Pre-Christmas gloom casts new doubts over HMV

HMV admitted it is almost certain to breach banking covenants at the end of January and again at the end of April

The future of the 240-strong HMV chain was plunged into doubt again today after it admitted that worse-than-expected sales in the run-up to Christmas meant it would miss profit forecasts and have to renegotiate terms with its banks.

The music, films and games group said: “Current market trading conditions result in material uncertainties facing the business.”

HMV admitted it is almost certain to breach banking covenants at the end of January and again at the end of April.

Chief executive Trevor Moore, who only took the role at the start of September following the departure of Simon Fox, said: “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.”

He said suppliers had been supportive and banks constructive as he tries to implement a turnaround plan.

HMV said that while it normally does 47% of its business in the third quarter, “the current trading performance is not in line with expectations”.

Moore would not be drawn on how far behind his hopes current sales are running. He said: “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.”

But analysts pointed out that there are few real blockbusters lined up in all three of HMV’s sales areas for this festive season.

Moore is tipping Fifa 2013 and Skylander among games, Mrs Brown’s Boys and Batman: The Dark Knight Rises among visual, and One Direction and Emili Sandé in music as the big sellers.

Finance director Ian Kenyon said HMV will be able to make big payments — £50 million of working capital and £30 million on the amortisation facility — when they fall due in January. He said: “Our cashflow is always negative as we stock up for Christmas and then turns positive as we sell that stock.”

HMV blamed the Olympics and the lack of big new releases for a 16% fall in same-store sales in the UK in the first half to October.

Total sales fell 13.5% to £288.6 million while operating losses were reduced from £33.2 million to £24.2 million.

That led to a net cash outflow of  £33.5 million with net debt rising to £176 million.

HMV shares, which had ticked up sharply ahead of today’s announcement, fell back by 40%, or 1.64p,  to 2.47p.

“We continue to see HMV as a value trap with potentially insurmountable structural issues,” said Freddie George, analyst at Seymour Pierce, who says that the company’s shares are worth no more than 1p.

Glyn Mummery, partner at FRP Advisory, the restructuring firm, said  “HMV’s turnaround strategy is still under extreme pressure with further radical surgery still needed to its High Street presence, to ensure it can survive the push into the games market while battling head-on with pure-play internet retailers.”

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