His Master's Value Stock

12/01/2010 9:30 am EST


John Snowden

Contributor, The IRS Report

Down-on-its-luck music retailer HMV is in the early stages of an impressive turnaround, writes John Snowden in The IRS Report.

HMV Group (London: HMV) has a rich heritage and its brand is probably one of the most well known, both in the UK and internationally. It is one of the world’s largest specialist retailers of entertainment and books.

HMV has 285 stores in the UK and Ireland and 125 in Canada. On the other side of the world, HMV operates five stores in Hong Kong and two in Singapore.

The arrival of the Internet and stiff competition prompted the start of HMV’s decline. In 2006, private equity group Permira popped in a bid of £847 million, worth 212 pence per share. The bid was rejected as the board thought it undervalued the group. Having looked at ways to enhance shareholder value, HMV bought out rival Ottakar through its Waterstones subsidiary in 2007.
A Louder Profit  
The results for the 52 weeks to April certainly reflected improvement all round. The demise of Woolworth and Zavvi on the high street probably helped and pre-tax profits of £74.2 million, up 17.7% from £63 million and record sales in excess of £2 billion, were up to market expectations. The total dividend for the year was unchanged at 7.4 pence per share, banking facilities were refinanced and in a difficult trading environment the company had successfully placed shares to fund future acquisitions.

The company was deleted from the FTSE 250 Index in June and this may have contributed to the share price dropping to 55 pence by the end of June, though it then rose strongly to 70 pence in July. [Shares closed at 46.25 pence in London Friday—Editor.]

In September, group finance director Neil Bright announced he was leaving in December, but the board issued another positive statement adding that the plans for the peak trading period were in good shape.

There were rumors that former Waterstones boss Tim Waterstone was planning a bid for the book division, but these were dismissed by chief executive officer Simon Fox, and no more has been heard.

Recent Misfires
The main recent upset was a plunge in first-quarter sales as shoppers stayed away from stores to watch the soccer World Cup. Sales in the UK and Irish stores were down about 15%, international sales were down 9%, while total group sales including the contribution from live music events were down 5.9% on the year.

The foray into live music initially hit a wrong note. Simon Fox told journalists that the company had been too ambitious in launching its inaugural High Voltage classic rock event in summer 2010 and that the company would refocus its attention on taking over the running of existing festivals.

The first quarter is traditionally lower than the others and the board remains optimistic for the Christmas period as a number of new products could become festive hits. I believe this is a classic recovery situation.

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