
    
    
    
    538,748
    
    
    
    547,685
    
    
    
    548,332Merchandise cost of revenue
    
    
    303,714
    
    
    
    307,074
    
    
    
    315,780
    
    
    
    321,438
    
    
    
    326,025Rental asset cost of revenue
    
    
    29,950
    
    
    
    29,424
    
    
    
    30,948
    
    
    
    31,107
    
    
    
    33,862Total cost of revenues
    
    
    333,664
    
    
    
    336,498
    
    
    
    346,728
    
    
    
    352,545
    
    
    
    359,887Gross profit
    
    
    187,391
    
    
    
    194,848
    
    
    
    192,020
    
    
    
    195,140
    
    
    
    188,445Selling, general and administrative expenses(2)
    
    
    184,142
    
    
    
    183,413
    
    
    
    182,511
    
    
    
    177,028
    
    
    
    177,467Pre-opening expenses
    
    
    
    
    
    
    3
    
    
    
    233
    
    
    
    120
    
    
    
    94Operating income
    
    
    3,249
    
    
    
    11,432
    
    
    
    9,276
    
    
    
    17,992
    
    
    
    10,884Interest expense
    
    
    (1,014
    )
    
    
    (1,014
    )
    
    
    (1,961
    )
    
    
    (2,919
    )
    
    
    (3,260
    )Other, net (3)
    
    
    156
    
    
    
    1,902
    
    
    
    193
    
    
    
    123
    
    
    
    642Income before income taxes
    
    
    2,391
    
    
    
    12,320
    
    
    
    7,508
    
    
    
    15,196
    
    
    
    8,266Income tax expense(4)
    
    
    686
    
    
    
    5,387
    
    
    
    3,449
    
    
    
    4,951
    
    
    
    3,247Net income
    
    $
    1,705
    
    
    $
    6,933
    
    
    $
    4,059
    
    
    $
    10,245
    
    
    $
    5,019Basic income per share
    
    $
    0.19
    
    
    $
    0.72
    
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    0.45Diluted income per share
    
    $
    0.18
    
    
    $
    0.71
    
    
    $
    0.39
    
    
    $
    0.93
    
    
    $
    0.44Weighted-average common shares outstanding  basic
    
    
    9,036
    
    
    
    9,610
    
    
    
    10,122
    
    
    
    10,797
    
    
    
    11,244Weighted-average common shares outstanding  diluted
    
    
    9,326
    
    
    
    9,752
    
    
    
    10,324
    
    
    
    11,055
    
    
    
    11,518Other Data:Depreciation (5)
    
    $
    17,273
    
    
    $
    18,957
    
    
    $
    20,019
    
    
    $
    19,400
    
    
    $
    19,865Capital expenditures (6)
    
    $
    11,906
    
    
    $
    11,265
    
    
    $
    25,539
    
    
    $
    15,256
    
    
    $
    18,566Store Data:Total selling square footage at end of period
    
    
    3,017,739
    
    
    
    3,065,477
    
    
    
    3,137,692
    
    
    
    3,134,912
    
    
    
    3,121,737Comparable-store revenues increase (decrease) (7)
    
    
    1.4
    %
    
    
    (3.1
    %)
    
    
    (1.6
    %)
    
    
    (0.1
    %)
    
    
    1.8
    %Revenue per selling square footage(8)
    
    $
    172.40
    
    
    $
    170.58
    
    
    $
    171.69
    
    
    $
    174.70
    
    
    $
    175.63January 31,2011
    
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007Balance Sheet Data:Working capital (9)
    
    $
    83,870
    
    
    $
    88,740
    
    
    $
    75,373
    
    
    $
    76,983
    
    
    $
    71,941Total assets
    
    $
    229,683
    
    
    $
    238,800
    
    
    $
    253,703
    
    
    $
    260,221
    
    
    $
    257,498Total long-term debt
    
    $
    31,766
    
    
    $
    38,174
    
    
    $
    44,507
    
    
    $
    40,616
    
    
    $
    41,922Dividends declared
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Total shareholders equity(4)
    
    $
    104,726
    
    
    $
    108,158
    
    
    $
    102,036
    
    
    $
    101,808
    
    
    $
    97,553
 (1)
    
    In fiscal 2010 and fiscal 2009, we recorded approximately $0.8 million and $8.5 million,
respectively, of revenue for the estimated breakage on gift cards we previously issued and
sold. See Note 1 of the financial statements for additional discussion.  17




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(2)
    
    Includes approximately $0.7 million, $1.6 million, $0.8 million, and $0.9 million of
impairment charges for fiscal 2010, 2009, 2008, and 2006, respectively. No impairment charges
were recognized during fiscal 2007.(3)
    
    For fiscal 2009, includes approximately $1.4 million related to gain from insurance proceeds.
See Note 15 of the financial statements for additional discussion.(4)
    
    The results for fiscal 2010 include a discrete tax benefit of approximately $0.2 million
related to amended state returns resulting from an Internal Revenue Service (IRS) audit of
the Companys previously filed Federal tax returns. The results for fiscal 2009 include a
discrete tax charge of approximately $0.4 million related to amended state and federal tax
returns resulting from an IRS audit of the Companys previously filed tax returns. The
results for fiscal 2008 reflect a discrete tax charge of approximately $0.8 million related to
an IRS audit of the Companys previously filed federal tax returns. The IRS audit resulted in
a change in our tax method used to account for gift cards and the $0.8 million represents
interest due as a result of the audit. On February 1, 2007, we recognized an increase in the
liability for uncertain tax positions plus interest and penalties totaling $0.8 million as a
result of the adoption of ASC 740, with a corresponding adjustment to retained earnings. The
results for fiscal 2007 reflect an income tax benefit of approximately $0.9 million related to
a favorable settlement of a prior years state tax liability.(5)
    
    Excludes amounts associated with our rental asset cost depreciation of $11.9 million, $12.3
million, $14.8 million, $13.4 million, and $15.8 million, for fiscal 2010, 2009, 2008, 2007,
and 2006, respectively.(6)
    
    Includes purchases of property, equipment and improvements. For fiscal 2009, amount is shown
net of approximately $0.5 million in proceeds received from insurance that were used to fund
capital expenditures to replace assets that were damaged.(7)
    
    Stores included in the comparable-store revenues calculation are those stores that have been
open for a minimum of 60 weeks. Also included are stores that are remodeled or relocated.
Sales via the internet and gift card breakage revenues are not included and closed stores are
removed from each comparable period for the purpose of calculating comparable-store revenues.(8)
    
    Excludes gift card breakage revenue of approximately $0.8 million and $8.5 million for fiscal
2010 and 2009, respectively.(9)
    
    Working capital is calculated as total current assets less total current liabilities.  18




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION.
        Lower of Cost or Market for Merchandise Inventory.
 Rental Asset Depreciation.
  19




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Impairment or Disposal of Long-Lived Assets
 Income Taxes.
  Share-Based Compensation.
 
    
    Expected volatility  The estimated stock price volatility is derived based upon our
historical stock prices over the expected life of the option.
    
    Expected life of the option  The estimate of an expected life is calculated based on
historical data relating to grants, exercises and cancellations, as well as the vesting
period and contractual life of the option.
    
    Risk-free interest rate  The risk-free interest rate is based on the yield on
zero-coupon U.S. Treasury securities for a period that is commensurate with the expected
life of the option.
  20




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Gift Card Breakage Revenue. www.goHastings.com
  21




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##### Table of Contents



Fiscal Year2010
    
    
    2009
    
    
    2008Merchandise revenue
    
    
    84.5
    %
    
    
    83.1
    %
    
    
    83.8
    %Rental asset revenue
    
    
    15.4
    
    
    
    15.3
    
    
    
    16.2Gift card breakage revenue
    
    
    0.1
    
    
    
    1.6
    
    
    
    Total revenues
    
    
    100.0
    
    
    
    100.0
    
    
    
    100.0Merchandise cost of revenue
    
    
    69.0
    
    
    
    69.6
    
    
    
    69.9Rental asset cost of revenue
    
    
    37.3
    
    
    
    36.2
    
    
    
    35.5Total cost of revenues
    
    
    64.0
    
    
    
    63.3
    
    
    
    64.4Gross profit
    
    
    36.0
    
    
    
    36.7
    
    
    
    35.6Selling, general and administrative expenses
    
    
    35.4
    
    
    
    34.5
    
    
    
    33.9Pre-opening expenses
    
    
    
    
    
    
    
    
    
    
    35.4
    
    
    
    34.5
    
    
    
    33.9Operating income
    
    
    0.6
    
    
    
    2.2
    
    
    
    1.7Other income (expense):Interest expense
    
    
    (0.2
    )
    
    
    (0.2
    )
    
    
    (0.3
    )Other, net
    
    
    
    
    
    
    0.3
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.3
    )Income before income taxes
    
    
    0.4
    
    
    
    2.3
    
    
    
    1.4Income tax expense
    
    
    0.1
    
    
    
    1.0
    
    
    
    0.6Net income
    
    
    0.3
    %
    
    
    1.3
    %
    
    
    0.8
    %
 Fiscal Year2010
    
    
    2009
    
    
    2008Hastings Stores(1):Beginning number of stores
    
    
    149
    
    
    
    153
    
    
    
    153Openings
    
    
    
    
    
    
    
    
    
    
    2Closings
    
    
    (3
    )
    
    
    (4
    )
    
    
    (2
    )Ending number of stores
    
    
    146
    
    
    
    149
    
    
    
    153
 (1)
    
    We operate one concept store, Sun Adventure Sports, which is not included in summary of
Hastings Stores activity.  22




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##### Table of Contents



Revenues.
 Fiscal Year Ended January 31,2011
    
    
    2010Percent
    
    
    
    
    
    
    Percent
    
    
    DecreaseRevenues
    
    
    Of Total
    
    
    Revenues
    
    
    of Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    440,038
    
    
    
    84.5
    %
    
    $
    441,462
    
    
    
    83.1
    %
    
    $
    (1,424
    )
    
    
    -0.3
    %Rental revenue
    
    
    80,216
    
    
    
    15.4
    %
    
    
    81,374
    
    
    
    15.3
    %
    
    
    (1,158
    )
    
    
    -1.4
    %Gift card breakage
revenue
    
    
    801
    
    
    
    0.1
    %
    
    
    8,510
    
    
    
    1.6
    %
    
    
    (7,709
    )
    
    
    -90.6
    %Total Revenues
    
    $
    521,055
    
    
    
    100.0
    %
    
    $
    531,346
    
    
    
    100.0
    %
    
    $
    (10,291
    )
    
    
    -1.9
    %
  Total
    
    
    1.4
    %Merchandise
    
    
    1.5
    %Rental
    
    
    1.0
    %
  Fiscal Year Ended January 31,2011
    
    
    2010Trends
    
    
    9.7
    %
    
    
    6.4
    %Hardback Café
    
    
    9.7
    %
    
    
    13.0
    %Movies
    
    
    6.3
    %
    
    
    -3.2
    %Video Games
    
    
    4.7
    %
    
    
    3.2
    %Consumables
    
    
    2.7
    %
    
    
    4.1
    %Electronics
    
    
    2.0
    %
    
    
    -2.0
    %Books
    
    
    -4.2
    %
    
    
    -0.9
    %Music
    
    
    -4.8
    %
    
    
    -12.6
    %
  23




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##### Table of Contents



Magic: The Gathering The Twilight Saga
   Gross Profit  Merchandise.
 Gross Profit  Rental.
  24




---



##### Table of Contents



Selling, General and Administrative Expenses (SG&A).
 Other Income.
 Income Tax Expense.
   Revenues
 Fiscal Year Ended January 31,2010
    
    
    2009Percent
    
    
    
    
    
    
    Percent
    
    
    Increase(Decrease)Revenues
    
    
    Of Total
    
    
    Revenues
    
    
    of Total
    
    
    Dollar
    
    
    PercentMerchandise revenue
    
    $
    441,462
    
    
    
    83.1
    %
    
    $
    451,492
    
    
    
    83.8
    %
    
    $
    (10,030
    )
    
    
    -2.2
    %Rental revenue
    
    
    81,374
    
    
    
    15.3
    %
    
    
    87,256
    
    
    
    16.2
    %
    
    
    (5,882
    )
    
    
    -6.7
    %Gift card breakage
revenue
    
    
    8,510
    
    
    
    1.6
    %
    
    
    
    
    
    
    0.0
    %
    
    
    8,510
    
    
    
    Total Revenues
    
    $
    531,346
    
    
    
    100.0
    %
    
    $
    538,748
    
    
    
    100.0
    %
    
    $
    (7,402
    )
    
    
    -1.4
    %
  Fiscal year ended January 31,20102010
    
    
    2009
    
    
    (excludes leap day)Total
    
    
    -3.1
    %
    
    
    -1.6
    %
    
    
    -2.7
    %Merchandise
    
    
    -2.4
    %
    
    
    -1.5
    %
    
    
    -2.1
    %Rental
    
    
    -6.7
    %
    
    
    -2.5
    %
    
    
    -6.2
    %
  25




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##### Table of Contents



Fiscal Year Ended January 31,20102010
    
    
    2009
    
    
    (excluding leap day)Hard Back Café
    
    
    13.0
    %
    
    
    8.7
    %
    
    
    13.4
    %Trends
    
    
    6.4
    %
    
    
    22.1
    %
    
    
    6.7
    %Consumables
    
    
    4.1
    %
    
    
    14.6
    %
    
    
    4.5
    %Video Games
    
    
    3.2
    %
    
    
    0.5
    %
    
    
    3.6
    %Books
    
    
    -0.9
    %
    
    
    1.3
    %
    
    
    -0.5
    %Electronics
    
    
    -2.0
    %
    
    
    10.0
    %
    
    
    -1.7
    %Movies
    
    
    -3.2
    %
    
    
    -2.4
    %
    
    
    -2.8
    %Music
    
    
    -12.6
    %
    
    
    -16.3
    %
    
    
    -12.3
    %
    Gross Profit  Merchandise.
 Gross Profit  Rental.
  26




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##### Table of Contents



Selling, General and Administrative Expenses (SG&A).
 Interest Expense.
 Other Income.
 Tax Expense
    Free Cash Flow
  Fiscal year ended January 31,2011
    
    
    2010
    
    
    2009Net cash provided by operating
activities
    
    $
    23,457
    
    
    $
    26,601
    
    
    $
    27,103Purchase of property and equipment, net
    
    
    (11,906
    )
    
    
    (11,265
    )
    
    
    (25,539
    )Free cash flow
    
    $
    11,551
    
    
    $
    15,336
    
    
    $
    1,564
  27




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##### Table of Contents



EBITDA and Adjusted EBITDA
  Fiscal year ended January 31,2011
    
    
    2010
    
    
    2009Net Income
    
    $
    1,705
    
    
    $
    6,933
    
    
    $
    4,059Adjusted forInterest expense, net
    
    
    1,014
    
    
    
    1,014
    
    
    
    1,961Income tax expense
    
    
    686
    
    
    
    5,387
    
    
    
    3,449Property and
equipment depreciation expense
    
    
    17,273
    
    
    
    18,957
    
    
    
    20,019EBITDA
    
    
    20,678
    
    
    
    32,291
    
    
    
    29,488Gift card breakage revenue
    
    
    (801
    )
    
    
    (8,510
    )
    
    
    Gain on casualty loss
    
    
    
    
    
    
    (1,412
    )
    
    
    Stock-based compensation
    
    
    749
    
    
    
    354
    
    
    
    113Store asset impairments
    
    
    678
    
    
    
    1,595
    
    
    
    947Adjusted EBITDA
    
    $
    21,304
    
    
    $
    24,318
    
    
    $
    30,548
 Adjusted Operating Income (Loss)
  Fiscal year ended January 31,2011
    
    
    2010
    
    
    2009Operating income
    
    $
    3,249
    
    
    $
    11,432
    
    
    $
    9,276Adjusted forGift card breakage revenue
    
    
    (801
    )
    
    
    (8,510
    )
    
    
    Stock-based compensation
    
    
    749
    
    
    
    354
    
    
    
    113Store asset impairments
    
    
    678
    
    
    
    1,595
    
    
    
    947Adjusted operating income
    
    $
    3,875
    
    
    $
    4,871
    
    
    $
    10,336
     28




---



##### Table of Contents



Consolidated Cash Flows
 Operating Activities .
 Investing Activities.
 Financing Activities .
    29




---



##### Table of Contents



Capital Structure.
      Contractual Obligations and Off-Balance Sheet Arrangements
  30




---



##### Table of Contents



Payments due by periodLess than
    
    
    1 to 3
    
    
    3 to 5
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt (principal only) (1)
    
    $
    31,766
    
    
    
    
    
    
    
    
    
    
    
    31,766
    
    
    
    Operating leases (2)
    
    
    169,648
    
    
    
    24,721
    
    
    
    47,170
    
    
    
    35,504
    
    
    
    62,253Revenue sharing (3)
    
    
    559
    
    
    
    559
    
    
    
    
    
    
    
    
    
    
    
    Total (4)
    
    $
    201,973
    
    
    
    25,280
    
    
    
    47,170
    
    
    
    67,270
    
    
    
    62,253
 (1)
    
    Based on our internal forecasts, we estimate interest payments for FY 2011 to be
approximately $1.4 million.(2)
    
    Amounts include the direct lease obligations, excluding any taxes, insurance, maintenance and
other related expenses. For the fiscal year ended January 31, 2011, payments for taxes,
insurance, maintenance, and other related expenses, which are variable in nature, were
approximately $5.7 million.(3)
    
    As of January 31, 2011, we were a party to revenue-sharing arrangements with various studios.
These agreements include minimum purchase requirements, based upon the box office results of
the title, at a lower initial product cost as compared to non-revenue sharing purchases. In
addition, these contracts require net rental revenues to be shared with the studios over an
agreed period of time. We have included amounts owed and an estimate of our contractual
obligation under these agreements for performance guarantees and minimum purchase requirements
for the period in which they can reasonably be estimated, which is approximately two months in
the future. Although these contracts may extend beyond the estimated two month period, we
cannot reasonably estimate these amounts due to the uncertainty of purchases that will be made
under these agreements. The amounts presented above do not include revenue sharing accruals
for rental revenues that will be recognized during fiscal 2011.(4)
    
    Uncertain tax position obligations including unrecognized tax benefits of $186,000 and
accrued interest and penalties related to unrecognized tax benefits of $248,000, as of January
31, 2011, were not included in this table. Due to the uncertainty surrounding the timing of
any future cash outflows related to uncertain tax position liabilities, we are not able to
reasonably estimate the period of cash settlement with the respective taxing authority.  31




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##### Table of Contents



QuarterFiscal year 2010:
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues
    
    $
    129,098
    
    
    $
    119,131
    
    
    $
    112,284
    
    
    $
    160,542Operating income (loss)
    
    $
    1,531
    
    
    $
    13
    
    
    $
    (4,885
    )
    
    $
    6,590% of full year:Total revenues
    
    
    24.8
    %
    
    
    22.9
    %
    
    
    21.5
    %
    
    
    30.8
    %Operating income (loss)
    
    
    47.1
    %
    
    
    0.4
    %
    
    
    (150.3
    %)
    
    
    202.8
    %
 QuarterFiscal year 2009:
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth(1)Total revenues
    
    $
    125,693
    
    
    $
    117,192
    
    
    $
    112,338
    
    
    $
    176,123Operating income (loss)
    
    $
    3,086
    
    
    $
    (367
    )
    
    $
    (4,727
    )
    
    $
    13,440% of full year:Total revenues
    
    
    23.7
    %
    
    
    22.1
    %
    
    
    21.1
    %
    
    
    33.1
    %Operating income (loss)
    
    
    27.0
    %
    
    
    (3.2
    %)
    
    
    (41.3
    %)
    
    
    117.5
    %
  (1)
    
    The fourth quarter of fiscal 2009 included a change in estimate related to gift card
breakage resulting in an increase in revenue of approximately $8.5 million.  32




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##### Table of Contents



Fair Value Measurements and Disclosures (Topic 820): Improving
Disclosures about Fair Value Measurements
 
 ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
   33




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##### Table of Contents



ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 HASTINGS ENTERTAINMENT, INC.
Index to Consolidated Financial Statements
and Financial Statement Schedule
 PageReport of Independent Registered Public Accounting Firm
    
    
    35Consolidated Balance Sheets as of January 31, 2011 and 2010
    
    
    36Consolidated Statements of Earnings
for the years ended January 31, 2011, 2010, and 2009
    
    
    37Consolidated Statements of Shareholders Equity
for the years ended January 31, 2011, 2010, and 2009
    
    
    38Consolidated Statements of Cash Flows
for years ended January 31, 2011, 2010, and 2009
    
    
    39Notes to Consolidated Financial Statements
    
    
    40ScheduleFinancial Statement Schedule II  The Financial Statement Schedule filed as part of
this report is listed under Part IV, Item 15(a). Exhibits and Financial Statement Schedules
    
    
    66
  34




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
  35




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
    January 31,2011
    
    
    2010AssetsCurrent assetsCash and cash equivalents
    
    $
    6,149
    
    
    $
    8,863Merchandise inventories, net
    
    
    146,636
    
    
    
    148,149Deferred income taxes
    
    
    6,022
    
    
    
    7,804Prepaid expenses and other current assets
    
    
    11,742
    
    
    
    10,120Total current assets
    
    
    170,549
    
    
    
    174,936Rental assets, net of accumulated depreciation of $20,312 and $21,444 at
January 31, 2011 and 2010, respectively
    
    
    13,129
    
    
    
    13,127Property and equipment, net
    
    
    41,588
    
    
    
    47,695Deferred income taxes
    
    
    1,668
    
    
    
    1,310Intangible assets
    
    
    391
    
    
    
    391Other assets
    
    
    2,358
    
    
    
    1,341$
    229,683
    
    
    $
    238,800Liabilities and Shareholders EquityCurrent liabilitiesTrade accounts payable
    
    $
    60,555
    
    
    $
    58,068Accrued expenses and other current liabilities
    
    
    26,124
    
    
    
    28,128Total current liabilities
    
    
    86,679
    
    
    
    86,196Long-term debt, excluding current maturities
    
    
    31,766
    
    
    
    38,174Other liabilities
    
    
    6,512
    
    
    
    6,272Shareholders equity:Preferred stock, $.01 par value; 5,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.01 par value; 75,000,000 shares authorized;
11,944,544 shares issued in fiscal 2010 and 2009;
8,743,550 shares outstanding in fiscal 2010 and
9,463,838 shares outstanding in fiscal 2009
    
    
    119
    
    
    
    119Additional paid-in capital
    
    
    36,673
    
    
    
    36,920Retained earnings
    
    
    88,589
    
    
    
    86,884Accumulated other comprehensive income
    
    
    107
    
    
    
    37Treasury stock, at cost
    
    
    (20,762
    )
    
    
    (15,802
    )104,726
    
    
    
    108,158$
    229,683
    
    
    $
    238,800
   36




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
    Fiscal Year2010
    
    
    2009
    
    
    2008Merchandise revenue
    
    $
    440,038
    
    
    $
    441,462
    
    
    $
    451,492Rental asset revenue
    
    
    80,216
    
    
    
    81,374
    
    
    
    87,256Gift card breakage revenue
    
    
    801
    
    
    
    8,510
    
    
    
    Total revenues
    
    
    521,055
    
    
    
    531,346
    
    
    
    538,748Merchandise cost of revenue
    
    
    303,714
    
    
    
    307,074
    
    
    
    315,780Rental asset cost of revenue
    
    
    29,950
    
    
    
    29,424
    
    
    
    30,948Total cost of revenues
    
    
    333,664
    
    
    
    336,498
    
    
    
    346,728Gross profit
    
    
    187,391
    
    
    
    194,848
    
    
    
    192,020Selling, general and administrative expenses
    
    
    184,142
    
    
    
    183,413
    
    
    
    182,511Pre-opening expenses
    
    
    
    
    
    
    3
    
    
    
    233Operating income
    
    
    3,249
    
    
    
    11,432
    
    
    
    9,276Other income (expense):Interest expense
    
    
    (1,014
    )
    
    
    (1,014
    )
    
    
    (1,961
    )Other, net
    
    
    156
    
    
    
    1,902
    
    
    
    193Income before income taxes
    
    
    2,391
    
    
    
    12,320
    
    
    
    7,508Income tax expense
    
    
    686
    
    
    
    5,387
    
    
    
    3,449Net income
    
    $
    1,705
    
    
    $
    6,933
    
    
    $
    4,059Basic income per share
    
    $
    0.19
    
    
    $
    0.72
    
    
    $
    0.40Diluted income per share
    
    $
    0.18
    
    
    $
    0.71
    
    
    $
    0.39
   37




---



##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
    AccumulatedAdditional
    
    
    
    
    
    
    Other
    
    
    
    
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    Treasury Stock
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnins
    
    
    Income (Loss)
    
    
    Shares
    
    
    Amount
    
    
    EquityBalances at January 31, 2008
    
    
    11,944,544
    
    
    $
    119
    
    
    $
    37,125
    
    
    $
    75,892
    
    
    $
    (15
    )
    
    
    1,555,205
    
    
    $
    (11,313
    )
    
    $
    101,808Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    
    
    
    
    (5,750
    )
    
    
    43
    
    
    
    50Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    764,199
    
    
    
    (4,350
    )
    
    
    (4,350
    )Exercise of stock options and other, net of taxes
    
    
    
    
    
    
    
    
    
    
    (194
    )
    
    
    
    
    
    
    
    
    
    
    (88,428
    )
    
    
    652
    
    
    
    458Grant of performance-based
restricted stock
    
    
    
    
    
    
    
    
    
    
    (350
    )
    
    
    
    
    
    
    
    
    
    
    (47,500
    )
    
    
    350
    
    
    
    Other
stock-based compensation
    
    
    
    
    
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,059
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,059Unrealized losses in
investments held for sale
in Supplemental Executive
Retirement Plan, net of
$42 in taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (52
    )
    
    
    
    
    
    
    
    
    
    
    (52
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,007Balances at January 31, 2009
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,651
    
    
    
    79,951
    
    
    
    (67
    )
    
    
    2,177,726
    
    
    
    (14,618
    )
    
    
    102,036Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    (24
    )
    
    
    
    
    
    
    
    
    
    
    (11,250
    )
    
    
    74
    
    
    
    50Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    318,896
    
    
    
    (1,287
    )
    
    
    (1,287
    )Exercise of stock options and other, net of taxes
    
    
    
    
    
    
    
    
    
    
    (11
    )
    
    
    
    
    
    
    
    
    
    
    (4,666
    )
    
    
    29
    
    
    
    18Other stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    304
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    304Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,933
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,933Unrealized gains in
investments held for sale
in Supplemental Executive
Retirement Plan, net of
$66 in taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104
    
    
    
    
    
    
    
    
    
    
    
    104Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,037Balances at January 31, 2010
    
    
    11,944,544
    
    
    
    119
    
    
    
    36,920
    
    
    
    86,884
    
    
    
    37
    
    
    
    2,480,706
    
    
    
    (15,802
    )
    
    
    108,158Issuance of stock to directors
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    (6,525
    )
    
    
    42
    
    
    
    50Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    939,795
    
    
    
    (6,376
    )
    
    
    (6,376
    )Exercise of stock options, vesting of restricted stock units and other, net of taxes
    
    
    
    
    
    
    
    
    
    
    (954
    )
    
    
    
    
    
    
    
    
    
    
    (212,982
    )
    
    
    1,374
    
    
    
    420Other stock-based
compensation
    
    
    
    
    
    
    
    
    
    
    699
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    699Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,705
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,705Unrealized gains in
investments held for sale
in Supplemental Executive
Retirement Plan, net of
$43 in taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    70Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,775Balances at January 31, 2011
    
    
    11,944,544
    
    
    $
    119
    
    
    $
    36,673
    
    
    $
    88,589
    
    
    $
    107
    
    
    
    3,200,994
    
    
    $
    (20,762
    )
    
    $
    104,726
   38




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 
    Fiscal Year2010
    
    
    2009
    
    
    2008Cash flows from operating activities:Net income
    
    $
    1,705
    
    
    $
    6,933
    
    
    $
    4,059Adjustments to reconcile net income to net cash provided
by operating activities:Rental asset depreciation expense
    
    
    11,887
    
    
    
    12,266
    
    
    
    14,833Purchases of rental assets
    
    
    (25,628
    )
    
    
    (20,864
    )
    
    
    (30,695
    )Property and equipment depreciation expense
    
    
    17,273
    
    
    
    18,957
    
    
    
    20,019Loss on rental assets lost, stolen and defective
    
    
    1,830
    
    
    
    1,131
    
    
    
    1,198Loss on disposal or impairment of property and equipment, excluding rental assets
    
    
    740
    
    
    
    1,746
    
    
    
    1,620Deferred income taxes
    
    
    1,424
    
    
    
    4,500
    
    
    
    (7,417
    )Non-cash stock-based compensation
    
    
    749
    
    
    
    354
    
    
    
    113Changes in operating assets and liabilities:Merchandise inventories
    
    
    13,422
    
    
    
    9,610
    
    
    
    35,924Other current assets
    
    
    (1,622
    )
    
    
    557
    
    
    
    (182
    )Trade accounts payable
    
    
    3,789
    
    
    
    2,565
    
    
    
    (16,445
    )Accrued expenses and other liabilities
    
    
    (1,814
    )
    
    
    (12,484
    )
    
    
    4,071Excess tax benefit from stock-based compensation
    
    
    (190
    )
    
    
    (2
    )
    
    
    (132
    )Other assets and liabilities, net
    
    
    (108
    )
    
    
    1,332
    
    
    
    137Net cash provided by operating activities
    
    
    23,457
    
    
    
    26,601
    
    
    
    27,103Cash flows from investing activities:Purchase of property, equipment and improvements
    
    
    (11,906
    )
    
    
    (11,812
    )
    
    
    (25,539
    )Proceeds from insurance on casualty loss
    
    
    
    
    
    
    547
    
    
    
    Net cash used in investing activities
    
    
    (11,906
    )
    
    
    (11,265
    )
    
    
    (25,539
    )Cash flows from financing activities:Borrowings under revolving credit facility
    
    
    538,564
    
    
    
    536,570
    
    
    
    556,589Repayments under revolving credit facility
    
    
    (544,972
    )
    
    
    (542,903
    )
    
    
    (552,698
    )Purchase of treasury stock
    
    
    (6,376
    )
    
    
    (1,287
    )
    
    
    (4,350
    )Change in cash overdraft
    
    
    (1,302
    )
    
    
    (6,320
    )
    
    
    1,904Deferred financing costs paid
    
    
    (599
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    230
    
    
    
    16
    
    
    
    326Excess tax benefit from stock-based compensation
    
    
    190
    
    
    
    2
    
    
    
    132Net cash provided by (used in) financing activities
    
    
    (14,265
    )
    
    
    (13,922
    )
    
    
    1,903Net increase (decrease) in cash and cash equivalents
    
    
    (2,714
    )
    
    
    1,414
    
    
    
    3,467Cash and cash equivalents at beginning of year
    
    
    8,863
    
    
    
    7,449
    
    
    
    3,982Cash and cash equivalents at end of year
    
    $
    6,149
    
    
    $
    8,863
    
    
    $
    7,449
   39




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##### Table of Contents



(1)
    
    Operations and Summary of Significant Accounting Policies
 (a)
    
    GeneralHastings Entertainment, Inc. operates a chain of retail stores in 20 states, primarily
in the Western and Midwestern United States. Revenues are generated from the sale of
new and used books, music, DVDs, video games, and video game consoles, and new software,
periodicals, consumables, and trends products. In addition, our revenues include the
rental of DVDs, Blu-ray DVDs, and video games.(b)
    
    Basis of ConsolidationThe consolidated financial statements present the results of Hastings Entertainment,
Inc. and its wholly-owned subsidiary. All inter-company transactions and balances have
been eliminated in consolidation.(c)
    
    Basis of PresentationWe operate in one reportable segment. Our fiscal years ended January 31, 2011, 2010 and
2009 are referred to as fiscal 2010, 2009 and 2008, respectively.(d)
    
    Cash and Cash EquivalentsWe consider all debit and credit card receivables totaling $1.5 million and $3.9 million
at January 31, 2011 and 2010, respectively, from MasterCard, Visa, Discover, and
American Express to be cash equivalents. All balances related to debit and credit card
receivables typically settle within five days. We utilize a cash management process
under which a book cash overdraft may exist for our primary disbursement accounts.
These overdrafts represent un-cleared checks in excess of cash balances in bank accounts
at the end of the reporting period and have been reclassified to accounts payable on the
consolidated balance sheets. We transfer cash on an as-needed basis to fund clearing
checks.(e)
    
    Revenue RecognitionMerchandise and rental asset revenues are recognized at the point of sale or rental or
at the time merchandise is shipped to the customer. Additionally, revenues are
presented net of estimated returns and exclude all sales taxes. An allowance has been
established to provide for expected merchandise returns.We reduce our rental revenue through reserves for the estimated utilization of early
return credits received by renters for early return of rentals. The reserve is relieved
upon the redemption of these early return credits.We provide our customers with the opportunity to trade in used DVDs, video games, CDs
and books in exchange for cash consideration or store credit in the form of a gift card.
Used merchandise inventory is recorded at a cost equal to the cash offer to the
customer. If a customer chooses store credit, a gift card is issued for the amount of
the cash offer plus a premium. Premiums associated with gift cards issued as a result
of trade-in transactions are recorded as a reduction of revenue in the period in which
the related gift cards are redeemed.
  40




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##### Table of Contents



(f)
    
    Gift Cards and Breakage RevenueWe sell gift cards through each of our stores and through our web site
www.goHastings.com. The gift cards we sell have no stated expiration dates or fees and
are subject to potential escheatment rights in some of the jurisdictions in which we
operate. Gift card liabilities are recorded as deferred revenue at the time of sale of
such cards with the costs of designing, printing and distributing the cards recorded as
expense as incurred. Prior to the fourth quarter of fiscal 2009, the liability was
relieved and revenue
was recognized only upon redemption of the gift cards. Beginning in the fourth quarter
of fiscal 2009, we had sufficient historical data to analyze gift card redemption
patterns and a final determination of the escheatment laws applicable to our operations.
As a result, during the fourth quarter of fiscal 2009, we recorded approximately $8.5
million of revenue for the estimated breakage on gift cards we previously issued and
sold. Subsequent to the initial change in estimate related to gift card breakage, gift
card breakage revenue is recognized as gift cards are redeemed, based upon an analysis
of the aging and utilization of gift cards, our determination that the likelihood of
future redemption is remote and our determination that such balances are not subject to
escheatment laws applicable to our operations. For fiscal 2010, we recorded
approximately $0.8 million of revenue related to gift card breakage. Unredeemed gift
cards, net of estimated gift card breakage, approximated $11.1 million at both January
31, 2011 and 2010.(g)
    
    Merchandise InventoriesMerchandise inventories are recorded at the lower of cost, which approximates the
first-in, first-out (FIFO) method, or market. Amounts are presented net of an
allowance for shrinkage and obsolescence.Expenses included in cost of revenues include cost of product purchased from vendors;
rental asset depreciation expense; revenue-sharing payments; shrinkage; inventory
markdowns and write-offs; freight charges; receiving costs; inspection costs; and
internal transfer costs. In addition, we include in cost of revenues all expenses
associated with our distribution center, including freight, warehouse personnel costs,
supplies, maintenance, depreciation, occupancy, property tax, and utility costs, in
addition to costs associated with our returns center, including vendor refused product,
handling charges, return fees, freight, return center personnel costs, supplies,
maintenance, depreciation, rent and utilities. We include occupancy costs for retail
locations in Selling, general and administrative (SG&A) expenses.We transfer rental assets that have been converted to previously viewed titles for sale,
from Rental Assets to Merchandise Inventories. The transfer to Merchandise
Inventories is recorded at the time of conversion, which is the first date the product
is made available for sale. During fiscal 2010, 2009, and 2008, $11.9 million, $9.8
million, and $12.3 million, respectively, were transferred from rental assets to
merchandise inventory at the lower of net book value or market.Merchandise inventory owned by us is generally returnable based upon return agreements
with our merchandise vendors. We continually return merchandise to vendors based on,
among other factors, current and projected sales trends, overstock situations,
authorized return timelines or changes in product offerings. At the end of any
reporting period, in order to appropriately match the costs associated with the return
of merchandise with the process of returning such merchandise, returns expense accruals
are required for inventory that has been returned to vendors, is in the process of being
returned to vendors, or has been identified to be returned to vendors. These costs can
include freight, valuation and quantity differences, and other fees charged by a vendor.
To accrue for such costs and estimate this allowance, we utilize historical experience
adjusted for significant estimated or contractual modifications. Certain adjustments to
the allowance can have a material effect on the financial results of an annual or
interim period. There were no material adjustments in fiscal 2010, 2009, or 2008.(h)
    
    Property and EquipmentProperty and equipment are recorded at cost and depreciated using the straight-line
method, except for rental assets, which are depreciated using an accelerated
depreciation method. Furniture, fixtures, equipment and software are depreciated over
their estimated useful lives of three to seven years.
Leasehold improvements are amortized over the shorter of the related lease term or their
estimated useful lives.
  41




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##### Table of Contents



Expenditures for maintenance, repairs and renewals that do not materially extend the
original useful lives of assets are charged to expense as incurred.We evaluate underperforming stores on a quarterly basis to determine whether projected
future cash flows over the remaining lease term are sufficient to recover the carrying
value of the fixed asset investment in each individual store. If projected future cash
flows are less than the carrying value of the fixed asset investment, an impairment
charge is recognized if the estimated fair value is less than the carrying value of such
assets. The carrying value of leasehold improvements as well as certain other property
and equipment is subject to impairment write-down.(i)
    
    Rental Asset DepreciationRental assets, except for initial purchases for new stores, are depreciated using an
accelerated method over six months or nine months. The initial purchases of rental
assets for new stores are depreciated over 36 months using the straight-line method.
Rental assets, which include DVDs, Books on CD, and video games, are depreciated to
salvage values ranging from $4 to $10. Rental assets purchased for less than
established salvage values are not depreciated.(j)
    
    Financial InstrumentsOur financial instruments include cash and cash equivalents, available for sale
investments related to our non-qualified supplemental executive retirement plan,
accounts payable, and long-term debt. The fair value of cash and cash equivalents and
accounts payable approximates carrying values due to their short-term duration. See
Note 6 Fair Value Measurements for discussion of the fair value of the available for
sale investments and long-term debt.(k)
    
    Stock Based CompensationDetermining the amount of share-based compensation expense requires us to develop
estimates that are used in calculating the grant-date fair value of stock options. In
determining the fair value of stock options, we use the Black-Scholes valuation model,
which requires us to make estimates of the following assumptions:
 
    
    Expected volatility  The estimated stock price volatility is derived based
upon our historical stock prices over the expected life of the option.
    
    Expected life of the option  The estimate of an expected life is calculated
based on historical data relating to grants, exercises, and cancellations and the
vesting period and contractual life of the option.
    
    Risk-free interest rate  The risk-free interest rate is based on the yield on
zero-coupon U.S. Treasury securities for a period that is commensurate with the
expected life of the option.
    42




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##### Table of Contents



(l)
    
    Advertising CostsAdvertising costs for newspaper, television and other media are expensed as incurred.
Advertising expenses, net of reimbursement allowances from vendors, for the fiscal years
2010, 2009, and 2008 were $7.7 million, $7.8 million, and $7.4 million, respectively.We receive payments and credits from vendors pursuant to cooperative advertising
programs and display allowance agreements. During fiscal years 2010, 2009, and 2008, we
received a total of approximately $7.7 million, $8.3 million, and $8.5 million,
respectively, for such payments and credits. To the extent such payments are a
reimbursement for a specific incremental and identifiable cost such amounts are recorded
as a reduction in SG&A expenses at the time the associated advertisement is publicly
released. The remainder of these payments and allowances are recorded as a reduction of
merchandise inventory and the cost of rental assets and recognized in income as the
related product is sold or rented.(m)
    
    Pre-opening CostsPre-opening expenses include human resource costs, travel, rent, advertising, supplies
and certain other costs incurred prior to a stores opening and are expensed as
incurred.(n)
    
    Earnings Per ShareBasic earnings per share is computed by dividing net earnings by the weighted-average
number of common shares outstanding during the period. Diluted earnings per share is
similarly computed, but includes the dilutive effect of stock-based awards.(o)
    
    Use of Management EstimatesThe preparation of the financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from
those estimates.(p)
    
    Subsequent EventsWe have evaluated subsequent events and transactions occurring between the end of our
fiscal year, January 31, 2011 and the date the financial statements were issued, for
possible recognition or disclosure in the financial statements. As a result of this
evaluation, there were no subsequent events that required either recognition or
disclosure in the financial statements.
  43




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##### Table of Contents



(q)
    
    Impact of Recently Issued Accounting StandardsIn January 2010, the Financial Accounting Standards Board (FASB) issued Accounting
Standards Update (ASU) No. 2010  06  Fair Value Measurements and Disclosures (Topic
820): Improving Disclosures about Fair Value Measurements. This standard amends the
disclosure guidance with respect to fair value measurements for both interim and annual
reporting periods. Specifically, this
standard requires new disclosures for significant transfers of assets or liabilities
between Level 1 and Level 2 in the fair value hierarchy, separate disclosures for
purchases, sales, issuance and settlements of Level 3 fair value items on a gross,
rather than net basis, and more robust disclosure of the valuation techniques and inputs
used to measure Level 2 and Level 3 assets and liabilities. Except for the detailed
disclosures of changes in Level 3 items, which will be effective for us as of February
1, 2011, the remaining disclosure requirements were effective for us as of February 1,
2010. We adopted the provisions of this guidance, as applicable, beginning in the fiscal
quarter ended April 30, 2010, with no material impact to our financial statements.
 (2)
    
    Merchandise Inventories
  January 31,2011
    
    
    2010Books
    
    $
    50,027
    
    
    $
    52,897Videos
    
    
    35,848
    
    
    
    36,150Video Games
    
    
    19,534
    
    
    
    19,503Music
    
    
    22,402
    
    
    
    22,039Trends
    
    
    16,338
    
    
    
    14,195Consumer Electronics
    
    
    6,528
    
    
    
    6,941Other
    
    
    2,147
    
    
    
    1,636152,824
    
    
    
    153,361Less allowance
for inventory
shrinkage and
obsolescence
    
    
    6,188
    
    
    
    5,212$
    146,636
    
    
    $
    148,149
   44




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##### Table of Contents



(3)
    
    Property and Equipment
  January 31,2011
    
    
    2010Furniture, equipment and software
    
    $
    176,925
    
    
    $
    169,485Leasehold improvements
    
    
    68,449
    
    
    
    67,060Buildings and land
    
    
    258
    
    
    
    258Work in progress
    
    
    181
    
    
    
    1,499245,813
    
    
    
    238,302Less accumulated depreciation
    
    
    204,225
    
    
    
    190,607Property and equipment, net
    
    $
    41,588
    
    
    $
    47,695
   45




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##### Table of Contents



(4)
    
    Accrued Expenses and Other Current Liabilities
  January 31,2011
    
    
    2010Allowance for cost of inventory returns
    
    $
    833
    
    
    $
    891Deferred gift card revenue
    
    
    11,062
    
    
    
    11,147Salaries, vacation, bonus and benefits
    
    
    4,199
    
    
    
    4,453Short term lease obligations
    
    
    626
    
    
    
    611Sales taxes payable
    
    
    1,666
    
    
    
    2,374Federal income tax payable
    
    
    444
    
    
    
    966Other accrued expenses
    
    
    7,294
    
    
    
    7,686Total
    
    $
    26,124
    
    
    $
    28,128
    
  46




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##### Table of Contents



(5)
    
    Long-term Debt
        47




---



##### Table of Contents



(6)
    
    Fair Value Measurements
  
    
    Level 1  Observable Inputs  quoted prices in active markets for identical assets
and liabilities;
    
    Level 2  Observable inputs other than the quoted prices in active markets for
identical assets and liabilities  includes quoted prices for similar instruments,
quoted prices for identical or similar instruments in inactive markets, and amounts
derived from valuation models where all significant inputs are observable in active
markets; and
    
    Level 3  Unobservable inputs  includes amounts derived from valuation models
where one or more significant inputs are unobservable and require us to develop
relevant assumptions.
     
  48




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##### Table of Contents



(7)
    
    Leases
  Fiscal Year2010
    
    
    2009
    
    
    2008Minimum rentals
    
    $
    26,692
    
    
    $
    26,581
    
    
    $
    25,903Contingent rentals
    
    
    83
    
    
    
    222
    
    
    
    267Less sublease income
    
    
    (92
    )
    
    
    (127
    )
    
    
    (130
    )Rental expense
    
    $
    26,683
    
    
    $
    26,676
    
    
    $
    26,040
  2011
    
    $
    24,7212012
    
    
    24,8982013
    
    
    22,2722014
    
    
    19,5532015
    
    
    15,951Thereafter
    
    
    62,253Total minimum lease payments
    
    
    169,648Less sublease income
    
    
    56Net minimum lease payments under
operating leases
    
    $
    169,592
  49




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##### Table of Contents



(8)
    
    Income Taxes
  Fiscal Year2010
    
    
    2009
    
    
    2008Current federal
    
    $
    (815
    )
    
    $
    504
    
    
    $
    10,589Current state and local
    
    
    121
    
    
    
    449
    
    
    
    235Deferred federal, state, and local
    
    
    1,380
    
    
    
    4,434
    
    
    
    (7,375
    )$
    686
    
    
    $
    5,387
    
    
    $
    3,449
  Fiscal Year2010
    
    
    2009
    
    
    2008Computed expected income tax expense
    
    $
    813
    
    
    
    34.0
    %
    
    $
    4,312
    
    
    
    35.0
    %
    
    $
    2,628
    
    
    
    35.0
    %State and local income taxes, net of
federal income tax effect
    
    
    132
    
    
    
    5.5
    %
    
    
    551
    
    
    
    4.4
    %
    
    
    238
    
    
    
    3.2
    %Interest on settlement of federal tax exam
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    800
    
    
    
    10.7
    %Other adjustments
    
    
    (259
    )
    
    
    (10.8
    %)
    
    
    524
    
    
    
    4.3
    %
    
    
    (217
    )
    
    
    (3.0
    %)$
    686
    
    
    
    28.7
    %
    
    $
    5,387
    
    
    
    43.7
    %
    
    $
    3,449
    
    
    
    45.9
    %
  Fiscal Year2010
    
    
    2009Deferred tax assets:Deferred gift card revenue
    
    $
    3,025
    
    
    $
    4,321Deferred rent and lease incentives
    
    
    2,280
    
    
    
    2,238Inventories
    
    
    1,660
    
    
    
    1,523Property and equipment
    
    
    5,885
    
    
    
    6,554Other
    
    
    2,017
    
    
    
    1,582Total deferred tax assets
    
    
    14,867
    
    
    
    16,218Deferred tax liabilities:Rental assets
    
    
    (7,177
    )
    
    
    (7,104
    )Total deferred tax liabilities
    
    
    (7,177
    )
    
    
    (7,104
    )Net deferred tax assets
    
    $
    7,690
    
    
    $
    9,114
  50




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##### Table of Contents



Income Taxes,
 Fiscal Year2010
    
    
    2009
    
    
    2008Unrecognized tax positions at beginning of period
    
    $
    186
    
    
    $
    186
    
    
    $
    186Increases in tax positions from prior years
    
    
    
    
    
    
    
    
    
    
    Decreases in tax positions from prior years
    
    
    
    
    
    
    
    
    
    
    Increases in tax positions from current year
    
    
    
    
    
    
    
    
    
    
    Settlements with taxing authorities
    
    
    
    
    
    
    
    
    
    
    Lapse in statute of limitations
    
    
    
    
    
    
    
    
    
    
    Unrecognized tax positions at end of period
    
    $
    186
    
    
    $
    186
    
    
    $
    186
     51




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##### Table of Contents



(9)
    
    Earnings Per Share
  Fiscal Year2010
    
    
    2009
    
    
    2008Net income
    
    $
    1,705
    
    
    $
    6,933
    
    
    $
    4,059Average shares outstanding:Basic
    
    
    9,036
    
    
    
    9,610
    
    
    
    10,122Effect of dilutive stock-based
awards
    
    
    290
    
    
    
    142
    
    
    
    202Diluted
    
    
    9,326
    
    
    
    9,752
    
    
    
    10,324Earnings per share:Basic
    
    $
    0.19
    
    
    $
    0.72
    
    
    $
    0.40Diluted
    
    $
    0.18
    
    
    $
    0.71
    
    
    $
    0.39
  (10)
    
    Benefit Plans
     52




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##### Table of Contents



(11)
    
    Shareholders Equity
       53




---



##### Table of Contents



(12)
    
    Stock-Based Compensation
  Stock Options
   Fiscal Year2010
    
    
    2009
    
    
    2008Expected dividend yield
    
    
    
    
    
    
    
    
    
    
    Risk-free interest rate
    
    
    1.74
    %
    
    
    2.11
    %
    
    
    2.08
    %Expected life in years
    
    
    5.33
    
    
    
    4.67
    
    
    
    4.57Historical Volatility
    
    
    0.50
    
    
    
    0.50
    
    
    
    0.47
  54




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##### Table of Contents



Weighted-Options (in
    
    
    average exerciseactual shares)
    
    
    priceOutstanding at January 31, 2008
    
    
    905,373
    
    
    $
    5.45Granted
    
    
    162,650
    
    
    
    3.08Exercised
    
    
    (88,428
    )
    
    
    3.70Forfeited and expired
    
    
    (18,150
    )
    
    
    9.44Outstanding at January 31, 2009
    
    
    961,445
    
    
    $
    5.14Granted
    
    
    183,650
    
    
    
    4.30Exercised
    
    
    (4,666
    )
    
    
    3.51Forfeited under option exchange
    
    
    (406,717
    )
    
    
    7.05Forfeited and expired
    
    
    (40,981
    )
    
    
    6.82Outstanding at January 31, 2010
    
    
    692,731
    
    
    $
    3.70Granted
    
    
    215,150
    
    
    
    6.60Exercised
    
    
    (71,855
    )
    
    
    3.21Forfeited and expired
    
    
    (58,833
    )
    
    
    3.88Outstanding at January 31, 2011
    
    
    777,193
    
    
    $
    4.54
    55




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##### Table of Contents



Weighted-Weighted-
    
    
    averageaverage exercise
    
    
    remaining
    
    
    AggregateOptions
    
    
    price
    
    
    contractual life
    
    
    intrinsic valueRange: $1.69 to $4.99Options outstanding
and exercisable at
January 31, 2011
    
    
    292,743
    
    
    $
    3.08
    
    
    3.31 years
    
    $
    1,994,597Options outstanding
and unexercisable at
January 31, 2011
    
    
    190,586
    
    
    $
    3.49
    
    
    7.66 years
    
    $
    381,523Range: $5.00 to $8.70Options outstanding
and exercisable at
January 31, 2011
    
    
    71,034
    
    
    $
    6.57
    
    
    4.71 years
    
    $
    14,518Options outstanding
and unexercisable at
January 31, 2011
    
    
    222,830
    
    
    $
    6.70
    
    
    8.97 years
    
    
    
   Weighted Average Exercise price for
    
    
    Weighted Average Fair value forFiscal Year
    
    
    Fiscal Year2010
    
    
    2009
    
    
    2008
    
    
    2010
    
    
    2009
    
    
    2008Options granted at
market price
    
    $
    6.53
    
    
    $
    4.23
    
    
    $
    3.29
    
    
    $
    3.06
    
    
    $
    1.89
    
    
    $
    1.36Options granted at
prices exceeding market
price
    
    $
    7.09
    
    
    $
    4.68
    
    
    $
    1.86
    
    
    $
    2.41
    
    
    $
    1.50
    
    
    $
    0.53Total options granted
    
    $
    6.60
    
    
    $
    4.30
    
    
    $
    3.08
    
    
    $
    2.97
    
    
    $
    1.82
    
    
    $
    1.24
 Option Exchange
   56




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##### Table of Contents



Restricted Stock Awards
   Awards
    
    
    Weighted-average(in actual shares)
    
    
    grant date fair valueOutstanding at January 31, 2008
    
    
    283,330
    
    
    $
    8.23Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Forfeited and expired
    
    
    (108,330
    )
    
    
    7.78Outstanding at January 31, 2009
    
    
    175,000
    
    
    $
    8.50Granted
    
    
    288,075
    
    
    
    4.25Vested
    
    
    (23,750
    )
    
    
    5.37Forfeited and expired
    
    
    (130,000
    )
    
    
    9.67Outstanding at January 31, 2010
    
    
    309,325
    
    
    $
    4.40Granted
    
    
    190,000
    
    
    
    6.45Vested
    
    
    (164,877
    )
    
    
    4.52Forfeited and expired
    
    
    (19,166
    )
    
    
    5.57Outstanding at January 31, 2011
    
    
    315,282
    
    
    $
    5.83
   57




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##### Table of Contents



(13)
    
    Supplemental Cash Flow Information
  (14)
    
    Commitments and Contingencies
   (15)
    
    Involuntary Conversion of Property and Equipment
   58




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##### Table of Contents



(16)
    
    Interim Financial Results (Unaudited)
 QuarterFiscal year 2010:
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues
    
    $
    129,098
    
    
    $
    119,131
    
    
    $
    112,284
    
    
    $
    160,542Total cost of revenues
    
    
    82,131
    
    
    
    74,476
    
    
    
    71,494
    
    
    
    105,563Gross profit
    
    
    46,967
    
    
    
    44,655
    
    
    
    40,790
    
    
    
    54,979Selling, general and administrative expenses (2)
    
    
    45,436
    
    
    
    44,642
    
    
    
    45,675
    
    
    
    48,389Pre-opening expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    1,531
    
    
    
    13
    
    
    
    (4,885
    )
    
    
    6,590Interest (expense) and other income, net
    
    
    (112
    )
    
    
    (164
    )
    
    
    (328
    )
    
    
    (254
    )Income (loss) before taxes
    
    
    1,419
    
    
    
    (151
    )
    
    
    (5,213
    )
    
    
    6,336Income tax expense (benefit)
    
    
    401
    
    
    
    (69
    )
    
    
    (2,134
    )
    
    
    2,488Net income (loss)
    
    
    1,018
    
    
    
    (82
    )
    
    
    (3,079
    )
    
    
    3,848Basic income (loss) per share
    
    $
    0.11
    
    
    $
    (0.01
    )
    
    $
    (0.35
    )
    
    $
    0.44Diluted income (loss) per share
    
    $
    0.11
    
    
    $
    (0.01
    )
    
    $
    (0.35
    )
    
    $
    0.43
 QuarterFiscal year 2009:
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthTotal revenues (1)
    
    $
    125,693
    
    
    $
    117,192
    
    
    $
    112,338
    
    
    $
    176,123Total cost of revenues
    
    
    78,707
    
    
    
    73,680
    
    
    
    71,333
    
    
    
    112,778Gross profit
    
    
    46,986
    
    
    
    43,512
    
    
    
    41,005
    
    
    
    63,345Selling, general and administrative expenses (2)
    
    
    43,898
    
    
    
    43,878
    
    
    
    45,732
    
    
    
    49,905Pre-opening expenses
    
    
    2
    
    
    
    1
    
    
    
    
    
    
    
    Operating income (loss)
    
    
    3,086
    
    
    
    (367
    )
    
    
    (4,727
    )
    
    
    13,440Interest (expense) and other income, net (3)
    
    
    (277
    )
    
    
    (211
    )
    
    
    (194
    )
    
    
    1,570Income (loss) before taxes
    
    
    2,809
    
    
    
    (578
    )
    
    
    (4,921
    )
    
    
    15,010Income tax expense (benefit)
    
    
    1,107
    
    
    
    (182
    )
    
    
    (1,485
    )
    
    
    5,947Net income (loss)
    
    
    1,702
    
    
    
    (396
    )
    
    
    (3,436
    )
    
    
    9,063Basic income (loss) per share
    
    $
    0.17
    
    
    $
    (0.04
    )
    
    $
    (0.36
    )
    
    $
    0.95Diluted income (loss) per share
    
    $
    0.17
    
    
    $
    (0.04
    )
    
    $
    (0.36
    )
    
    $
    0.94
 (1)
    
    The fourth quarter of fiscal 2009 includes approximately $8.5 million of revenue related a
change in estimate of gift card breakage.(2)
    
    Includes store asset impairments of approximately $0.7 million and $1.6 million recognized in
the fourth quarter of fiscal 2010 and 2009, respectively.(3)
    
    The fourth quarter of fiscal 2009 includes approximately $1.4 million related to gain from
insurance proceeds.  59




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##### Table of Contents



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
  
 ITEM 9A.
    
    CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
     Changes in Internal Control over Financial Reporting
   60




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##### Table of Contents



ITEM 9B.
    
    OTHER INFORMATION
  
 PART III
 
 ITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
  Section 16(a) Beneficial Ownership Reporting Compliance
  Code of Ethics and Other Corporate Governance Information
  
 ITEM 11.
    
    EXECUTIVE COMPENSATION.
  
 ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
  
 ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
  
 ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES.
   61




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##### Table of Contents



PART IV
 
 ITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
 (a)
    
    1. The following consolidated financial statements of the Company are included in Part II,
Item 8:
 Report of Independent Registered Public Accounting Firm
    
    
    35Consolidated Balance Sheets as of January 31, 2011 and 2010
    
    
    36Consolidated Statements of Earnings for the years ended
January 31, 2011, 2010, and 2009
    
    
    37Consolidated Statements of Shareholders Equity for the years
ended January 31, 2011, 2010, and 2009
    
    
    38Consolidated Statements of Cash Flows for the years ended
January 31, 2011, 2010, and 2009
    
    
    39Notes to Consolidated Financial Statements
    
    
    40
 2.
    
    The following financial statement schedule and other information
required to be filed by Items 8 and 15(d) of Form 10-K are
included in Part IV:
 Financial Statement Schedule II  Valuation and Qualifying Accounts
and Reserves
    
    
    66
  3.
    
    The following exhibits are filed herewith or incorporated by reference as indicated
as required by Item 601 of Regulation S-K. The exhibits designated by an asterisk are
management contracts and/or compensatory plans or arrangements required to be filed as
exhibits to this report.
 ExhibitNumber

    
    Description3.1
    (1)
    
    Third Restated Articles of Incorporation of the Company.3.1
    (2)
    
    Amended and Restated Bylaws of the Company.4.1
    (3)
    
    Specimen of Certificate of Common Stock of the Company.4.2
    (1)
    
    Third Restated Articles of Incorporation of the Company (see 3.1 above).4.3
    (2)
    
    Amended and Restated Bylaws of the Company (see 3.1 above).10.1
    (4)
    
    Form of Indemnification Agreement by and between the Company and its
directors and executive officers.10.2
    *(5)
    
    Hastings Amended 1996 Incentive Stock Plan.10.3
    *(6)
    
    Hastings 1994 Stock Option Plan.10.4
    *(7)
    
    Hastings 1991 Stock Option Plan.10.5
    *(8)
    
    Hastings Entertainment, Inc. Associates 401(k) Plan and Trust.10.6
    *(9)
    
    Hastings Employee Stock Ownership Plan Trust Agreement.10.7
    *(10)
    
    Chief Executive Officer Stock Option, as amended.10.8
    *(11)
    
    Corporate Officer Incentive Plan.10.9
    *(12)
    
    Management Stock Purchase Plan.10.10
    *(13)
    
    Management Incentive Plan.10.11
    *(14)
    
    Salary Incentive Plan.10.12
    *(15)
    
    Hastings Entertainment, Inc. Stock Option Plan for Outside Directors.10.13
    *(16)
    
    Agreement,
dated January 31, 2001 between John H. Marmaduke and the Company.10.14
    (17)
    
    Lease Agreement, dated August 3, 1994, as amended, between Omni Capital Corporation and
the Company, for warehouse space located at Sunset Center in Amarillo, Texas.10.15
    (18)
    
    Lease Agreement, dated May 28, 1992, between the City of Amarillo and the Company for
space located at 1900 W. 7th Avenue in Amarillo, Texas.10.16
    *(19)
    
    Stock Grant Plan for Outside Directors.10.17
    *(20)
    
    Form of Employment Agreement by and between the Company and certain of its executives.
  62




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##### Table of Contents



ExhibitNumber

    
    Description10.18
    (21)
    
    Amended Lease Agreement, dated October 13, 1999, between Omni Capital Corporation and
the Company, for office space located at Sunset Center in Amarillo, Texas.10.20
    (22)
    
    International Swap Dealers Association, Inc. Master Agreement between Hastings
Entertainment, Inc. and Fleet National Bank.10.22
    (23)
    
    Severance Agreement and Release with Robert Berman, dated March 19, 2005.10.24
    (23)
    
    Severance Agreement and Release with Steve Hicks, dated December 16, 2005.10.26
    (24)
    
    Severance Agreement and Release with David Moffatt, dated April 5, 2006.10.27
    (24)
    
    Employment Agreement with Michael Rigby, dated December 5, 2005.10.29
    (25)
    
    Amendments to the Employment Agreement by and between the Company and Dan Crow,
dated August 1, 2008.10.30
    (25)
    
    Amendments to the Employment Agreement by and between the Company and Alan Van
Ongevalle (as described in the Form 8-K filed by the Company on February 9, 2007), dated
August 1, 2008.10.31
    (25)
    
    Amendments to the Employment Agreement by and between the Company and Susan Dasse
(as described in the Form 8-K filed by the Company on May 2, 2008), dated August 1, 2008.10.32
    (25)
    
    Amendments to the Employment Agreement by and between the Company and Kevin Ball,
dated August 1, 2008.10.33
    (25)
    
    Amendments to the Employment Agreement by and between the Company and John Hintz (as
described in the Form 8-K filed by the Company on February 9, 2007), dated August 1, 2008.10.34
    (25)
    
    Amendments to the Employment Agreement by and between the Company and Victor Fuentes
(as described in the Form 8-K filed by the Company on October 18, 2007), dated August 1,
2008.10.35
    (25)
    
    Amendments to the Employment Agreement by and between the Company and Philip
McConnell (as described in the Form 8-K filed by the Company on June 12, 2006), dated
August 1, 2008.10.36
    (26)
    
    Amendments to the Employment Agreement by and between the Company and John H
Marmaduke, dated February 1, 2009.10.37
    (27)
    
    Stock transfer agreement between the Company and the John H. Marmaduke Family Limited
Partnership.10.38
    (29)
    
    Amended and Restated Loan and Security Agreement, dated as of July 22, 2010, by and
between Hastings Entertainment, Inc. and Bank of America, N.A., acting in its capacity as
agent for various lenders identified therein.10.39
    (29)
    
    Employment Agreement by and between the Company and Scott Voth, dated January 5, 2011.21.1
    (28)
    
    Subsidiaries of the Company.23.1
    (29)
    
    Consent of Ernst & Young LLP.24.1
    (29)
    
    Powers of Attorney (included on signature page).31.1
    (29)
    
    Certification of Chief Executive Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).31.2
    (29)
    
    Certification of Chief Financial Officer of Registrant Pursuant to SEC Rule 13a-14(a)/15d-14(a).32.1
    (29)
    
    Certification of Chief Executive Officer and Chief Financial Officer of Registrant Pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
 
 (1)
    
    Previously filed Exhibit 3.1 to the Companys Registration Statement on Form
S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit number
herein and are incorporated herein by reference.(2)
    
    Previously filed as an exhibit to the Companys Form 8-K (File No. 000-24381)
filed on January 17, 2008, and incorporated herein by reference.(3)
    
    Previously filed as Exhibit 4.1 to the Companys Registration Statement on Form
S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit number
herein and are incorporated herein by reference.(4)
    
    Previously filed as Exhibit 10.1 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.  63




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##### Table of Contents



(5)
    
    Previously filed as Exhibit 10.4 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(6)
    
    Previously filed as Exhibit 10.5 to the Companys Registration Statement on
Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(7)
    
    Previously filed as Exhibit 10.6 to the Companys Registration Statement on
Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(8)
    
    Previously filed as Exhibit 10.7 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(9)
    
    Previously filed as Exhibit 10.8 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(10)
    
    Previously filed as Exhibit 10.9 to the Companys Registration Statement on
Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(11)
    
    Previously filed as Exhibit 10.10 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(12)
    
    Previously filed as Exhibit 10.11 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(13)
    
    Previously filed as Exhibit 10.12 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(14)
    
    Previously filed as Exhibit 10.13 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(15)
    
    Previously filed as Exhibit 10.14 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(16)
    
    Previously filed as Exhibit 10.15 to the Companys Annual Report on Form 10-K
for the fiscal year ended January 31, 2001, and incorporated herein by reference.(17)
    
    Previously filed as Exhibit 10.16 to the Companys Registration Statement on
Form S-1/A, dated June 11, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(18)
    
    Previously filed as Exhibit 10.18 to the Companys Registration Statement on
Form S-1, dated March 13, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(19)
    
    Previously filed as Exhibit 10.21 to the Companys Registration Statement on
Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.(20)
    
    Previously filed as Exhibit 10.20 to the Companys Registration Statement on
Form S-1/A, dated May 19, 1998 (File No. 333-47969) and with a corresponding exhibit
number herein and are incorporated herein by reference.  64




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##### Table of Contents



(21)
    
    Previously filed as Exhibit 10.22 to the Companys Annual Report on Form 10-K,
as amended, for the fiscal year ended January 31, 2000, and incorporated herein by
reference.(22)
    
    Previously filed as Exhibit 10.20 to the Companys Annual Report on Form 10-K
for the fiscal year ended January 31, 2002, and incorporated herein by reference.(23)
    
    Previously filed as an exhibit (with an exhibit number corresponding to the one
used in the above table) to the Companys Annual Report on Form 10-K for the fiscal
year ended January 31, 2006, and incorporated herein by reference.(24)
    
    Previously filed as an exhibit (with an exhibit number corresponding to the one
used in the above table) to the Companys Annual Report on Form 10-K for the fiscal
year ended January 31, 2007, and incorporated herein by reference.(25)
    
    Previously filed as an exhibit (with an exhibit number corresponding to the one
used in the above table) to the Companys Annual Report on Form 10-K for the fiscal
year ended January 31, 2009, and incorporated herein by reference(26)
    
    Previously filed as Exhibit 99.1 to the Companys Form 8-K (File No. 000-24381)
filed on April 16, 2009, and incorporated herein by reference.(27)
    
    Previously filed as Exhibit 10.1 to the Companys Form 8-K (File No. 000-24381)
filed December 4, 2009, and incorporated herein by reference.(28)
    
    Previously filed as Exhibit 21.1 to the Companys Form 10-K for the fiscal year
ended January 31, 2010, as amended, and incorporated herein by reference.(29)
    
    Filed herewith.  65




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##### Table of Contents



HASTINGS ENTERTAINMENT, INC.
 Fiscal Year2010
    
    
    2009
    
    
    2008Reserves deducted from assets:Allowance for shrinkage and inventory
obsolescence:Balance at the beginning of period
    
    $
    5,288
    
    
    $
    5,750
    
    
    $
    5,612Additions charged to costs and expenses
    
    
    13,064
    
    
    
    13,194
    
    
    
    13,481Deductions for write-offs
    
    
    (11,978
    )
    
    
    (13,656
    )
    
    
    (13,343
    )Balance at end of period
    
    $
    6,374
    
    
    $
    5,288
    
    
    $
    5,750Reserves added to liabilities:Allowance for costs of inventory returns:Balance at the beginning of period
    
    $
    891
    
    
    $
    962
    
    
    $
    1,343Additions charged to costs and expenses
    
    
    4,388
    
    
    
    4,352
    
    
    
    5,247Deductions for write-offs and payments
    
    
    (4,446
    )
    
    
    (4,423
    )
    
    
    (5,628
    )Balance at end of period
    
    $
    833
    
    
    $
    891
    
    
    $
    962
  66




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##### Table of Contents



SIGNATURES
  HASTINGS ENTERTAINMENT, INC.Date: April 20, 2011
    By:
    /s/ Dan CrowDan CrowVice President and Chief Financial Officer
(Principal Financial and Accounting Officer) POWER OF ATTORNEY
   Signature
    
    Title
    
    Date/s/ John H. Marmaduke

John H. Marmaduke
    
    Chairman of the Board, President and Chief Executive Officer
(Principal Executive Officer)
    
    April 20, 2011/s/ Danny W. Gurr

Danny W. Gurr
    
    Director
    
    April 20, 2011/s/ Daryl L. Lansdale

Daryl L. Lansdale
    
    Director
    
    April 20, 2011/s/ Ann S. Lieff

Ann S. Lieff
    
    Director
    
    April 20, 2011/s/ Frank O. Marrs

Frank O. Marrs
    
    Director
    
    April 20, 2011/s/ Jeffrey G. Shrader

Jeffrey G. Shrader
    
    Director
    
    April 20, 2011/s/ Dan Crow

Dan Crow
    
    Vice President and Chief Financial Officer 
(Principal
Financial and Accounting Officer)
    
    April 20, 2011
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