HMV admits mistakes after profits warning
Music and books retailer HMV today said it had paid the price for failing to react quickly enough to changing consumer demands as it issued its second profits warning since the start of the year.
Children’s books, a stationery range and new interactive HMV stores with a “refreshment hub” are now planned for the group as part of a recovery strategy aimed at boosting sales and saving £40m (€58.5m) a year by 2010.
More than 30 stores within its Waterstone’s book chain face the chop as the group plans to overhaul its shop portfolio and a number of jobs are under threat as part of a review of its back office operations, which will see the Waterstone’s and HMV head offices merge.
Some of the stores being reviewed are likely to be Ottakar’s sites, which HMV acquired last year.
The group said that 10% of its 330 book stores were under review, largely where there was overlap between the Ottaker’s and Waterstone’s shops, as well as its six university campus sites.
“Less than a handful” of loss-making HMV stores could also be closed, according to the firm.
HMV’s recently appointed chief executive Simon Fox, who joined the group last year, said the company hoped to be able to avoid redundancies “through redeployment and natural attrition”.
The group admitted sales had continued to plummet since January and warned its full-year pre-tax profits would be lower than City forecasts, which had already been trimmed to £63.5m (€92.9m), a 35% drop on 2005 figures.
Profit forecasts are now expected to come down to less than £50m (€73.2m) for the financial year.
Mr Fox said: “Waterstone’s and HMV are great brands, but have not adapted quickly enough to the way customers are now buying and consuming media. Our performance has suffered as a consequence.”
He added he had “every confidence” the three-year rescue strategy would turn the business around.
HMV will focus heavily on its online presence, aiming to more than treble the proportion of HMV sales via the internet, from 6% to 20% by 2010, while the group hopes to increase Waterstone’s web-based sales from less than 1% now to 9% within three years.
The firm will also launch a social networking site for music, film and games enthusiasts having struck partnership deals with Universal Music and 20th Century Fox.
Other plans in the strategy include the launch of a loyalty card, a bigger range of portable digital products, such as MP3 and MP4 players, and a new look for HMV stores.
Two new-format HMV stores will open in the autumn as a trial, featuring soft drink and juice bars where customers can log on to the music retailer’s website and social networking site, alongside games areas and kiosks where music can be downloaded and burnt onto CDs.
The changes mostly affect the group’s UK arm, but Mr Fox said they were launching a “strategic review” of its Japanese business, which could lead to a sale of the operation.
HMV’s overseas chains have performed poorly so far this year, with like-for-like sales in Asia down 7% in the nine weeks to March 10 compared to the same period last year, while Canada saw a like-for-like sales decline of 8%, although Mr Fox said there was “a lot of growth potential” in the Canadian market.
Investors appeared unconvinced by the group’s turnaround strategy, with shares falling 14% to 131p before lunchtime.
Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers, said today’s recovery plan announcement required “a leap of faith” from investors as HMV had failed to previously reach cost-cutting targets.
Details of the overhaul strategy come a year to the day since HMV rejected a takeover offer from private equity group Permira, which was offering 210p a share for the group – far higher than the 131p price per share today.
