HMV has warned it might breach its banking covenants despite narrowing losses and improved like-for-like sales in the first half.
The entertainment specialist said the “current level of Christmas trading has not been in line with the level expected” and that it is “probable” it will not comply with its January and April 2013 covenants. The retailer makes around 46% of its sales in the third quarter, which includes Christmas.
First half like-for-like sales improved from an 11.9% fall last year to a 10.2% fall in the 26 weeks ended October 27, 2012. The retailer made an operating loss of £24.1m, up from a loss of £33.2m last year.
Total sales fell 13.5% to £288.6m on last year.
HMV chief executive Trevor Moore said: “HMV has had a difficult first half. However, the business has started to deliver a number of new initiatives that will help to maximise the seasonal sales opportunity and provide a platform for growth in 2013.
“Additionally, as we trade through this period we will continue to develop further initiatives with our suppliers and I will provide updates at the appropriate time.”
At the end of the period, HMV had a 38% share of the physical music market and a 27% share of the physical visual market after working with suppliers on promotions after a lackluster summer release schedule attributed to suppliers being wary of releasing products during the Olympics and Diamond Jubilee.
HMV said it had not seen the pick-up in games and technology sales it had hoped for despite the collapse of rival Game and the increased demand for headphones and tablets. Losses in the UK business narrowed by £9.7m to £23.2m.
Moore said he has introduced a number of initiatives to improve service including reducing administration tasks for store managers and training shopfloor staff on technology product knowledge.
He added: “I have also initiated a comprehensive review of the group’s cost base to reflect the simplification of the group following the disposal of the live business. At the appropriate time I will provide further updates on the secure future that I believe HMV can enjoy.”
Independent retail analyst Nick Bubb said: “Beleaguered HMV has warned with its interim results that ‘material uncertainties’ face the business, with a probable covenant breach looming at the end of January. How far this is just an automatic ‘health warning’ is unclear, as the rest of the statement is all quite upbeat, with first-half losses reduced somewhat and the new chief executive Trevor Moore waxing lyrical about the support HMV is getting from its suppliers etc. There is no precise update on current trading pre-Christmas, but it can’t be good.”