Competition from digital editions has put pressure on more than one bricks-and-mortar retailer, and that trend is largely behind the decision by Hastings Entertainment to find a merger partner, according to documents filed by the company in connection with its pending acquisition by Joel Weinshanker, whose National Entertainment Collectibles Association owns 12% of Hastings’s stock.

In its preliminary proxy statement, Hastings noted that the digital delivery of content has negatively impacted all the categories, including books, that had historically provided the chain with its largest revenues. Despite efforts to offset the impact of those declines on its bottom line—including closing a total of 20 stores over the last three years—the company has posted annual losses since the fiscal year ended Jan. 31, 2012, and its internal forecasts project that it will continue to report losses for at least the next four years. Given those projections, and worried that it could eventually run into a liquidity problem, the company decided its best alternative was to look for an a suitor, which led to the deal with NECA.

The historical and projected data provided by Hastings also showed how the inventory mix for the retailer has changed and will continue to change. Books was once its largest category, accounting for 22% of Hastings’s sales in 2012 ($101 million), but fell 14% in 2013 to $87 million, representing 20% of sales. Hastings executives projected book sales of $68.5 million in 2019, which would amount to 15% of estimated sales that year. Over the next five years, executives believe that Hastings’s strongest growth will come from the video games, trends (gifts), electronics, and cafe categories. Despite its decline, though, the book segment is still projected to be Hastings’s second-largest category five years from now.

In reviewing the last year, Hastings reported that it closed 10 stores and had 126 outlets remaining as of January 2014; the company said that it expects to close two to three stores in the current year, and it will open no new outlets. One of Hastings’s largest revenue channels has been used items, but those sales dropped by about 10% in the year, to approximately $60 million, and accounted for 13.8% of total revenue—down from 14.6% in 2012. One of its newer efforts, affiliated marketing, netted $2.3 million in revenue, drawn from about 1.4 million clicks on affiliate’s websites, with about 5% of consumers who clicked through buying a product.

According to the documents, Hastings still hopes to close the merger in the second quarter of the current fiscal year, though no date to approve the deal has been announced. The company has also filed a motion to dismiss a lawsuit that challenges the deal.

Hastings Sales & Earnings Projections

(in thousands)

Fiscal Years Ending Jan. 31
2015 2016 2017 2018 2019
Video $97,004 $94,341 $92,817 $91,773 $91,526
Books 80,677 76,647 73,110 70,460 68,508
Rental 48,616 48,132 47,836 47,178 46,461
Music 37,459 36,244 35,840 35,616 35,519
Video Games 48,267 52,445 56,108 59,130 61,545
Trends 43,176 46,265 48,340 49,735 50,772
Electronics 27,093 31,063 34,320 37,198 39,833
Consumables & Cafe 20,259 21,709 23,008 24,362 25,723
Recreation & Lifestyles 6,005 6,585 7,143 7,778 8,523
Musical Instruments 4,841 5,260 5,654 6,099 6,623
Other 17,572 19,796 20,882 21,276 21,187
Merchandise Coupons (1,817) (1,817) (1,817) (1,817) (1,817)
Total Revenue $429,151 $436,669 $443,241 $448,786 $454,403
Net Loss $10,657 $8,079 $7,299 $5,521 $2,818