Entertainment retailer HMV became the latest big name British chain to warn it could go out of business as a downturn in consumer spending accelerates the long-term decline of its core CDs and DVDs markets.
With Britons’ disposable incomes being squeezed by rising prices, muted wages growth and government austerity measures, retailers are nervous about spending in the key Christmas trading period and heavy discounting is rife.
That is heaping pressure on businesses like HMV, which are also struggling with longer-term changes like the rise of digital downloading and internet retailing, as well as the march of grocers like Tesco into general merchandise ranges.
Outdoor goods retailer Blacks Leisure recently warned its shareholders they are unlikely to realize any value if the group is sold. And with retailers’ rent for the first quarter of 2012 due at the end of the week, fears are growing of a wave of retail failures equivalent to that which saw Woolworths go under in 2008-9.
Ninety-year old HMV, famous for its Nipper the Dog trademark, said on Monday it was currently able to meet its liabilities as they fall due.
“However, the economic environment and trading circumstances create material uncertainties which may cast significant doubt on the group’s ability to continue as a going concern in the future,” it said.
Its shares, down 88 per cent this year, fell 13.2 per cent.
HMV CEO Simon Fox said of the warning: “It’s something we’re obliged to do and our auditors are obliged to do.”
The group, which trades from 256 stores in Britain and Ireland, employing 4,500, ended the period with net debt of £163.7-million and has a market capitalization of just 14.2 million pounds.
To cut debt HMV has sold it Waterstone’s book chain and a Canadian arm, and in June secured a £220-million refinancing with its banks, with whom it is having “regular and constructive discussions.
Mr. Fox has now started a strategic review of its profitable HMV Live concert and festival division which could lead to a sale that he thinks could recoup more than the £60-million it paid for the unit in 2009.
“What we’ve looking at with (a sale of) HMV live is to de-leverage in order not to be paying higher interest rates (from January 2013) and in order to make sure that by the time we come to re-finance the business in September 2013 our overall levels of debt are lower,” Mr. Fox told reporters.
But some analysts think HMV needs to sell even more assets.
“We think that it needs to sell off both Live and (digital business) 7digital,” said Panmure Gordon analyst Philip Dorgan.
Mr. Fox, who has presided over four profit warnings this year, said he had not ruled out attempting to tap shareholders for more funds in the new year.
“It’s certainly not a route we’d wish to close off. But I’ve always said we’ve got to have a strong equity story in order to raise equity,” he said.
British online grocer Ocado added to the retail gloom on Monday with a profit warning.
HMV shares were down 0.51 pence at 3.39 pence at 1240 GMT.
The firm, the last national music and movies chain on Britain’s town centre shopping streets, posted an underlying pretax loss of £36.4-million in the 26 weeks to October 29, versus a loss of £27.4-million in the same period last year.
Analysts expect no better than breakeven in the full year to end-June 2012.
Total sales slumped 17.6 per cent to £364.9-million in the first half and like-for-like retail sales were down 13.2 per cent in the seven weeks to December 17, although this should improve with an extra Saturday (December 24) of trade this year.
“The next few days (are) crucial if it is to prevent its financial situation deteriorating further,” said Mr. Dorgan. “It is difficult to see equity value being created for the shares.”
Mr. Fox denied reports that suppliers, worried about HMV’s longevity, had refused to supply the firm. “Our suppliers have been extremely supportive. It’s in their interests that we continue to be on the high street and that we prosper,” he said.
HMV has been shifting its emphasis from CDs and DVDs to the growth markets of portable digital products such as headphones, speaker docks and tablet computers.
Mr. Fox said since 144 stores had been refitted with the extended technology range like-for-like technology sales had increased 42 per cent.
And he took some comfort from “outstanding” performances from selected products, with “The Inbetweeners” likely to be the firm’s biggest ever week one DVD.