HMV pushes ahead with roll-out of new-style stores after profits soar 25%

HMV will accelerate the roll-out of its next generation of stores after reporting strong profits and sales growth for the year ending 26 April, driven largely by buoyant sales of video and computer games.

However, shares in the entertainment-to-books retailer tumbled by nearly 8 per cent yesterday as investors fretted over the slowdown in consumer spending and delays in the restructuring of the supply chain for HMV's bookstore chain, Waterstone's.

HMV said its pre-tax profits rose by 25.2 per cent to £56.6m and total sales grew by 11.3 per cent. Simon Fox, the chief executive, said: "A year ago, we said this would be a year for stabilising the business, but actually it turned into a year of growth. We are only one year into the three-year turnaround strategy, but we are definitely ahead of schedule."

Like-for-like sales at HMV UK and Ireland rose by 11.4 per cent, while those at Waterstone's were up by 3.3 per cent. Mr Fox said HMV increased its share in the booming market for video games and technology products. These accounted for 21 per cent of total UK and Ireland sales over the year, up from just 14 per cent a year ago. Mr Fox added: "[The] games [market] is cyclical, but people expect it to be longer and stronger than previous cycles. The Wii [Fit] is a fantastic product and is still in short supply."

HMV shares fell by 17p, or 13.1 per cent, to 112.5p on another dismal day for many retail shares.

Mr Fox said HMV planned to convert a further 10 to 15 stores to its "next-generation" format, which includes transactional kiosks and multi-player game features, over the next 12 months. Five trial stores, including two at Heathrow's Terminal 5, had generated a 25 per cent uplift in sales, he added.

But he said the restructuring of the supply chain for Waterstone's, and the resulting cost savings, would be deferred until 2009-10. A new depot will deliver directly to stores and fulfil orders from the Waterstones.com website. Mr Fox said 1.5 million customers had signed up for the new Waterstone's loyalty card, launched last September, and HMV would launch a similar card this autumn. Sales on the HMV.com website grew by 40 per cent over the year.

HMV has launched a social networking site, Get Closer, and will relaunch its MP3 download service to be compatible with all devices, including iPods. But Freddie George, an analyst at Seymour Pierce, said: "We have a niggling concern that downloading will eventually impact sales of DVDs and CDs longer term."