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

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!