HMV sinks further into the financial mire

Not only has the embattled music retailer issued another profit warning, but its debts have soared to almost twice its current market value...

by James Taylor
Last Updated: 19 Aug 2013
Is there any way out for HMV? The embattled music and games retailer saw its share price plummet today after warning that full-year profits will be 'moderately below expectations' (of £45m). And if that wasn't enough to spook the market, it added that its debt pile had grown to 'not less than' £130m, almost twice as much as it's currently worth; apparently its suppliers are struggling to get credit insurance, so it's having to pay for more of its stock up front. CEO Simon Fox is still talking a good game, and flogging Waterstones may keep the wolf from the door for a while. But with confidence in the brand draining away by the day, is there really any hope of turning this dire situation around?

HMV said today that 'trading conditions have remained challenging' since its last profit warning in January - i.e. it's still not selling much, and this time it can't even blame the snow. That's always good for lopping a few pence off the share price. However, that £130m debt pile is, if anything, more alarming – three times as much as some analysts had expected, and almost twice as much as its current market value of £76m. Indeed, HMV admitted today that it would fail its covenant tests (the conditions attached by the bank to their loans) when the full-year results come out.

HMV boss Simon Fox insists there's no need to panic; apparently the company is 'maintaining a regular and constructive dialogue' with its lenders, who 'continue to be supportive'. But the cynic might ask: why, exactly? HMV's traditional music business is being eaten alive by online competitors, and the drop in sales at its big high street stores is surely only going to get worse. It's already had to close its flagship Oxford Street store; are we really going to need an HMV on any high street in five or ten years' time?

To be fair, Fox clearly recognises this, which is why he's been diversifying into live music, one of the few areas of the industry that still makes money (and with some success, too). He also has a short-term option for raising funds that won't involve going cap-in-hand to shareholders; apparently, Russian shareholder Alexander Mamut is in talks about a potential bid for books arm Waterstone’s. This won't exactly solve HMV's problems at a stroke (and is unlikely to make its shares look any more attractive), but it might make its financial position a bit easier. At this rate, he may not have much choice.

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