HMV: The Last Music Shop on the UK High-Street

HMV was a profitable company with a shrinking business as ever more of its customers buy music as downloaded MP3s straight to their Smartphones or buy CDs, DVDs and Blu-Rays from Amazon or Sainsbury. HMV is the last UK High Street music store, as all the others gave up to the online competition. "Everyone" knows they can't survive, but I thought the perceived gloom was overdone, especially given the profitable and popular bookseller, Waterstone's also belonging to HMV. With a few shop closures, more emphasis on their online exposure and a radical re-brand of the remaining HMV shops to appeal to those who want to browse music on the High Street. Unfortunately even Waterstones business is vulnerable to downloaded books to read on the Amazon Kindles, Smartphones or iPads.

HMV seem to be having another tough Christmas in 2011 after a very bad Christmas in 2010, with poor sales (down about 10%) partly due to the unusually heavy snow. They made profit warnings and perhaps more importantly announced that they will be unable to meet some terms of their bank loans. They have a market capitalization significantly smaller than their outstanding debt (approximately £70 million and £240 million respectively, at time of writing). They closed many of their 285 HMV and sold the 312 Waterstone's shops.

2011 Christmas Sales

HMV has changed a lot since Christmas 2010, with a far smaller presence on the High Street after the closure of many of the stores and the sale of Waterstone's book shops and HMV Canada. They still have significant debt and may have to close more shops and possibly even sell off their live music division. Like-for-like sales leading up to Christmas are down on last year and losses and debt have increased, although technology sales have increased significantly.

I bought HMV shares last year as a value investment, sold fairly quickly after a big rise in the price and a profit I couldn't resist, then bought again at an even lower price, repeating the process a couple more times and even getting a reasonable dividend. I thought I had become a genius trader (despite my original intention of this being a value investment) I still hold my last purchase of a few thousand shares at a significant loss that would wipe out my previous gains if I sold now, but I am going to hold in the hope HMV comes up with some sort of clever strategy.

HMV will disappear from the High Street unless something is done. People like to browse through music titles and touch real tangible, physical objects rather than digital downloads. They also make far better presents, so there must be some business for a few years to come, but HMV needs to find a reason for people to want to continue coming to their shops: A trendy music orientated coffee shop for teenagers to hang out, perhaps, or alternatively concentrate more on vinyl, the music format that just refuses to die and really is best purchased from a shop or maybe a more grown-up atmosphere for classical music lovers, who haven't yet moved to downloaded (generally lower quality) music. Unfortunately it would be impossible to suit all of these customers. The teenagers don't want to hang out with old people (and vice versa)

The Waterstone's bookshop chain will probably still have to be sold to help pay the bills, assuming they can get a good price for it. Alexander Mamut (friend of Roman Abramovich and former adviser to Boris Yeltsin's Russian government) is expected to make an offer of £35 million for Waterstone's in April 2011. Alternatively there could be a rights issue (more shares created and sold to investors to raise more cash) but the existing shares would be diluted so much, due to the low valuation of the company, that this may not be viable, but I think there is hope for HMV's survival, if a suitable rescue package can be devised, even if it didn't turn out to be the great value investment I had hoped for.

Update (20th May 2011): HMV to sell Waterstone's Bookshop for £53m

HMV has agreed to sell the Waterstone's bookshop chain, as widely expected, although for perhaps more than had been feared (A&NN Capital Fund Management will pay £53m versus estimates of about £35m, although the sale has to be approved by shareholders and pension trustees)

Update (28th June 2011): HMV sell Canadian stores for £2m

HMV Canada was sold to Hilco, a restructuring company, for just £2m to help reduce debts.

Update (30th June 2011): HMV results

HMV said like-for-like sales fell 14.5% for the year to April. The firm remains in profit, although, before tax the profit was just £200,000.

Sales of CDs and DVDs have declinded due to competition from supermarkets and online downloads, but HMV is expanding its live ticketing, and digital music and equipment business.

Update (19th December 2011)

HMV may sell its live music division to raise funds. Like-for-like sales dropped 11.6% (26 weeks to October versus last year)

pre-tax loss of £36.4m (down £9m)

net debt of £163.7m (up from £151.6)

like-for-like technology sales up 42% in refitted shops

15 more UK stores to be closed to reduce costs

like-for-like sales in the seven weeks to 17 December down 13.2%

Update (20th January 2012)

HMV share-price rose 200% today. HMV is still here and has today, been given a reprieve. A deal struck with their banks and suppliers has given HMV more time to reduce debts, which they aim to halve in three years.

Update (1st June 2012)

HMV has agreed to sell its London comedy and music venue, the Hammersmith Apollo, to Stage C for £32m, which will be used to pay down debt and allow HMV to extend £220m bank loans until September 2014. The Apollo was bought by HMV in 2010.

Survival Plans for HMV?

HMV remains in profit (albeit ever shrinking profit)

HMV owns 50% of a digital downloads business: 7digitaland has an agreement with RIM and the Blackberry Playbook (competitor to the iPad) will come with the 7digital download app built in

HMV will refit 150 stores in September, to allocate selling space for new digital devices: tablets, handhelds etc. and to coincide with the beginning of the Christmas sales market.

I won't be buying any more HMV shares, even at less than 10p each, but I also won't sell the few I have.