Simon Fox must regret the day he decided not to take the top job at ITV….
….because things are going from bad to worse at HMV.
Thursday’s price action.
Today’s half year results from the struggling music, books and DVD retailer make for pretty grim reading. A bigger than expected loss, a 72 per cent rise in net debt and a slashed dividend are just some of the low-lights.
But what’s really worried investors is the fact that there has been no improvement in trading since the September’s trading update.
From Citigroup:
The acceleration in the group’s LFL sales declines between 1Q and 2Q (from -10.6% to -12.4%), despite a similar or weaker LFL sales comparative across the group, and a positive Waterstones 1Q exit LFL run rate, appears to reflect a more aggressive structural deterioration in the group’s UK entertainment markets and leaves full-year earnings forecasts looking exposed. A trend made worse by the highly disruptive recent weather patterns, occurring as they have during the critical trading period of the year.
For these reasons we expect consensus earnings forecasts to fall circa 10-20% today, and expect HMV to move into a sharp cost reduction phase in the New Year (including store portfolio rationalisation).
Hmm. Structural deterioration in the group’s UK entertainment markets.
Sounds pretty terminal to us.
For the record, Seymour Pierce expects HMV to post a pretax profit of £55m in the current fiscal year. That equates to earnings of 9.6p, which on the face of it makes HMV look cheap. But with debts of £151m and the company losing market share, it’s a brave punter that takes the plunge.
Perhaps Fox’s best hope lies with a bid from his new Russian shareholder.
Update: 17.30 (GMT). Some detail on HMV’s banking covenants, via Altium Securities.
We don’t think that management will hit its debt-free objective by 2012/13 and we expect that net debt to EBITDAR will be around 5.5x, well above management forecasts of 4.3x, even after allowing for a halving of capital expenditure and a slashing of the dividend. HMV has bank facilities of around £240m in place until September 2013, with an option to extend for one year, compared with debt which is likely to be close to £100m by the year end. The concern is that, if double digit like-for-like sales growth perpetuates, then even our forecasts could be too high and this could cause significant cashflow weakness.
Related link:
HMV hit by sharp decline in sales – FT