Analyst: Victor Sula, Ph.D.

Initial Report
February 25th, 2009

HAST daily 2/23/09

3.25

3.00

2.75

2.50

2.25

2.00

1.75

1.50

1.25

volume © BigCharts.com
200

Millions
150

100

50

0
Dec 09 Feb

MARKET DATA

Share Statistics NASDAQ FY 2007 FY 2008 FY 2009E

(12/23/08)
Symbol HAST Revenues, $ Mn. 548.3 547.7 534.1
Current Price $2.03 Gross margin 34.4% 35.6% 35.0%
Low/ High 52 weeks $1.26 - $8.91 Operating margin 2.0% 3.3% 1.3%
Average Volume (3m) 24,638.7 Net margin 0.9% 1.9% 0.8%
Market Capitalization $20.31 Mn
Shares Outstanding 10.01 Mn Diluted EPS, $ $0.44 $0.93 $0.41

Source: Yahoo Finance, Analyst Estimates

Background
Hastings Entertainment Inc. (the “Company,” or “HAST”) is a multime-
dia entertainment retailer that operates entertainment superstores that buy,
sell, trade and rent various home entertainment products, including books,
music, software, periodicals, new and used CDs, DVDs, video games, video
game consoles and electronics, as well as consumables and trends products
such as apparel, T-shirts, action figures, posters, greeting cards and sea-
sonal merchandise.

The Company is operating approximately 153 superstores mainly in medi-

um-sized markets located in 20 states, primarily in the Western and Mid-
western United States. HAST stores average approximately 20,000 square
feet of sales space. The Company is also operating a multimedia entertain-
ment e-commerce Web site offering a broad selection of books, software,
video games, DVDs and music.

Hastings Entertainment Inc. (Nasdaq: HAST) 1

 Analyst: Victor Sula, Ph.D.
Initial Report
February 25th, 2009

The Company aims to enhance its position as a leading multimedia entertainment retailer primarily in medium-
sized communities by expanding and remodeling existing stores, opening new stores in selected markets and to
a lesser extent, offering its products through the Internet. The Company’s strategy is designed to build consumer
awareness of the Hastings concept and achieve high levels of customer loyalty and repeat business. The key ele-
ments of this strategy are the following:

Superior Multimedia Concept: HAST stores present a wide variety of product categories with individual prod-
ucts tailored to local preferences in a dynamic and comfortable atmosphere with exceptional service.

Medium-Sized Market Focus. The Company targets medium-sized markets with populations generally less than
250,000 to capitalize of customized product selection in both new and used products, low pricing strategy, the
ability to trade-in and customer service.

Customer-Oriented Format. HAST stores provide an easy-to-shop, open-store atmosphere by offering major
product categories in a “store-within-a-store” format. HAST stores position product with customer affinities
together in three departments (e.g., books, music/video games/trends and video) that are designed to allow cus-
tomers to view the entire store.

Low Pricing. The Company’s pricing strategy is to offer value to the customers by maintaining low prices that
are competitive with or lower than the prices charged by other retailers in the market.

Used and Budget-Priced Products. The Company is buying and trading the customers’ and third-party vendors’
CDs, DVDs, videogames and books to sell as used product in order to leverage the value of its offering.

Internet. To augment the store offering, HAST operates an e-commerce Internet Web site (www.gohastings.
com), which enables customers to electronically access more than 1.5 million new and used entertainment prod-
ucts and unique, contemporary gifts.

Investment Highlights
Niche business with low prices and increased competitiveness in a crisis environment

HAST is a niche business with a strong competitive advantage in small town

markets. The Company’s strategy is to offer low prices that are competitive with
or lower than the prices charged by other retailers in the market. HAST’s low
pricing structure results from: (1) the ability to purchase a majority of products
directly from publishers, studios and manufacturers as opposed to purchasing
from distributors; (2) the proprietary information systems that enable manage-
ment to make more precise and targeted purchases and pricing for each store;
and (3) the focus on maintaining low occupancy and operating costs.

We believe the discount retailer business model will allow the Company to sur-
vive in a crisis environment since its offering is more resistant to recession.

Solid revenue base

Over the last decade, HAST revenue has grown from approximately $350 mil-

Hastings Entertainment Inc. (Nasdaq: HAST) 2

 Analyst: Victor Sula, Ph.D.
Initial Report
February 25th, 2009

lion to nearly $550 million in FY2007 and FY2008. The growth was primarily driven by the growth of stores num-
ber from 100 to 153 by the end of FY2009.

However, the current financial crises and declining consumer spending negatively influenced the Company’s rev-
enue, which is likely to decline 2%-3% in FY2009 compared to 2008.

Revenue, $ Mn

Source : SEC Filings, Fiscal year ending January 31.

Despite the revenue decline the Company is likely to report positive earning in FY 2009 and 2010.

The declining revenue has significantly altered the Company’s operating margins and made HAST to report
losses in Q3 FY2009. Going forward, the management lowered the FY2009 EPS guidance from $0.95-$1 range to
$0.5-$0.55. Management citied lower revenue due to decreasing consumer spending and greater expenditures as-
sociated with the operation of new, expanded and relocated stores, as well as increased store utility costs.

Quarterly revenue and operating margin, $ Mn

2009

Source: SEC Filings, Fiscal year ending January 31.

Hastings Entertainment Inc. (Nasdaq: HAST) 3

 Analyst: Victor Sula, Ph.D.
Initial Report
February 25th, 2009

The analyst consensus forecast EPS in the range of $0.41 for FY 2009 and $0.50 for FY 2010.

Income Statement, $ Mn

9 months 9 months % Chg Q3 Q3 % Chg

FY 2008 FY 2009 FY2008 FY2009

Revenue 376.2 371.9 -1.1% 122.3 114.3 -6.5%

Сost of revenue 238.4 235.7 -1.1% 77.9 73.0 -6.3%
Gross profit 137.8 136.2 -1.2% 44.4 41.3 -7.1%
Selling, general and 129.8 134.0 3.2% 43.6 46.0 5.4%
administrative expenses
Operating profit 8.0 2.2 -72.9% 0.8 -4.7 n/m
Other expenses 260.5 257.5 -1.1% 85.3 79.2 -7.1%
Income before income 5.8 0.8 -85.6% 0.1 -5.1 n/m
taxes
Net income 4.4 0.0 -100.2% 0.1 -3.7 n/m
Diluted EPS 0.40 0.00 -100.0% 0.01 -0.36 n/m
Gross margin 36.6% 36.6% 0.0% 36.3% 36.1% -0.2%
Operating Margin 2.1% 0.6% -1.5% 0.7% -4.1% -4.8%
Net Margin 1.2% 0.0% -1.2% 0.1% -3.2% -3.3%

Source: SEC Filings, Fiscal year ending January 31.

Decent balance sheet

HAST has a decent balance sheet with cash reserves nearing $4 million and positive operating cash flows. The
Company’s main capital requirements arise from the purchasing, warehousing and merchandising of inventory
and rental products, opening new stores, expanding/reformatting existing stores, as well as updating existing
and implementing new information systems technology.

Despite the fact that HAST has positive operating cash flows, it might use borrowing facilities to fund the open-
ing of new stores, relocation and reformatting of existing stores. Despite these efforts the reported revenue was
rather flat, which has driven down the price of the Company’s stock.
Balance Sheet, $ Mn

31-Jan-08 31-Oct-08

Total current assets: 190.0 213.6

Cash and cash equivalents 4.0 4.2
Merchandise inventories, net 171.6 188.5
Deferred income taxes 3.4 9.8
Prepaid expenses and other current assets 11.0 11.0
Other assets 70.2 76.9
Total Assets 260.2 290.5

Current liabilities 113.0 128.6

Long term debt 40.6 58.9
Other liabilities 4.8 4.6
Total Shareholders’ Equity 101.8 98.4

Source: SEC Filings

Hastings Entertainment Inc. (Nasdaq: HAST) 4

 Analyst: Victor Sula, Ph.D.
Initial Report
February 25th, 2009

Expansion of the Internet sales

HAST’s proprietary goShip system allows it to list selected stores’ inventory on goHastings.com and Amazon
Marketplace. Orders are sourced to approximately 110 of the Company’s stores and generally shipped within 72
hours. This has allowed HAST to leverage its store inventory to a wider group of customers. This increases store
revenue and enhances the performance of the product inventory.

Investment sentiment
HAST is traded with discount to peer group valuation multiples, mainly due to the fact that management has
significantly lowered the guidance for FY 2009 ended January 31. In addition, the disappointing results for Q3
FY2009, with significant loses and increased debt, have caused the market to imply that the Company might have
liquidity problems.
Compariative analysis

Company Name Ticker Price per Mrkt. Cap. P/E EPS, $

12/23/08 symbol Share, $ $ Mn 2008 2009 2008 2009 2009 2010 %chg
Blockbuster Inc. BBI 1.06 204 3.31 n/a 0.04 n/a 0.32 n/a n/m
Barnes & Noble Inc. BKS 16.65 921 11.40 14.87 0.18 0.18 1.46 1.12 -23%
Conns Inc. CONN 13.31 299 11.68 8.81 0.34 0.32 1.14 1.51 32%
Best Buy Co. Inc. BBY 27.89 11,530 10.65 11.67 0.26 0.24 2.62 2.39 -9%
Trans World Entert. Corp. TWMC 0.89 28 n/m n/m 0.03 0.03 -1.56 -1.44 -8%
Median 11.02 11.67 0.18 0.21 -8.2%

Hastings Entertainment Inc. HAST 2.03 20 4.06 n/a 0.04 0.04 0.5 n/a 22%

Source: Yahoo Finance!

However, we consider these problems as temporary and driven mainly by the recession environment. HAST is
a well-established regional discount retailer with more than 40 years of history, solid geographical presence and
store base, and significant pricing advantages that position its business model as recession resistant. Moreover,
comparing to our peer group selection HAST shares seems very cheap and could offer significant upside poten-
tial. As a result we rate HAST as a “Speculative Buy.”

Hastings Entertainment Inc. (Nasdaq: HAST) 5

 Analyst: Victor Sula, Ph.D.
Initial Report
February 25th, 2009

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I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this
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Victor Sula, Ph.D. - Senior Analyst

Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant posi-
tions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where
he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D.
degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.

Hastings Entertainment Inc. (Nasdaq: HAST) 6