LONDON (AFX) - HMV Group PLC, the troubled music and books retailer, has warned on full-year profits for the second time in less than three months, blaming a further deterioration in trading conditions since January, particularly in its overseas markets and at Waterstone's.
The alert came as Simon Fox, the 86-year old group's new chief executive, revealed an 'exciting, radical and far-reaching' three-year plan to revitalise its UK businesses and counteract a declining music market. He also signalled the possible disposal of HMV's Japanese operation.
But his enthusiasm for the programme wasn't shared by investors and by 12.59 pm the stock had crashed 15 pct.
Over the nine weeks to March 10 the group's total sales increased 7.7 pct but were down 3.0 pct on a like-for-like basis, which strips out the impact of new and closed space.
Within this, HMV UK & Ireland's like-for-like sales were up 1.0 pct, but like-for-likes were down 7.2 pct and 7.6 pct in HMV Asia and HMV Canada respectively. Waterstone's like-for-like sales were down 6.1 pct, reflecting a soft post-Christmas book market.
'The board has taken a cautious view for the balance of the year and it now expects full-year profits to be below the current range of market expectations,' it said.
Prior to today's statement analysts were forecasting a year to end-April 2007 underlying pretax profit of 55 mln-64 mln stg, with a consensus of 61 mln stg, down from 98.2 mln stg last time.
Finance director Neil Bright told reporters he reckons the consensus will fall to about 50 mln stg.
Fox explained that although HMV UK & Ireland saw continued market share gains in all product categories, a planned improvement in gross margin and some targeted cost savings failed to materialise.
On the positive side he noted the remaining seven weeks of the financial year include the UK launch of the Sony PlayStation 3 games console and Easter.
The group is battling being squeezed by the supermarkets and online retailers as well as the threat posed by the increasing popularity of music downloads.
'This morning's disappointing news on current trading reinforces the need for change', said Fox.
'The markets in which we operate are both challenging and undergoing structural change. We have to address this with urgency.'
His transformation plan has three areas of focus -- driving cost efficiencies, revitalising the core business and generating new revenues from new channels.
He is targeting cost savings of 40 mln stg per annum by 2009/10 -- 20 mln stg from simplifying the HMV UK and Waterstone's supply chains, 16 mln stg from maximising group purchasing and head office synergies, and 4 mln stg from store closures.
A review of the group's UK store portfolio is underway, with some 10 pct of the Waterstone's estate of 330 stores, and 'less than a handful' of HMV UK's 235 stores, likely to be sold. No redundancies are currently planned.
To revitalise the core business new product categories will be launched across both the HMV and Waterstone's brands.
In HMV an enhanced range of portable digital products from suppliers including Apple, Bose, Samsung and Sony will be launched. Waterstone's will offer an expanded range of children's books and will introduce a range of quality gift stationery.
A new HMV store format is being developed, to be trialled from autumn 2007, that will give customers 'a truly new interactive experience', said Fox.
The new stores will have a 'refreshment hub', where consumers can combine taking a drink with access to the group's websites; kiosks for downloading and burning CDs; and an enhanced games area with a 'pay to play' facility.
Fox declined to reveal the location of the first new format store but noted a similar one opened yesterday in Yokohama, Japan.
A new loyalty card to drive spending across both brands and all channels will be rolled out during 2007/08.
Fox also sees 'a huge opportunity' to grow the business through generating new revenue from new channels.
HMV will launch a 'social networking site' for music, film and games enthusiasts, providing revenue streams from advertising, sponsorship and paid-for content. Strategic content partnerships have been agreed with Universal Music and 20th Century Fox.
HMV is also partnering with 3, the mobile phone company, providing content to its 3.75 mln subscribers. A number of HMV's larger UK stores will also host 3 in-store concessions.
Fox expects growth in HMV.co.uk and Waterstones.com will be accelerated by increased marketing, enhanced functionality and closer integration with stores.
He is targeting for HMV.co.uk to account for 20 pct of HMV UK sales by 2010, and Waterstones.com 9 pct of Waterstone's sales -- the figures are currently 6 pct and less than 1 pct respectively.
Fox will consider acquisitions of other sites. 'If things become available, I'm sure we'll take a look but our focus is to build our existing sites.'
Capital expenditure is expected to remain at 50-55 mln stg per year, with expenditure on new initiatives financed by savings from reduced new store openings.
HMV also flagged that it intends to broadly maintain current levels of dividend (7.4 pence a share last year) but wants to rebuild dividend cover to around 2.0 times within three years.
A strategic review of operations in Japan is now underway which may result in the sale of the business. A decision will be announced in June. HMV Canada remains core.
Nick Bubb, analyst at Pali International, cut his investment recommendation from 'buy' to 'hold', describing Fox's measures to grow HMV sales as 'a little underwhelming', and is disappointed the new store format won't be trialled until the autumn.
He is also concerned about the dividend, given that achieving cover up to the target of two times would require pretax profit to reach 85 mln stg in three years time.
Analysts at Merrill Lynch repeated a 'neutral' stance but said the strategic update looks 'fairly unexciting'.
Analysts at Citigroup reiterated a 'hold' recommendation but don't expect the plan to deliver any profit progress in the year to end-April 2008.
By 12.59 pm shares in the group were down 22-1/4 pence at 130-1/2, valuing the business at 526 mln stg.
A year ago the group's board rejected a 210 pence conditional bid from Permira, the private equity group. james.davey@thomson.com jdd/slm/jdd/vlb COPYRIGHT Copyright AFX News Limited 2007. All rights reserved. The copying, republication or redistribution of AFX News Content, including by framing or similar means, is expressly prohibited without the prior written consent of AFX News. AFX News and AFX Financial News Logo are registered trademarks of AFX News Limited
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