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HMV still spinning out the initiatives

HMV Group appears somewhat reliant for growing its sales on the death of competitors (Woolworths, Zavvi and Fopp) and to a lesser extent artists (Michael Jackson), which does not exactly bode well for the group’s long-term future as there are none of the former left and few musicians with as big a following as the latter. By Glynn Davis, City editor


HMV still spinning out the initiatives

As the last-man standing on the high street selling categories such as music, DVDs and video games HMV has proven that its model is more resilient than its rivals. This is helped by the fact chief executive Simon Fox has been pursuing a three-year transformation strategy that involves tapping into all aspects of the fast-changing entertainment business.

Initiatives include the acquisition of multi-player games concession Gamerbase, the la

unch of a multi-channel loyalty card, entry into the ebooks market, the launch of a pre-played games offer, a music downloads service, a joint venture with Mean Fiddler Group that takes HMV into the live music and ticketing market, and partnerships with Curzon for cinemas and Orange for mobile phone concessions.

Undoubtedly some of this will stick and some won't. How much of its does will ultimately answer one of the key questions that investors should have about HMV - whether or not it has the capacity to deliver growth beyond the three-year plan?

At least under Fox the business looks like it is being positioned to have a fighting chance of being relevant in today's and tomorrow's market. The only difficulty is that nobody really knows how the entertainment industry will look tomorrow.

Even media gods continue to be proved wrong. Rupert Murdoch was applauded for his timely purchase of MySpace but is now being criticised for it losing ground to Facebook and for failing to leverage its assets across the rest of his sprawling empire.

At HMV, the numbers for now are at least proving reasonably attractive. For the 12 months to April 25 group sales increased by 4.4 per cent and pre-tax profits came in at the top-end of market expectations at 63 million.

Its core division HMV UK and Ireland (that accounts for 1.15 billion of the group's total sales of 2 billion) delivered like-for-like sales up 1.9 per cent as the company continued to benefit from increasing the revenues it derives from video games.

This category accounts for 24 per cent of the division's total sales compared with 20 per cent the previous year, which is a bit of a worry as this market is highly cyclical due to its heavy reliance on new releases from the key games franchises.

On a positive note HMV took market share in all categories in the UK on the back of the demise of a number of its high street rivals. It will be interesting to see how it holds onto this over the coming months as online competitors continue to grow their businesses.

This is a worrying area of weakness for HMV as online sales still only account for only 10 per cent of turnover, against a target it set of 20 per cent by 2010. With the entertainment category increasingly moving online this is not overly impressive and suggests there are some weak links in the execution of Fox's strategy.

The other weak link continues to be Waterstone's - where like-for-like sales fell 3.8 per cent over the 12 months to April 25 - as it continues to suffer from the general pressures hitting the book market. The only saving grace for HMV Group is that the division accounts for less than 30 per cent of group sales.

One short term attraction of the group for investors is the retreat its share price has made from the 150p level at the end of April to a current 115.5p, which represents significant underperformance against the sector. But longer-term there still remains an elephant in the room: the structural shifts that are taking place in the industry. And this is out of everybody's control.

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