Is the music over for HMV?

Times are tough for the embattled entertainment retailer, with terrible half-year results raising concerns over its future. James Thompson reports

James Thompson@Thompj
Tuesday 20 December 2011 01:00

There has been plenty of feverish talk of troubled retailers, from the outdoor specialist Blacks Leisure to the lingerie chain La Senza. But there had not been a statement from HMV, the embattled entertainment retailer, since it revealed on 9 September that its first-quarter sales had fallen by 15.1 per cent.

But all that changed yesterday when the 258-store group unveiled grisly half-year results, which raised fresh concerns over its future, as its sales, losses and debt all headed in the wrong direction. Indeed, the retailer has been forced to conduct a strategic review of HMV Live, following an 8 per cent rise in the group's debt burden to £163.7m over the half-year to 29 October.

This is likely to lead to a sale of the operator of 13 concert venues, which more than doubled its operating profit to £3.4m over the first half.

Simon Fox, the chief executive of HMV, said he did not regret buying the music operator Mama for £46m in early 2010. But the timing of a potential sale of HMV Live – which may attract the interest of Universal Music – in a trough for buy-outs could hardly be worse.

Mr Fox said: "As we look at the level of our leverage – which is still high – it is one of the options we have open to reduce the level of our borrowings."

HMV sold its Waterstone's book business to the Russian oligarch Alexander Mamut for £53m as recently as June.

But the knives came out after HMV's pre-tax losses widened to £45.7m over the half year and its underlying sales tumbled by 11.9 per cent.

Neil Saunders, the managing director of Conlumino, said: "These results are dire and, unfortunately, they reflect the fact that HMV no longer has a viable business model. Well over half of all music and film sales are now made via digital downloads and with each passing year sales through physical stores dwindle still further. It is a tide that HMV can't stem and it means that the economics of its store-based model increasingly fail to stack up."

HMV's shares tumbled by 0.97p, or 25 per cent, to 2.90p yesterday, valuing its equity at just £12.2m.

Worse still, while HMV said it had "adequate resources" to continue for the foreseeable future, it said tough trading conditions "create material uncertainties which may cast significant doubt" on its ability to continue as a going concern.

John Stevenson, an analyst at Peel Hunt, said: "They are not in a Woolworths imminent demise position, but the business still needs to deliver significant change in order to continue."

Certainly HMV was bullish about its shift to selling more technology products, as it reduces its reliance on CDs and DVDs. It boasted a 42 per cent rise in technology sales at the 144 stores it has refitted with an expanded range, including headphones and speaker docks. HMV envisages technology will account for a third of total sales by 2014, up from a meagre 12 per cent today.

But the technology market is already overcrowded with the likes of Currys, Comet, Argos and the big supermarkets, as well as Amazon online.

Mr Stevenson says: "Technology is low margin and you have competition across the high street and on the net. While HMV is often the first place you think of to buy a [physical] CD or DVD, it is not necessarily the first place when you want to buy some headphones."

While HMV's £220m facility with its banks runs until September 2013, it is structured to incentivise early repayment in terms of rising interest rates.

Overall, as investors are unlikely to back a cash call, HMV appears to be running out of long-term options.

A defiant Mr Fox said he remained committed to maintaining a 240-plus stores. He added: "We are optimistic we will find a route through these difficult conditions. I think we have a positive future – we are a very important part of the film and music industry."

But after HMV's retail sales fell by 13.2 per cent in the seven weeks to 17 December, his optimism is not widely shared.

Off tune: tech drive

HMV's move to grow technology sales is the latest of its efforts to combat the long-term decline in sales of CDs and DVDs.

In 1998, it acquired the book chain Waterstone's for £300m and then paid £62.8m for Ottakar's in 2006. But HMV got out of books by selling Waterstone's for £53m in June.

It has also tried in-store smoothie bars, art-house cinemas and fashion – all of which have either been canned or hugely scaled back. For instance, as part of a joint venture with Curzon, it is still has a cinema in Wimbledon, London.

HMV now appears set to end its foray into live music venues after it paid £46m for Mama Group in 2010.

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