Its share price plunges on worries over its banking covenants.
When music sharing software like Napster and later iTunes began changing how kids bought and consumed music, I don't remember anyone mentioning the British weather.
Getting music over the Internet was free or at least cheaper, it conveniently delivered it straight in digital form for MP3 players, and it also saved a bus trip into town. But avoiding a snowball in the face? The pioneers missed a pitch.
On Wednesday, however, HMV (LSE: HMV), the 80-year old purveyor of recorded music, blamed the recent icy weather on a 10% slump in Christmas sales.
Worse, it alluded to potential banking problems, stating:
"Given the difficult trading conditions over Christmas and the likely outturn for the year, the Board now expects that compliance with the April covenant test under the Group's bank facility will be tight and is taking further mitigating actions during the next four months to address this."
The slow death of the CD is one thing, but the whiff of banking woes is more immediately bad news. Not surprisingly HMV shares are down 25% as I write. Over the past year the share price has fallen 75%.
Slip-sliding sales
Superficially, management's claim that the snow hit music sales seems credible, when you compare recent trading with last year.
Like-for-like sales at HMV's UK and Ireland stores were down 13.6% in the five weeks to 1 January compared to last year, and 14% lower over the past ten weeks, which pretty much covers the cold snap.
Yet I don't see why HMV should blame the snow, as sales were already declining. In the six months to 23 October, like-for-like sales fell 11.5%, and while the summer weather was nothing to write home about, I don't remember icicles on Oxford Street in June.
What's more, like-for-like sales at its Waterstones division were roughly flat over Christmas, which is a relatively great result. Are book buyers made of more snow proof stuff? Hardly -- it's yet more evidence that music retailing is in long-term decline.
To be fair, the company does add that 'underlying entertainment markets' remain weak, notwithstanding 'strong sales' of certain key products.
I suspect the latter are video games related. Shareholders in Game (LSE:GAME) -- itself down over 4% on the HMV release -- will have to wait for their own trading update. It is due on 13 January.
Shareholders take cover
As for HMV's debts, as of that half-yearly report, underlying net debt stood at £151 million, having ballooned from £88 million on the back of the acquisition of the MAMA live music group. The acquisition is making a positive contribution, but it's negligible in the grand scheme of things.
Can HMV afford its debt? Interest payments of £7 million a year seem small in comparison with HMV's turnover, which is not far short of £2bn.
Yet while Wednesday's trading update says profits will be at the bottom range of expectations, or around £46 million, this is before exceptional charges. Given the company also announced it is to close 60 of its 700-odd stores as well as seeking £10 million in further cost savings, some sort of charge may loom.
The only real bright spot is the modest turnaround at Waterstones. I wonder if HMV may consider selling Waterstones to satisfy its bankers. It's hardly the best circumstances in which to achieve a great price, which may mean the other unattractive alternative -- a hugely discounted rights issue -- is now inevitable.
True, according to analysts at Investec the shares have a net asset value of 28p, but investors who witnessed the decline of Woolworths will take that figure with a pinch of salt (or grit).
Needless to say, HMV's dividend yield of 13.5% is now a fantasy figure that is certain to be heavily slashed.
Going down
While HMV will be just the first company to blame the snow for bad trading over Christmas, it will also be among the most disingenuous.
Generations of teeny-boppers, punks and grunge fans got to the shops whatever the weather -- the reason the current lot aren't going to HMV is because they no longer have to.
For the past few years HMV has killed off or acquired rivals such as Fopp and Zavvi as well as the bookseller Ottakar's, even as digital distribution of music and the increasing dominance of online retailers like Amazon and Play.com -- not to mention aggressive expansion by the supermarkets -- has undermined High Street music megastores like HMV and Waterstones.
HMV has vastly expanded its retail space and taken out its competitors -- the so-called Last Man Standing argument. But the net result is it's now a giant retailer on wafer-thin margins saddled with banking worries and selling less of its core product every month.
Investors beware: In the movies, the Last Man staggering down the High Street often turns out to be a zombie.
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