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HMV In Talks With Banks Over Its Future

(c) Sky News 2012

HMV has warned that uncertainties facing the business mean it is likely to breach its banking covenant in January.

The high street stalwart - which sells CDs (SNP: ^CDSY - news) , DVDs, games and music players - said it was in "constructive discussions" with banks about its performance.

Despite numerous promotions total sales fell 13.5%, while like-for-like sales were down 10.2% in the six months to October 27.

HMV reported a loss before tax of £37.3m - an improvement on the £48.1m loss over the same period the year before.

But net debt at the 91 year-old company increased from £163.7m to £176.1m.

After the results were announced shares in the company fell 39% valuing HMV at just £10.1m.

Its (Euronext: ALITS.NX - news) new chief executive Trevor Moore admitted HMV had experienced a difficult first half of the year.

"However, the business has started to deliver a number of new initiatives which will help to maximise the seasonal sales opportunity and provide a platform for growth in 2013," he said.

"Additionally, as we trade through this period we will continue to develop further initiatives with our suppliers and I will provide updates at the appropriate time."

He added that closing more stores or placing the business into administration was not "part of our plan".

HMV had responded to declining sales of music and films by focussing on games and technology products.

But the company said that despite the reduced high street presence of rival GAME - and the division's 6% sales - growth was "not as strong as the business had believed it would be".

Performance at HMV Live, the company's music venue, festival and ticketing division, was also poor, following the sale of the Hammersmith Apollo for £32m.

It blamed the cancellation of the Vintage festival and an unpopular Lovebox festival for the fall in sales to £25.4m from £31.2m in the previous year.

Retail analyst Joseph Robinson from Conlumino said the warning of the covenant breach raised real concerns about the business's future.

"Fundamentally, HMV's key markets are in terminal decline and, with its major competitors having already exited the high street, there are very few opportunities to mitigate this through market share gains," he said.

Both music and film companies are keen to keep the business afloat as competition from online retailers like Amazon and Play increases.

Suppliers including Universal Music came to HMV's rescue in January in an attempt to return the company to financial health over three years, and in 2011 a group of top music executives pledged their support to the struggling chain.

Mr Robinson added: "As the last man standing on the high street, suppliers have inevitably displayed eagerness to assist the retailer, having a mutually beneficial interest in its survival, particularly in the run up to the traditionally critical Christmas period.

"But there is a danger that this will weaken somewhat as we go into 2013.

"The unfortunate fact remains that HMV's proposition has become increasingly irrelevant in the modern retail landscape."

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