HMV's nightmare before Christmas

The picture looks even bleaker than expected at the long-suffering entertainment chain, with directors admitting there is doubt over its future

In the latest profit warning from the beleaguered entertainment chain HMV, 23 words tell the sad story about how precarious its future has become. Following the group admitting its early Christmas sales had tumbled below expectations and that it would probably breach its banking covenants early next year: the 238-store chain said: "The directors recognise that this represents a material uncertainty which may cast doubt upon the group's ability to continue as a going concern."

That HMV is in this position will surprise few. The now-almost-hackneyed lines about it being battered by the online specialist Amazon, losing sales to the big supermarkets on the web and in-store, and consumers increasingly digitally downloading their music are as true today, if not more so, as they were five years ago.

Joseph Robinson, a senior consultant at Conlumino, the retail consultancy, said: "Fundamentally, HMV's key markets are in terminal decline and, with its major competitors having already exited the high street, there are very few opportunities to mitigate this through market-share gains."

But even by HMV's previous standards the amount of red ink on its half-year results was alarming, most notably the fact its debts have actually risen despite a huge sell-off of its assets.

While the group received £25.7m from the sale of its Hammersmith Apollo music venue in London, HMV's net debt rose by 8 per cent to £176.1m over the six months to 27 October. After the period end, HMV sold off the rest of its live music division Mama Group, and its 50 per cent stake in venue operator Mean Fiddler, for a paltry £7.3m. Last year, it had tried to slash its debt mountain by selling its Waterstones book business to the Russian oligarch Alexander Mamut for £53m.

However, Trevor Moore, the new chief executive of HMV, insisted the group has a "strong future", adding its UK stores receive 170 million visits a year and its website 50 million. Before Mr Moore took the helm in September, the group had started to try to offset the continuing decline in sales of DVDs and CDs by ramping up the amount of technology products, including docking stations, headphones and tablets, it sells.

But he said today: "Things have started more slowly than we would have hoped but there are still shopping days until Christmas. As we all know Christmas is getting later and later every year. We have bought well and have some excellent promotions." Mr Moore tipped Fifa 2013 and Skylander among games, Mrs Brown's Boys and Batman: The Dark Knight Rises among visual, and One Direction and Emeli Sandé in music as the big sellers but analysts believe there are few real blockbusters.

But the figures speak for themselves. HMV's cashflow was negative by £9.4m at the end of October, following a surplus of £7m last year. And its UK like-for-like sales tumbled by 10.2 per cent over the half year. Indeed, HMV is likely to miss its profit target of £10m for its current financial year to April, which was only made in August, by some distance.

More pressingly, with its debt mountain of nearly £180m, HMV's directors are likely to be forced into spending more time with its banks after their latest rendition of Auld Lang Syne.

"We will start discussions with our syndicate of eight banks early in January when we know exactly how Christmas and the New Year sales have gone," said Mr Moore.

In addition to the support of its banks, HMV is also now effectively reliant on its suppliers' support. Suppliers are thought to be providing funding of about £40m this year to HMV, largely in the form of discounts on products, and they have provisionally planned a similar amount for 2013-14.

The support of suppliers is understood to be linked to HMV's announcement in May to amend its existing £220m bank facility and extend it to September 2014. While the group remains in "constructive discussions" with its banks, it warned it would almost certainly breach two covenants tests in January and April. One relates to the ratio between underlying profits and its net debt.

Of course, Mr Moore, the former chief executive of ailing camera shops chain Jessops, may be able to deliver an improbable turnaround from the shop floor and its website.

But multiple sources believe HMV's best hope of survival may be the continuing support of its banks and suppliers, allied to a possible restructuring next year, although HMV has ruled out any imminent store closures.

After its shares tumbled by 1.6p, or 40 per cent, to just 2.5p today, the City appears to have grave doubts about any possible recovery.

Mr Robinson said: "The unfortunate fact remains that HMV's proposition has become increasingly irrelevant in the modern retail landscape."

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