London: British music, books and games retailer HMV issued its third profit warning in three months, ratcheting up the pressure for it to raise funds by selling book chain Waterstone’s or issuing shares.
Shares in the 90-year-old company, which trades from about 700 stores in seven countries, fell about 10% on Tuesday after it said it now expected underlying 2010/11 pretax profit of around 30 million pounds ($48 million).
In March 2011 analysts cut forecasts to a consensus 39 million pounds, according to Thomson Reuters I/B/E/S data, after HMV trimmed its profit outlook to moderately below 45 million pounds. That alert followed another in January.
“Since the group’s last update on 1 March, trading conditions have remained difficult,” HMV said, echoing comments from Dixons, Britain’s No. 1 electricals goods retailer, Home Retail, Britain’s leading household goods retailer, and Mothercare, the mother and baby products firm, which all warned on profit in March.
In addition to grim economic conditions, HMV, which employs 13,000 staff, is battling intense competition from the supermarkets and Internet retailers as well as the growing popularity of digital downloading.
“The intractable problem remains that HMV is King Canute to the incoming tide of digitalisation,” said Investec analyst David Jeary.
“HMV needs to re-capitalise, probably via a combination of distressed asset sales and an equity raise,” he said.
Last month HMV, famous for its Nipper the dog trademark, had flagged higher-than-expected year-end debt of 130 million pounds and said it did not expect to meet conditions applying to its bank loans when tested in April.
The firm said on Tuesday its lenders, including the state-backed Royal Bank of Scotland and Lloyds Banking Group, had agreed to extend the measurement period for financial covenant tests to the 12 months to 2 July.
Analysts said this would allow the group additional time to consider a rights issue or realise cash from the possible disposals of Waterstone’s and HMV Canada.
HMV said in March it was looking into the possible sale of these businesses.
Billionaire Russian businessman Alexander Mamut, who owns 6.1% of HMV, has been linked with a bid for Waterstone’s along with founder Tim Waterstone.
Mamut’s war chest is set to be bolstered with the imminent initial public offering (IPO) of his mobile phone retail business Euroset.
HMV remains in talks with its lenders on potential changes to its agreements. It said its facilities remain “fully available” and its lenders “continue to be supportive”.
Shares in HMV, which prior to Tuesday’s update had lost 83% of their value over the last year were down 1.5 pence, or 9.8%, at 13.75 pence at 0841 GMT, valuing the business at about 58 million pounds.
“Although the shifting of the group’s year-end covenant test will allow time for cash inflows, we would continue to avoid the shares,” said Numis analyst Andrew Wade.
He cut his 2010-2011 profit forecast to the guided level, noting that this time last year he was forecasting profit of 86 million pounds.