U.K. Music Retailer HMV Sees Stock Drop Amid Weak Sales, Debt Concerns

LONDON - British music and DVD retailer HMV on Thursday said current weak market conditions have resulted in "material uncertainties facing the business," with the company likely to breach its debt covenants at the end of January.

our editor recommends

U.K. Entertainment Retail Giant HMV Swings to Full-Year Loss

U.K. Retail Giant HMV Hires New CEO

That could potentially lead to the company being forced into bankruptcy. However, the firm, which also reported a narrowed loss despite lower-than-expected revenue for its latest period, said it is in talks with its banks about its future.

HMV's stock was in freefall early Thursday. As of 9:45am London time, it was down 35.5 percent at $0.04 (2.65 pence), near its 52-week low. That gave the company a market value of just $18.1 million (£11.2 million).

Product suppliers, including Universal Music, came out to support HMV last January with a deal that allowed the retailer to reduce part of its big debt burden. Film studios and music labels are seen as having an interest in keeping the retailer afloat.

"The current level of Christmas trading has not been in line with the level expected, and the directors have concluded that it is probable that the January 2013 and April 2013 covenants will not be complied with," HMV said in predicting weaker-than-expected results for its fiscal year that ends in April. "The directors recognize that this represents a material uncertainty which may cast doubt upon the group's ability to continue as a going concern."
It particularly cited "volatility in the group's core music, visual and games markets driven by the release schedule and the growth of the digital market."

About its liquidity, HMV said: "The group is currently operating within the terms of its banking facility, and the directors continue to maintain regular and constructive discussions with the group's banks. The directors believe that the group will be able to meet their [debt] liabilities as they fall due," including a $48 million (£30 million) payment due in January. HMV also predicted it would have "adequate resources to continue in operational existence for the foreseeable future."

Revenue from continuing operations for the 26 weeks ended in October fell 13.5 percent year-over-year to $466 million (£288.6 million). HMV's loss after tax and exceptional items narrowed to $58.2 million (£36.1 million from $80.8 million (£50.1 million)

The latest financials included costs for store closures and an impairment loss of $16.8 million (£10.4 million) on the remeasurement of the fair value to sell off the remainder of the company's live music business.

Said CEO Trevor Moore: "HMV has had a difficult first half. However, the business has started to deliver a number of new initiatives, which will help to maximize the seasonal sales opportunity and provide a platform for growth in 2013."

Email: Georg.Szalai@thr.com

Twitter: @georgszalai