The obituaries of HMV are being written, but rumours of its imminent demise may have been exaggerated, as there seem to be reasonable hopes that something can be salvaged from the wreckage.

The obituaries of HMV are being written, but rumours of its imminent demise may have been exaggerated, as there seem to be reasonable hopes that something can be salvaged from the wreckage.

There are many ironies in HMV’s current predicament, not least that the stores looked so packed at Christmas, with long queues of customers waiting to buy CD’s, DVD’s and video games as the ideal gifts for their loved ones. That would imply that an awful lot of people, young and old, will miss it when and if it’s gone, and that a “pop-up” chain of HMV shops that appeared only in December would certainly have a good future, but things may not to come to that yet.

Another irony is that HMV’s former subsidiary Waterstones apparently had a surprisingly good Xmas, with positive LFL sales, according to industry sources, despite the advance of the e-reader.

It is also ironic that the disappearance of HMV from the High Street would help the much-maligned private equity fund OpCapita, because it would temporarily boost their investment in the rump of the Game chain, leaving Game as “the last man left standing” selling video games in specialist stores.

The ultimate irony, however, is that the main cause of the disappointing overall sales at Christmas was the much-vaunted area of Technology. HMV’s main markets were tough, but market share was improved in DVD’s and video games and was held in music, despite the competition from Amazon and the supermarkets. HMV had high hopes of replacing some of the lost sales in entertainment with sales of tablet PC’s, the “hot” product on the High Street at Christmas, but couldn’t get sufficient supply. HMV have work to do to be seen as a credible supplier of Technology by consumers, as well as the likes of Apple, but, in theory, if they could get a second chance this Christmas and get better supply of product then the story could be different.

In HMV’s core entertainment business though, the evidence is that the better supply of stock and promotional support from suppliers did help at Christmas 2012, compared to the poor supply situation at Christmas 2011. And it is striking that the suppliers are still making vigorous noises of support today for HMV.

Now, the FT says today that HMV’s suppliers turned down a rumoured £300m rescue package to pay down all the group’s debts and fund a store portfolio restructuring and, to be honest, that was a lot of money to ask for, but the vibes are that the suppliers were certainly prepared to cough up quite a lot of money and that the funding gap wasn’t massive.

This provides hope that the suppliers will be keen to see a shrunken HMV store chain emerge from the ashes, even though the banks weren’t happy that HMV couldn’t achieve adequate cover for the c£20m a year interest bill.

But HMV in the UK will still have achieved sales of some £725m in the last year from its current 230 stores and may have still made a modest 1% EBIT margin. Yet if they could close their worst stores and keep 60% of their turnover whilst losing 50% of their costs, HMV might still be a 5% EBIT margin business (despite some diseconomies from losing scale) and still have a decent 15% share of the market.

At the end of the day no business can survive forever with a 10% LFL sales decline a year, and HMV can’t survive as a chain of 230 stores, but HMV’s best 100 stores in the top High Streets and shopping malls probably do account for 60% of its turnover and its smaller stores in secondary locations probably do account for half its overheads, so my hypothetical scenario may not be a complete pipe-dream.

Exactly how “HMV Part 2” reaches that outcome is uncertain, via the administration process, but it is clear that the new management team under CEO Trevor Moore is up for the fight. Whether a consortium of music and DVD suppliers clubs together to back an MBO bid…or whether a private equity fund can come forward to fund management plans for a smaller retail chain and bigger online presence remains to be seen. But HMV is not dead and it doesn’t deserve to die completely.

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”.