HMV has a hard time. And so do the company’s investors. The Christmas quarter should have showed the best performance of the retailers’ whole year, but instead, HMV disappointed with a huge drop in revenues.
So what happened? In the last 10 weeks to 1 January 2011, sales at HMV fell significantly – at shops that had been open at least two years, sales plummeted -10.8% compared to the same time last year.
Whose fault is it? Well, the management obviously points the finger at the bad weather in December, but that every retailer had to face. So the fault has to lie somewhere else.
There’s the rub
Taking a closer look at the numbers one can see how the wind blows. HMV plc is divided into four different businesses. HMV UK and Ireland, HMV International, HMV Live and its book-unit Waterstone’s.
Worst performer by far was HMV’s core business – the shop with the three pink letters. With a fall in revenues of -14.1% in the UK and Ireland, there is clearly something going wrong.
A research note by Citigroup suggests that HMV really is in a pickle. 2010’s profit before tax was at GBP73.9 million – fantastic compared to what is to come: 2011 should see a drop to only GBP46.0 million, with profits in 2012 and 2013 plummeting further to GBP42.0 million and GBP40.0 million.
Plan B
Bad news. So, what’s the way out? HMV’s management is hoping to trump with a Plan B: 60 stores are to be axed across the UK over the next 12 months, 40 of which likely to be HMV entertainment stores plus 20 Waterstone’s bookshops.
Cost savings of GBP10 million across all areas are also on the cards and the group is expecting to save money on the longer term by lowering its rent expenses.
Survival?
So, will HMV survive this? Maybe. First of all, HMV must make sure it doesn’t breach banking covenants at the end of its financial year in April. Then, it still has to face the fact that its original core business, the selling of music, won’t stop becoming tougher with strong online competitors such as iTunes and Spotify.
Taking all this into account, should one invest? Probably not. With a realistic outlook of no dividend for the coming years, HMV is no company for easy cash-ins. And Citigroup is not the only broker with a negative outlook. In the investment universe, seven brokers recommend sell on HMV shares, seven brokers have a hold rating and only five brokers would buy the stock, according to Reuters.
