Hasting Entertainment's annual report, filed yesterday with the SEC, reflects the state of physical media products and the need for physical retail to retool its stores.

Like its competitors, entertainment retailer Hastings has sought out growth segments to make up for falling CD and stagnant DVD sales. Unlike some of its competitors, Hastings is keeping its head above water and appears well positioned for the coming years.

Music accounted for 15% of Hasting's revenue in 2008 compared to 17% in 2007 and 20% in 2006. Other product categories remained stable last year. In 2008, video remained steady at 22%, books rose a percentage point to 23%, rental was even at 16% and video games was event at 11%.

Comp store music sales were down 16.3% in the fiscal year ending January 31, 2009 and were down 15.3% the previous year. Electronics were up 12.9% and up 20.3% the previous year. Movies were down 2.4% and up 4% the previous year. Used and budget items represented 15.6% of total revenues in 2008, up from 11.2% in 2007 and 9.9% in 2006.

Hasting's shareholder return is below that of the NASDAQ and S&P composites. A $100 investment on January 31, 2004 was worth $53.05 on January 31, 2009 (compared to $73.01 and $71.46 for the NASDAQ and S&P, respectively). Net income during that span dropped from $5.8 million to $4.1 million while total revenue dropped slightly from $542 million to $538 million. Sales per selling square footage dropped from $178.29 to $171.69.

Unlike many of its competitors, Hastings has maintained its store count over the last few years. It has altered its product mix to compensate for drops in physical media. Large gains have been made in recent years in trends, consumables and electronics. Music is obviously playing a lesser role. Music inventory dropped 22.5% last year, and the company projects it will spend $1.8 million this year to reformat the music, trends and children's books departments in 20 of its stores. The company has a very manageable debt load and enough room in its credit facility to fund operations, new stores and store reformations in the current fiscal year.