Market Watch

HMV Issues Third Profit Warning of 2011


Display Driver IC Forecast

HMV Group, owner of UK specialist entertainment retailer HMV and book retailer Waterstones has issued its third profits warning since the beginning of 2011. The warning lowers the group's expected profits to £30m ($49m) from an earlier estimate of £45m ($74m). The retail group has stressed that banking facilities remain fully available, that its lenders continue to be supportive and that a regular and constructive dialogue is being maintained with them. The chain is still the single largest home video retailer in the UK, operating 287 stores at the end of 2010 and accounting for 21.1 per cent of UK consumer spending on home video that year according to the BVA.

Analysis
The Q2 lull in sales caused by the 2010 FIFA world cup and the unexpectedly heavy winter snows in December 2010 leading to lower than expected annual video sales. Coupled with the general downturn in demand for physical media this has cut deeply into HMV's overall profitability.  HMV has already instigated a programme of store closures for underperforming stores, part of the natural cycle for such retailers, drawing similarities to previous UK specialist chain closures such as those of Zavvi in 2008 and the spate of specialist chain closures in 2005.

The loss of sales to the industry in those instances was limited primarily to impulse, rather than destination or gift purchases largely because alternative video retailers (including HMV) were readily accessible, frequently in the same shopping venues. However now that HMV is the only remaining specialist retailer, the closure of its stores is likely to end the availability of home video retail in some UK High Streets and shopping malls.

Categories that HMV specialise in (such as destination catalogue and promotion) as well as a significant share of impulse product simply cannot be picked up by other retailers. Some catalogue sales will inevitably shift online, however that sector's sales have plateaued in recent years and actually declined marginally in 2010. The likely outcome of store closures over 2011 is that sales will vanish from the market altogether; consumers shopping in places where HMV no longer operates will find many types of video product unavailable for purchase.

If all HMV stores were to disappear from UK High Streets a sizable proportion of the 40m in UK unit sales accounted for by the chain in 2010 would irrevocably lost to the video industry.

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