HMV issues second profit warning

The Bookseller - 01.03.11 - Lisa Campbell

The HMV Group has issued its second profit warning of the year and will breach a bank covenant test when it announces full year results in April.

The struggling entertainment retail group, which also owns Waterstone's, admitted profits will be “moderately below market expectations” since trading had been poor since January, following on from appalling Christmas sales. Market expectations were for the Group to reach £45 million before tax, already down from the previous year's £74m and the Group is now negotiating with its bankers to change its borrowing conditions. HMV also admitted its year end debt will be at least £130m, higher than the previously mooted figure of £70m.

There was no mention of Waterstone's in the trading statement and a spokesperson for the bookseller said she had no further comment to make.

Chairman Robert Swannell is standing down and being replaced by Philip Rowley, the current senior independent non-executive director and a former finance director of B&Q. Swannell recently became chairman of Marks & Spencer and HMV said it needed someone who could devote more attention to its issues.

In January, the Group announced that 40 HMV stores and 20 Waterstone's stores would close before the end of the year following disastrous Christmas trading results. Today's trading statement has forced City analysts to renew calls for the break-up of the chain.

Russian investor Alexander Mamut, who owns a 6.1% stake in the HMV Group, is rumoured to be holding talks in London this week about potentially buying Waterstone's. A figure of £70m has been rumoured as the likely price tag for the chain, now more than HMV Group's market capitalisation.

Nick Bubb, analyst at Arden Partners, said: “The banks are said to be supportive of HMV's strategy, but we think this debt disaster will increase the pressure on the group to either sell Waterstone's or raise emergency equity. Neither is a particularly palatable prospect but we still think the least worst option is to sell Waterstones to Mr Mamut.”

Freddie George, analyst at Seymour Pierce, maintained his Sell stance on the shares. He said despite the speculation about a Mamut Waterstone's bid, he viewed investing as "a value trap". He added: "There are also growing doubts with the management strategy and HMV Live. HMV lacks scale, however, group wise, to overcome the very immediate structural concerns."

Waterstone's like-for-like sales were down 0.4% in the five weeks to 1st January but HMV UK and Ireland figures were down by 13.6% in that time.