High street names feel the pinch as Christmas sales tumble

Entertainment giant shuts 60 stores after dire results

HMV confirmed the City's worst fears of a dire Christmas yesterday by issuing a profits warning, revealing concerns over a key banking covenant test in April and unveiling plans to close 60 stores.

Its eponymous chain said it had taken a £20m hit from the recent "severe weather". But it also blamed a "weak" entertainment market for a 14.1 per cent slump in underlying sales in the UK and Ireland over the 10 weeks to 1 January.

Given the group's heavy reliance on Christmas trading, the calamitous update sent shares in HMV, which also owns the bookseller Waterstone's, down by 20 per cent yesterday to an all-time low of 26p.

It also dragged down shares in Game, the video game retailer, and Dixons Retail, the owner of Currys and PC World. HMV said its full-year pre-tax profits would now come in at the lower end of City guidance of between £46m and £60m, compared to the £74.2m delivered last year. The warning on profits is the latest blow for the group, which last month said its losses had nearly doubled to £41.3m for the half year to 23 October.

HMV is struggling to combat fierce competition from the supermarkets and internet specialists, such as Amazon and Play.com, selling DVDs and CDs, as well as from consumers downloading – both legally, and often illegally – the same entertainment products over the internet.

The group has diversified its revenue stream into cinema, live concerts, festivals and clothing recently but the changes are yet to have a substantial impact on its bottom line.

Total sales at HMV, which also has stores in Canada, Hong Kong and Singapore, fell by 13.3 per cent over the 10 weeks. Simon Fox, HMV Group's chief executive, said: "The pace of change in the markets in which we operate underlines the urgency with which we must continue to transform this business."

To slash its cost base, the company is to close 40 of its 285 HMV stores and 20 of its Waterstone's shops over the next year. A spokeswoman said the stores closed are located in major conurbations where there is already an HMV or Waterstone's shop.

"It is a rental cost reduction programme rather than a headcount reduction programme," she said.

Given its woes, HMV said it would be "tight" to meet a key covenant test under its bank facility in April relating to the ratio between its rent bill and earnings before interest, tax, depreciation and amortisation. But it expects the store closures to help it pass the test. The group also trumpeted an additional £10m of cost savings to be delivered in its next financial year. However, Andrew Wade at Numis Securities said: "With unabating structural pressures from new non-food grocery space and online competition, trading showing no sign of improvement and banking concerns now hanging over the business, we continue to [advise investors to] steer well clear."

John Stevenson, at Peel Hunt, said: "While short-term snow disruption is not a structural failing, we feel the market is changing at a faster rate than HMV." Total sales at the group fell by 9.1 per cent over the 10 weeks.

However, Waterstone's fared better than HMV. Sales fell by just 2.1 per cent over the 10 weeks and by just 0.2 per cent over the final five. The book chain was helped by Jamie Oliver's latest cookery tome, which it said was the "fastest-selling non-fiction book of all-time".

Mr Fox said: "Progress at Waterstone's this year has been pleasing, and we remain on track to meet our business and financial objectives for the end of the first year of our turnaround programme."