HMV sees profit boost from strong games demand

By Mike Elliott Fri May 9, 5:25 AM ET

LONDON (Reuters) - British music and books retailer HMV Group Plc (HMV.L) said it was confident full-year profits would be towards the top end of market expectations, driven by strong demand for computer games.

HMV, one year into a 3-year turnaround plan centered on "interactive" stores and more online sales, said it was also gaining ground in music and DVD sales, even as the overall market for CDs shrunk.

"HMV has clearly benefited from a strong games market. However we continue to outpace this fast-growing market," Chief Executive Simon Fox told a conference call on Friday.

"It's a good market and we're certainly expecting double-digit sales growth from games in the year ahead."

HMV, which owns bookseller Waterstone's as well as music shops under its own name, said group like-for-like sales grew by 10.1 percent in the last 16 weeks of the year to April 26, and by 7.3 percent for the full year.

Like-for-like sales at HMV UK and Ireland grew 13.8 percent in the 16 weeks to April 26, while at Waterstone's they rose 6.6 percent.

"HMV has released a strong full-year pre-close statement with the group seemingly seeing little of the ongoing high street slowdown," Numis analyst Nick Coulter said in a note.

Coulter, who has a 'Hold' rating and 160p price target on the stock, said the 11.4 percent rise in like-for-like sales at HMV UK in the year beat consensus expectations for 10 percent.

MARKET SHARE GAINS

Panmure Gordon analysts, however, believe the stock to be expensive and vulnerable to any weakening in trading momentum, keeping a 'Sell' rating on the stock.

"Whilst this is an excellent performance we believe the structural problems in the books and entertainments markets will continue unabated," they said.

HMV's Fox said stripping computer games from the numbers, HMV UK's like-for-like sales grew by more than 8 percent in the 16 weeks, reflecting "accelerating market-share gains" in music and DVDs.

Fox said the music CD market fell by just under 9 percent in the 16 weeks while HMV saw growth of around 7 percent. The DVD market had been growing by around 3 percent while HMV has been growing at well over 20 percent, he added.

Shares in HMV, which have outperformed the UK general retailers' index (.FTASX5370) by around 102 percent in the past 12 months, initially rose as high as 171.275 pence but by 0845 GMT had given up the gains to stand 0.5 percent down at 148.5p, valuing the company at 585 million pounds ($1.14 billion).

INDIANA JONES

Market expectations for pretax profit before items for the year to April 26 are in the range of 46 to 58 million pounds, the retailer said in a trading update. That compares with profit of 48.1 million pounds last year.

"As we complete the first full year of our three-year turnaround plan, we are ahead of where we expected to be," Chief Executive Simon Fox said in the statement.

"We still have much to do, but I am confident that the group is well positioned for the next phase of our transformation."

Fox told reporters the schedule of new releases looked good with the 'Sweeney Todd' DVD out next week, the new Coldplay CD in June, Sebastian Faulks' James Bond book 'Devil May Care' at the end of May, and in games there are tie-ups with blockbuster films like 'Indiana Jones and the Kingdom of the Crystal Skull'.

Fox said that thanks to the sale of its Japan business and strong cash management, HMV ended the year "broadly debt-free."

(Editing by Will Waterman and Quentin Webb)