Analysis: Entertainment retailer HMV set for a difficult new year after weak trading in the first half

It is not great news for the entertainment retailer which relies on its third quarter, which includes Christmas, for 46% of its sales.

HMV’s struggle to ensure its proposition remains relevant in the digital age has been well documented. Its focus on technology as its traditional core markets deteriorate further - music, games and film - has not won over the cynics just yet. In fact HMV reported today that sales in the category - which it is very much pinning its revival hopes on - were below expectations in the last quarter, throwing in to doubt HMV’s turnaround strategy.

As part of its revival plan it is also selling its live business, which until only a few years ago it was desribing as its saviour.

Yet while the strategy has seemed muddled in recent years, some of the work has paid off. HMV revealed that its first half losses narrowed by £9.7m to £23.2m - although this was worse than expectations.

Like-for-likes slumped 10.2%, although it is a slight improvement on the 11.9% fall last year.

The sales slump seems particularly concerning considering the collapse of rival entertainment retailer Game this year.

Conlumino analyst Joseph Robinson says: “While this seems to have helped it to grow physical share, this is of little comfort in a market which is shrinking rapidly.”

In addition, HMV reported that the Olympic Games hindered trading, due to a lack of major releases in the summer.

Robinson adds: “HMV’s major challenge has been to evolve its increasingly irrelevant product offer; refocusing it towards complementary categories such as technology and video games. However, achieving such a significant evolution is a long term process and, unfortunately, the retailer is not yet at the forefront of consumers’ minds when purchasing electrical devices such as tablets and laptops.”

While discussions between HMV and its banks are said to be “constructive”, there is no telling how long they will remain supportive of a business in, what has been described as, terminal decline.

Seymour Pierce analyst Freddie George adds: “We are unconvinced that the shift in mix towards portable digital technology will be enough to offset the structural pressures on its core business of music, vision and gaming.

“In addition, while the disposal proceeds of HMV Live will be used towards debt reduction and management has a £220m bank facility due September 2014, the business remains highly indebted.

“We continue to see HMV as a value trap with potentially insurmountable structural issues.”

And with consumers becoming more savvy regarding technology and entertainment purchases, it is likely they are shopping around for the best deals this Christmas, with supermarkets,  electricals specialists and online retailers like Amazon getting the lion’s share of the sales.

Christmas may not prove very merry for HMV, setting up what is likely to be a very tough 2013 indeed.

Robinson adds: “There are very few bright spots on the horizon for HMV.

“In the short term, as the last man standing on the high street, suppliers have inevitably displayed eagerness to assist the retailer, having a mutually beneficial interest in its survival, particularly in the run up to the traditionally critical Christmas period. However, there is a danger that this will weaken somewhat as we go into 2013.”