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Nick Bubb's Verdict: 7 days to save HMV's world?

Nick Bubb

Thanks to the support from its suppliers, HMV has much better stock levels and promotions than a year ago, so operationally the business is in good shape, but will consumers cooperate?

Thanks to the support from its suppliers, HMV has much better stock levels and promotions than a year ago, so operationally the business is in good shape, but will consumers cooperate?

The next seven days are, literally, “make or break” for HMV, as unless there is huge last-minute spending spree on the high street this week, it will not be possible to avoid some unpleasant discussions next month with Lloyds TSB and RBS, HMV’s principal banks.

It’s hard to be optimistic about the outcome, but there is effectively two more days of trading this year before Christmas, given the calendar shift, and HMV desperately needs customers to stop buying online through Amazon (once the order delivery cut-off comes in) or buying entertainment in the supermarkets and rush instead into HMV’s stores for their last-minute Christmas DVD, CD and video game gifts.

Hope springs eternal, but history teaches us that the trend is not HMV’s friend, as the LFL sales decline suffered in the first six months or so of the financial year has had a habit of persisting through the key trading period. And if LFL sales continue to run down by 10% in H2, as they did in H1, then HMV is likely to incur a full-year loss of £10m on an underlying basis, before exceptional costs.

HMV has not confirmed this scenario, but the company knows the writing is on the wall, as it made clear last Thursday, with the announcement of the interims, that trading has been below expectations and that it is likely to breach its banking covenants next month.

Back in early August, after the sale of the Hammersmith Apollo, HMV negotiated an extension of its existing £220m Bank Facility to 30 September 2014, but this was subject to financial covenants in respect of gearing and fixed charge cover (interest and rent), to be tested quarterly. And whichever way you cut, the next covenant tests at the end of January are unlikely to be met, with borrowings rising and EBITDA subsiding.

HMV’s net debt of £176m at the end of the first half was over £12m higher than at the end of October last year (despite the benefit of the £26m net proceeds received from the disposal of Hammersmith Apollo) and £207m had been drawn down from the Bank Facility. Cash will flow in over Christmas, but the financial position remains parlous.

HMV’s fate therefore lies in the hands of its bankers and suppliers. Assuming the suppliers remain onside, what will the bankers do? One option is simply to give CEO Trevor Moore more time to inject more energy and drive into the business, but improved staff morale and customer service doesn’t seem to have made much difference so far (given the structural downtrends in the entertainment market) and the results of the big push into technology have been disappointing.

The first discussion the banks will have with HMV next month will be over further asset sales, but the cupboard is pretty bare, with just a few scraps left of HMV Live to sell off, whilst the 8 HMV stores in Hong Kong and Singapore and the 9 Fopp stores in the UK are not worth a huge amount of money.

The only remaining asset of any great value that HMV could sell is its stake in the loss-making digital music business 7Digital, but although its well-connected boss Ben Drury raised $10m from a couple of strategic investors in October, HMV’s stake was diluted down from 50% to 35% after that refinancing. And in a buyer’s market, it’s difficult to see that this stake in 7Digital is worth enough to make much of a difference, given the scale of HMV’s debts.

The next discussion with the banks will be about HMV raising new equity, but it’s very hard to see that HMV has much scope here, given its lowly share price and a market cap of just £10m. Existing institutional shareholders won’t want to throw good money after bad, but it is possible that the entertainment suppliers could be persuaded to club together and inject enough new equity to safeguard HMV as its distribution channel.  

In the absence of any new equity funding, more store closures are inevitable and, whatever happens, HMV will not be running 230 stores in the UK this time next year. With strong doubts about whether the business is a “going concern”, the end game may well be one of CVA’s and pre-packs, but let’s all hope that HMV survives in some form. 

In the meantime, Retail Week readers can do their bit to save HMV by getting on down to their local HMV in the High Street to buy their Batman DVDs and Emeli Sande CDs for Christmas!

About Nick Bubb

Nick Bubb has been a leading retailing analyst for over 30 years. He is a well-known commentator on UK retailing and is a founder member of the influential KPMG/Ipsos “Retail Think-Tank”.


Readers' comments (8)

  • Ok, here is how I see it, HMV have sat back and allowed on-line to dominate over the past few years, rather than restructure ( happening now but too little to late ?) and get their customer base on side, Customer service has been non existent to date and that's what Makes the bricks side of the business different ( sounds like common sense right?) You want to be able to go in buy a track or an album or even listen to it first ! sync it to your phone or ipod or whatever and have a good experience. Instead you go in, are greeted with a bad experience the majority of the time, no knowledge where things are etc or they just don't seem to be interested. The Main problem of course is that they are overpriced. You can buy the same product locally cheaper - so why would you pay extra for a worse experience. Remember a few years ago you would see a CD in HMV for £15 and you could but it elsewhere for £10 well they should have invested that extra £5 they charged more wisely given the state they are in now.

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  • I've tried on three occasions to support HMV by buying CD’s and DVD’s as Nick suggests but have unfortunately been turned away by the huge Q at the checkout, the last one 26 people long.

    Fantastic I hear you say they’re getting the customers in, true they are but they’re also only operating 3 out of 6 tills right in the middle of lunch time. I’d argue that ‘operationally’ they've got it wrong, sure there are lots of staff on the floor who look like Christmas hires but obviously haven’t been till trained and therefore not being used.

    Maybe HMV hired them to late in a misguided attempt to save a few pounds?

    I'm not the only one frustrated as the run up to the tills are littered with out of place goods obviously dropped by exhausted consumers.

    It's a tough environment out there but you've got to get the basics right.

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  • Well lets be real...other than Christmas when does anybody go into these shops? Supermarkets are cheaper and quicker, online have the range and it so easy. I'm sure the banks will go with a CVA which might get them through the summer but after that...don't buy a gift voucher!

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  • Timing is everything ...strategy is everything.
    Online has completely decimated their business.
    Music - itunes for downloads, Amazon for CDs but rarely bought.
    Films - Apple TV, Netflix or Lovefilm or Amazon for the DVD.
    HMV just does not figure any more - their strategy should have been online long ago.

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  • Ian Middleton

    Which ever way you look at it the internet is either a hinterland or a bogeyman. It's the place stores like HMV should decamp to or it's the thing that has made them uncompetitive on the high street.

    Either way it begs the question - Do they need a high street presence at all? Or at least the number that they have. If not, their best alternative would be a pre-pack that dumps the stores and a resurrection as a pureplay website whilst retaining their distribution hubs.

    That applies to a hell of a lot of other retailers now, and as we stare down the barrel of yet another hike in overheads costs next April I can't see much of a positive answer as far as physical stores go.

    There's likely to be a lot of holes in the high street next year and I suspect a lot of bankers and investors starting to feel the cold wind of reality whistling round their ankles.

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  • I think we are past the tipping point for a large number of town centres with Comet now gone and HMV close to going on top of the others in the past 4 years, it is hard to see all these empty units being taken up.
    I hope I am wrong but with the increasing and unstoppable growth of online shopping the economics of a High Street presence do not make sense any longer.

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  • I believe the high street will survive but in a very different form. It is not going to be about shopping as it used to be, it will be about collecting what you have ordered, browsing the windows so you can see what to order and have a coffee and a sandwich. Traditional high streets must adapt and become leisure hubs to attract people to stay in them.

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  • Ian Middleton

    Anon - Haven't you just described a normal high street? I can't really see why you'd browse a window, then go home (or on your mobile) and order something and then go back and collect it.

    Also high streets are too expensive for that sort of operation now. Better to have a showroom on a retail park or another out of town location where rates are a quarter of what they are in prime locations.

    I see many industrial parks being re-tasked as spaces to be shared between non-competing online retailers with a selection of goods to be browsed whilst handling collections and same day local deliveries to online customers.

    High streets will probably continue to be over colonised by coffee bars and other F&B uses until they eventually start to see less and less demand for what they're offering without the draw of local retail to bring in custom. Then perhaps they can also decamp to the internet hubs I described above and offer a cup of coffee while your online order is brought to you.

    Think I may have hit on a new business idea here. Anyone want to offer me some funding?

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