The Hastings Entertainment chain continues to defy odds by showing increasing profits and holding its own on sales revenue. For the three-month period ended, Jan. 31, Hastings Entertainment reported improved profits of $5.8 million profit, or 54 cents per diluted share, on sales of $171.5 million. That's up from the $5.1 million, or 45 cent per diluted share, the company reported in the prior fiscal fourth quarter when revenues were $174.2 million.

The fourth quarter helped the Amarillo, Texas-based company to report annual net income of $10.2 million, or 93 cents per diluted share, on sales of $547.7 million. That's double the profit of the previous year, when the company reported net income of $5 million, or 44 cents per diluted share, on sales of $548.3 million.

"The retail industry faced its weakest holiday sales period since 2002, followed by a sluggish January, Hastings CEO John Marmaduke noted. "In spite of a challenging retail environment, our sales remained relatively flat." But through continued focus on margin management and cost control, the company was able to increase profits, he added.

For the year, the 153-store chain reported a 0.1% decline in comparable store sales, but sales were only down 0.8% while video rental, which accounts for nearly 21% of the chain's volume, registered a 4.8% decline. By product category, electronics led the way with a 20.3% comparable store increase followed by video games, which posted a 17.3% comparable-store increase.

Meanwhile, the cafe increased 10.9%; , trend merchandise, 8.1%; movie sales, 4%; consumables, 3.8%; and books, 2.1%. Music was the only category to post a decrease in comparable store sales, dropping 15.3%. With music remaining weak, the company is reformatting 35 stores to reduce the music department by 15%-20%, the company reported, and will use the space to introduce new products and expand inventory in other departments, including trend merchandise and childrens' products.

Even though the chain is reducing music space in some stores, we still believe we are a store destination for music," says CFO Dan Crow. The company plans to spend almost $25 million in capital expenditures this year to open three new stores, relocate six, and reformat the 25 stores. While the company expects the retail environment to remain challenging in the current fiscal year, management expects to grow pretax earnings by 16%, it said. It also projected positive comparable-store increases in the low single digits; net income to range from $10.5 million to $11 million, or 95 cents to $1 per diluted share.

At 3 p.m. EST, the company's shares were trading at $7.82, up 24 cents from the previous day close. The company announced its financial results before the start of trading today.