Hast

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

2/23/09

HAST daily

3.25 3.00 2.75 2.50 2.25 2.00 1.75 1.50 1.25 volume

© BigCharts.com 150 100

Millions

200

50 0

Dec

09

Feb

MARKET DATA

Share Statistics

FY 2007

NASDAQ

FY 2008

FY 2009E

(12/23/08) Symbol

HAST

Revenues, $ Mn.

Current Price

$2.03

Gross margin

Low/ High 52 weeks

$1.26 - $8.91

Operating margin

Average Volume (3m)

24,638.7

Net margin

Market Capitalization

$20.31 Mn

Shares Outstanding

10.01 Mn

Diluted EPS, $

548.3

547.7

534.1

34.4%

35.6%

35.0%

2.0%

3.3%

1.3%

0.9%

1.9%

0.8%

$0.44

$0.93

$0.41

Source: Yahoo Finance, Analyst Estimates

Background Hastings Entertainment Inc. (the “Company,” or “HAST”) is a multimedia 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 seasonal merchandise. The Company is operating approximately 153 superstores mainly in medium-sized markets located in 20 states, primarily in the Western and Midwestern United States. HAST stores average approximately 20,000 square feet of sales space. The Company is also operating a multimedia entertainment e-commerce Web site offering a broad selection of books, software, video games, DVDs and music.

Hastings Entertainment Inc. (Nasdaq: HAST)

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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 mediumsized 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 elements of this strategy are the following: Superior Multimedia Concept: HAST stores present a wide variety of product categories with individual products 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 customers 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 products 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 management 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 survive 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 milHastings 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 number from 100 to 153 by the end of FY2009. However, the current financial crises and declining consumer spending negatively influenced the Company’s revenue, 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 associated 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)

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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 FY 2008 FY 2009 Revenue Сost of revenue Gross profit Selling, general and administrative expenses Operating profit Other expenses Income before income taxes Net income Diluted EPS Gross margin Operating Margin Net Margin

% Chg

Q3 FY2008

Q3 FY2009

% Chg

376.2 238.4 137.8 129.8

371.9 235.7 136.2 134.0

-1.1% -1.1% -1.2% 3.2%

122.3 77.9 44.4 43.6

114.3 73.0 41.3 46.0

-6.5% -6.3% -7.1% 5.4%

8.0 260.5 5.8

2.2 257.5 0.8

-72.9% -1.1% -85.6%

0.8 85.3 0.1

-4.7 79.2 -5.1

n/m -7.1% n/m

4.4 0.40 36.6% 2.1% 1.2%

0.0 0.00 36.6% 0.6% 0.0%

-100.2% -100.0% 0.0% -1.5% -1.2%

0.1 0.01 36.3% 0.7% 0.1%

-3.7 -0.36 36.1% -4.1% -3.2%

n/m n/m -0.2% -4.8% -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 opening 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: Cash and cash equivalents Merchandise inventories, net Deferred income taxes Prepaid expenses and other current assets Other assets Total Assets

190.0 4.0 171.6 3.4 11.0 70.2 260.2

213.6 4.2 188.5 9.8 11.0 76.9 290.5

Current liabilities Long term debt Other liabilities Total Shareholders’ Equity

113.0 40.6 4.8 101.8

128.6 58.9 4.6 98.4

Source: SEC Filings

Hastings Entertainment Inc. (Nasdaq: HAST)

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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 12/23/08

Ticker symbol

Price per Mrkt. Cap. Share, $ $ Mn

P/E 2008 2009

2008

2009

2009

EPS, $ 2010 %chg

Blockbuster Inc. Barnes & Noble Inc. Conns Inc. Best Buy Co. Inc. Trans World Entert. Corp. Median

BBI BKS CONN BBY TWMC

1.06 16.65 13.31 27.89 0.89

204 921 299 11,530 28

3.31 11.40 11.68 10.65 n/m 11.02

n/a 14.87 8.81 11.67 n/m 11.67

0.04 0.18 0.34 0.26 0.03 0.18

n/a 0.18 0.32 0.24 0.03 0.21

0.32 1.46 1.14 2.62 -1.56

n/a 1.12 1.51 2.39 -1.44

n/m -23% 32% -9% -8% -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 potential. As a result we rate HAST as a “Speculative Buy.”

Hastings Entertainment Inc. (Nasdaq: HAST)

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

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These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements. We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable. To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information). We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org. All decisions are made solely by the analyst and independent of outside parties or influence. 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 report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. 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 positions 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)

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