Year two of HMV's three-year transformation plan is over, and results just in show it is firmly on track.
I was pleasantly surprised when I took a look at HMV Group (LSE: HMV) a couple of weeks ago. I had in my head an image of stores that people don't visit much, with it all happening online these days, but the profits were apparently still rolling in. I've since visited a store again and found it quite busy, and the Waterstone's store just a block away was buzzing. Clearly, my mental image of HMV was out of date.
After that, I wasn't at all surprised to read cheery tales in today's full-year results announcement. Unlike many such announcements, there was meat in the wordy bits, but first some numbers…
Nice profits
While total group sales were up 4.4% on last year, like-for-like sales weren't quite so rosy. At HMV they were up 1.9%, but down 3.8% at Waterstone's, though that's probably not surprising, as book sales really are being cornered by the Internet.
On those sales, profit before tax was up 11% to £63m, a shade ahead of forecasts, with adjusted earnings per share coming in at 11.1p (again, just ahead of forecasts). Those nice numbers lead to the expected maintenance of the full year dividend at 7.4p per share, for a yield of about 6%.
Net debt stands at around £6.5m, but that's a trifling sum for a £500m company with annual sales of £2b, and there's really nothing to worry about there.
The wordy stuff
Well into HMV's strategy for refocus in today's changing retail world, Chief Executive Simon Fox sounded pretty positive:
"At the end of the second year of our three-year transformation plan the Group has delivered further profit growth, despite the challenging retail environment. We are continuing to adapt to meet the changes in our markets and, whilst there is still much to do, our plans for the third year of our programme are on track.
We are also looking at further growth opportunities available to us, and are very pleased with the recently announced joint venture in live music and partnerships for film and mobile."
I know, directors always sound optimistic, but he does have the numbers to back him up.
The new chairman, Robert Swannell, who took the job in February, appears to be impressed by what he has seen so far, pointing out that the markets in both HMV and Waterstone's businesses are changing rapidly. But the current restructuring plan, which was launched in March 2007 on the back of a pretty bad year, appears to be bearing fruit.
Reacting to bad fortune
HMV does appear to be planning well for the future. However, it has to be noted that this isn't the result of any great foresight, but was a reaction to profits taking a pounding in 2007, when pre-tax profit (and earnings per share) were slashed by almost half -- and that was on top of a 25% fall the previous year.
Having said that, HMV did react well. When many in 2007 were expecting to see further years of decline, the damage was halted almost immediately and we have since seen two years of what will hopefully be a long-term turnaround. Profits have grown both years, and 20% EPS growth is currently forecast for next year (though with the economy the way it is, it would be wise not to take that as anything more than a wild guess). And, importantly, it has all been achieved in hand with slashing debts to near zero, and without cutting the dividend.
While profits are still only about half what they were four or five years ago on similar turnover, HMV is adjusting to a more competitive, lower-margin business. And in 10 years time, I expect it will still be one of the big players in UK music and entertainment retail. The planned move into live music and film partnerships is heading in the right direction.
Low share price?
At around 120p, today's share price looks good to me. It is barely ahead of where it was at this stage in 2007, and today's HMV has become a very different beast in those two short years. Of course, with investors being very wary of paying anything more than rock bottom prices for shares these days, there are lots of cheap competitors out there for our investment cash. But looking at HMV does bring home to me how cheap some of the UK's companies really are now, and that were are probably in one of the best times for buying shares that most of us will ever experience.
More share ideas from Alan Oscroft:
