| HASTINGS ENTERTAINMENT INC ITEM 1A RISK FACTORS CAUTIONARY STATEMENTS The value of an investment in the Company involves significant risks and uncertainties |
| The following cautionary statements and other information included in this Annual Report on Form 10-K should be carefully considered |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations |
| If any of the following risks occur, our business, financial condition, operating results and cash flows could be materially adversely affected |
| Our growth is dependent on our ability to execute our expansion strategy |
| Our growth strategy is dependent principally on our ability to open new stores and remodel, expand and/or relocate certain of our existing stores and operate them profitably |
| In general, the rate of our expansion depends, among other things, on general economic and business conditions affecting consumer confidence and spending, the availability of qualified management personnel and our ability to manage the operational aspects of our growth |
| It also depends upon the availability of adequate capital, which in turn depends in a large part upon the cash flow generated from operations |
| Our future results will depend, among other things, on the success in implementing our expansion strategy |
| If stores are opened more slowly than expected, sales at new stores reach targeted levels more slowly than expected (or fail to reach targeted levels) or related overhead costs increase in excess of expected levels, our ability to successfully implement our expansion strategy would be adversely affected |
| Our business is dependent upon renewing or entering into new leases on favorable terms |
| All of the Company’s stores are located in leased premises |
| If the cost of leasing existing stores increases, the Company cannot assure that it will be able to maintain its existing store locations as leases expire |
| In addition, the Company may not be able to enter into new leases on favorable terms or at all, or it may not be able to locate suitable alternative sites or additional sites for new store expansion in a timely manner |
| The Company’s revenues and earnings may decline if the Company fails to maintain existing store locations, enter into new leases, locate alternative sites or find additional sites for new expansion |
| 9 _________________________________________________________________ [44]Table of Contents Our business is highly seasonal |
| As is the case with many retailers, a significant portion of our revenues, and an even greater portion of our operating profit, is generated in the fourth fiscal quarter, which includes the holiday selling season |
| As a result, a substantial portion of our annual earnings has been, and will continue to be, dependent on the results of this quarter |
| Less than satisfactory net sales for such period could have a material adverse effect on the Company’s financial condition or results of operations for the year and may not be sufficient to cover any losses that may have been incurred in the first three quarters of the year |
| We experience reduced rental activity in the spring because customers spend more time outdoors |
| Major world or sporting events, such as the Super Bowl, the Olympic Games or the World Series, also have a temporary adverse effect on revenues |
| Future operating results may be affected by many factors, including variations in the number and timing of store openings, the number and popularity of new book, music and video titles, the cost of the new release or “best renter” titles, changes in comparable-store revenues, competition, marketing programs, increases in the minimum wage, weather, special or unusual events, and other factors that may affect our operations |
| Intense competition from traditional retail sources and the Internet may adversely affect our business |
| We operate in highly competitive industries |
| For all of our product categories, we compete directly with national store operators, as well as regional chains and stores, specialty retailers dealing in our products, independent single store operators, discount stores, warehouse and mail order clubs, and mass merchandisers |
| In addition, the Internet is a significant channel for retailing for most of the product categories that we offer |
| In particular, the retailing of books, music and video over the Internet is highly competitive |
| In addition, we face competition from companies engaged in the business of selling books, music and movies and the renting of movies via electronic means, including the downloading of music content and in-home video delivery |
| An increase in competition in the physical or electronic markets in which we operate could have a material effect on our operations |
| Our business is dependent on consumer spending patterns |
| Revenues generated from the sale and rental of books, music, videos and other products we carry have historically been dependent upon discretionary consumer spending, which may be affected by general economic conditions, consumer confidence and other factors beyond our control |
| A decline in consumer spending on the buying and/or rental of the products we offer could have a material adverse effect on our financial condition and results of operations and our ability to fund our expansion strategy |
| We rely on certain key personnel |
| Management believes that the Company’s continued success will depend, to a significant extent, upon the efforts and abilities of Mr |
| Marmaduke could have a material adverse effect on our operations |
| We maintain a “key man” term life insurance policy on Mr |
| Marmaduke for dlra10 million |
| In addition, our success depends, in part, on our ability to retain key management and attract other personnel to satisfy our current and future needs |
| The inability to retain key management personnel or attract additional qualified personnel could have a material adverse effect on our operations |
| Our business could be negatively impacted if the in-store video retailer distribution window is reduced or eliminated |
| A competitive advantage that in-store video retailers currently enjoy over most other movie distribution channels, except theatrical release, is the early timing of the in-store video retailer “distribution window |
| ” After the initial theatrical release of a movie, studios generally make their movies available to in-store video retailers (for rental and retail, including by mass merchant retailers) for specified periods of time |
| This distribution window is typically exclusive against most other forms of non-theatrical movie distribution, such as pay-per-view, video-on-demand, premium television, basic cable and network and syndicated television |
| The length of this exclusive distribution window for in-store video retailers varies, but has traditionally ranged from 45 to 60 days for domestic video stores |
| Thereafter, movies are made sequentially available to television distribution channels |
| 10 _________________________________________________________________ [45]Table of Contents Our business could be negatively affected if (i) in-store video retailer distribution windows were no longer the first following the theatrical release; (ii) the length of the in-store video retailer distribution windows were shortened; or (iii) the in-store video retailer distribution windows were no longer as exclusive as they are now because newly released movies would be made available earlier on these other forms of non-theatrical movie distribution |
| As a result, consumers would no longer need to wait until after the in-store video retailer distribution window to view a newly released movie on these other distribution channels |
| We believe that the studios have a significant interest in maintaining a viable in-store video retail industry |
| However, the order, length and exclusivity of each window for each distribution channel is determined solely by the studio releasing the movie, and we cannot predict future decisions by the studios, or the impact, if any, of those decisions |
| In addition, any consolidation or vertical integration of media companies to include both content providers and digital distributors could pose a risk to the continuation of the distribution window |
| Our business is subject to changes in current rental video studio pricing policies |
| Recent studio pricing for movies released to in-store video retailers has impacted our video business |
| Historically, studio pricing was based on whether or not a studio desired to promote a movie for both rental and sale to the consumer, or primarily for rental, from the beginning of the in-store video distribution window |
| In order to promote a movie title for rental, the title would be released to in-store video retailers at a price that was too high to allow for an affordable sales price by the retailer to the consumer at the beginning of the retail in-store video distribution window |
| As rental demand subsided, the studio would reduce pricing in order to then allow for reasonably priced sales to consumers |
| Currently, substantially all DVD titles are released at a price to the in-store video retailer that is low enough to allow for an affordable sales price by the retailer to the consumer from the beginning of the retail in-store video distribution window |
| This low sell-through pricing policy has led to increasing competition from other retailers, including mass merchants and online retailers, who are able to purchase DVDs for sale to consumers at the same time as traditional in-store video retailers, like Hastings, which purchase both DVDs and VHS product for rental |
| In addition, some retailers sell movies at lower prices in order to increase overall traffic to their stores or businesses, and mass merchants may be more willing to sell at lower prices, and in some instances, below wholesale |
| These factors have increased consumer interest in purchasing DVDs, which has reduced the significance of the VHS rental window |
| We believe that the increased consumer purchases are due in part to consumer interest in building DVD libraries of classic movies and personal favorites and that the studios will remain dependent on the traditional in-store video retailer to generate revenues for the studios from titles that are not classics or current box office hits |
| Approximately 60prca of most studios’ revenues derive from their home entertainment divisions |
| We therefore believe the importance of the video rental industry to the studios will continue to be a factor in studio pricing decisions |
| However, we cannot control or predict studio pricing policies with certainty, and we cannot assure you that consumers will not, as a result of further decreases in studio sell-through pricing and/or sustained or further depressed pricing by competitors, increasingly desire to purchase rather than rent movies |
| Personal DVD libraries could also cause consumers to rent or purchase fewer movies in the future |
| Our profitability could therefore be negatively affected if, in light of any such consumer behavior, we were unable to (i) grow our rental business, (ii) replace gross profits from generally higher-margin rentals with gross profits from increased sales of generally lower-margin sell-through product; or (iii) otherwise positively affect gross profits, such as through price increases or cost reductions |
| Our ability to achieve one or more of these objectives is subject to risks, including the risk that we may not be able to compete effectively with other DVD retailers, some of whom may have competitive advantages such as the pricing flexibility described above or favorable consumer perceptions regarding value |
| Regardless of the wholesale pricing environment, the extent of our profitability is dependent on our ability to enter into and maintain arrangements with the studios that effectively balance copy depth and cost considerations |
| Each type of arrangement provides different advantages and challenges for us |
| The ability to negotiate preferred terms under revenue sharing agreements for the procurement of DVD, video games and VHS titles is crucial to our operations |
| Our profitability could be negatively affected if studios were to make other changes in their wholesale pricing policies and revenue-sharing agreements |
| 11 _________________________________________________________________ [46]Table of Contents Our business could be negatively impacted by new technology that provides alternate methods of video delivery |
| Advances in technologies such as video-on-demand or certain changes in consumer behavior driven by these or other technologies and methods of delivery, could have a negative effect on our business |
| In particular, our business could be impacted if (i) newly released movies were to be made widely available by the studios to these technologies at the same time or before they are made available to in-store video retailers for rental; and (ii) these technologies were to be widely accepted by consumers |
| In addition, advances in direct broadcast satellite and cable technologies may adversely affect public demand for video store rentals |
| If direct broadcast satellite and digital cable were to become more widely available and accepted, this could cause a smaller number of movies to be rented if viewers were to favor the expanded number of conventional channels and expanded content, including movies, specialty programming and sporting events, offered through these services |
| If this were to occur, it could have a negative effect on our video store business |
| Direct broadcast satellite providers transmit numerous channels of programs by satellite transmission into subscribers’ homes |
| Also, cable providers are taking advantage of digital technology to transmit many additional channels of television programs over cable lines to subscribers’ homes |
| We use a number of computerized information systems to manage our new release allocations, selection management, merchandise planning, pricing, markdowns, and inventory replenishment at each store and at our distribution facility |
| These major systems collectively support our supply chain |
| Through continuing processes of review and evaluation the Company is implementing modifications, enhancements, and upgrades to its information technology systems |
| In some cases these changes include replacing legacy systems with successor systems |
| There are inherent risks associated with modifying or replacing these core systems, including timely accurate movement and processing of data, which could possibly result in supply chain disruptions |
| We believe that the appropriate processes and procedures are in place through our software development life cycle (“SDLC”), design, testing, and staging implementation, along with obtaining appropriate commercial contracts and application documentation with third-party vendors supplying such replacement technologies |
| There can be no assurances that we will successfully modify, integrate, or launch these new systems or changes as planned or that they will occur without supply chain or other disruptions or without impacts on inventory valuation |
| These disruptions or impacts, if not anticipated and appropriately mitigated, could have a negative effect on our financial condition and results of operations |