HMV stakes its future on technology as sales slump

Fears for HMV intensified yesterday after a "disappointing and unsatisfactory" year saw profits slump more than 60 per cent and analysts failed to back the management's turnaround plan.

HMV saw profits tumble to £28.9m in the 12 months to the end of April from £74.2m a year earlier. The fall combined with soaring debts forced the company to slash its dividend and it will not pay another for the foreseeable future.

Yet, after a strategic review, the management believes it can pull the music and DVD retailer out of the mire.

Chief executive Simon Fox said the management had "taken decisive action to restructure and successfully refinance the group". He added: "HMV remains a world-class entertainment brand, and we now have a very clear focus and strategy to drive cash generation and cost reduction, and reinvigorate the customer offer."

The 90-year-old company was forced to sell off Waterstones to A&NN Capital Fund Management for £53m in May to secure an agreement from its banks to refinance its debts.

It also announced on Wednesday that it had also sold off its operation in Canada for £2m to Hilco. The sales allowed the company to secure a two-year credit facility of £220m with its banks.

As part of the revised facility the group had to pull its full-year dividend, sticking with the interim payment of 0.9p. Last year the group paid 7.4p. The chairman Philip Rowley added that it would not pay another dividend until the group had repaid a £90m loan.

HMV had suffered a turbulent year following the deterioration of the economy as well as "changes in our core product markets," Mr Rowley said.

The chain was also hit by an unusually poor Christmas, a period which typically accounts for 40 per cent of annual sales. "Our operating and financial performance this year has evidently been both disappointing and unsatisfactory," he said. "However, the board has grounds to be optimistic about our ability to improve the performance of the continuing group."

Mr Rowley said that during the year the company "has been working hard on its plans for the future", adding the board believes "there is a clear place for HMV as a specialist retailer of entertainment products".

The group is to focus on high-growth technology as well as developing into a broader entertainment business. In March it outlined a three-year strategy which included developing the live and digital operations. By Christmas, 150 HMV stores will have a quarter of their space dedicated to technology. The company will increase sales of MP3 players and tablet computers in an attempt to offset the structural decline in sales of DVDs and CDs.

Ben Hunt, an analyst at Oriel Securities, said: "We are less enthused with the plans, core markets will continue to create a drag on profits and we have little faith in the company's intention to restore operating margin to 3 to 4 per cent."

He added that the £170m in debt, more than four times the market capitalisation of the company and up from £68m a year earlier, meant the risks to shareholders "are high".

Shares in the company fell slightly yesterday to 9.5p, and Kate Calvert, an analyst at Seymour Pierce, expects them to almost halve from here.

She said: "We continue to believe that the business is a value trap and management will struggle to grow profitability." She blamed structural pressures in the "core market place ".

Debenhams delight

One clothing chain managed to sidestep the carnage on the high street this year, with results backed as "outstanding". Debenhams produced what Oriel Securities analyst Eithne O'Leary called a "very strong trading statement" covering the 43 weeks to 25 June. The retailer shrugged off fears of a 1 per cent decline in like-for-like sales and lifted them 1.5 per cent. "Clearly the tactical pricing and promotions deployed over the last four months have worked," the analyst added. The chief executive Rob Templeman said the group had benefited from strong sales of cosmetics.

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