HMV proves to be a sound investment as profits rise

HMV, the entertainment retail chain, said its strategy to diversify its revenues streams helped it post a rise in annual profits to just under £75m, as its decision to maintain the dividend sent its shares soaring yesterday.

The group recently launched a three-pronged strategy to turn around the performance of its Waterstone's book stores, move into live and digital music and evolve the type of products on offer at HMV outlets, in an effort to offset the long-term decline in sales of CDs and DVDs.

HMV Group's chief executive Simon Fox said that while the strategy was at an early stage, it was "progressing on track". For the year to 24 April, the group registered a 17.7 per cent jump in pre-tax profits, before exceptionals, to £74.2m, ahead of City forecasts. Total group sales rose by 3.1 per cent to £2.02bn – the first time it has passed the £2bn barrier.

HMV has recently diversified its strategy by branching in to fashion, mobile phones and Blu-ray Discs. This year, it also acquired Mama Group, in order to move into the lucrative market for live music.

"The most significant development in HMV's evolution as an entertainment brand over the past 12 months has been our entry into the fast-growing live music market, which in the UK is forecast to become one-third greater than the value of recorded music by 2012," Mr Fox said.

To drive sales of music downloads, HMV also bought a 50 per cent equity stake last September in the music website 7digital, whose technology powers the retailer's download service in the UK and Canada and an e-books site for Waterstone's.

Over the year to the end of April, HMV UK and Ireland, which has 285 shops, posted a 2.4 per cent drop in sales on stores open more than one year, dragged down by a final quarter affected by the heavy snow in January. HMV said it had benefited from a surge of 85 per cent in sales volumes of Blu-ray Discs in the market, but it had been hit by a slump in revenues from computer games.

Like-for-like sales also fell at Waterstone's by 6.2 per cent over the 12 months, but HMV struck an upbeat note on technology-related book products, despite a rocky year.

In January, the company fired Gerry Johnson, the managing director of Waterstone's, after a slump in sales over Christmas which Mr Fox described as "highly unsatisfactory". Mr Johnson was replaced by Dominic Myers, who was previously HMV Group's development director, as Waterstone's set out to deliver a more tailored book offer to local markets and put last year's supply-chain problems behind it.

Waterstone's said customers had bought nearly one million e-book downloads, adding that this would grow "strongly" as publishers increase the range of e-book from the current 30,000 titles. The bookseller also said it would benefit from the disappearance of Borders UK at the end of last year.

Investors sang along to HMV's decision to maintain its total dividend at 7.4p, following intense speculation that it would be reduced.

Shares in HMV Group soared by 6p, or by 10.5 per cent, to 63p. But HMV Group warned that the World Cup, with football fans staying at home or going to the pub, had led to "further disruption to trading" at the start of its new financial year.

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