Despite a "robust start to the year," as the Financial Times quoted HMV chief executive Simon Fox as saying, and an increase in overall revenue by 3.8%, profits plummeted due to dismal sales in the U.K. and Ireland, where the company's operating profits dropped by nearly 60% to Ô£24.5 million. HMV had previously predicted pre-tax profits for the period to be between Ô£69 milion and Ô£89 million, and had acknowledged in December 2006 its financial troubles, according to The Western Mail of Cardiff.
In March, HMV issued a profit warning and announced a three-year "transformation plan" with initiatives such as substantial cost-cutting and the launch of a social networking site for music, film and games enthusiasts.
Citing "more-severe-than-predicted" market shifts, Fox explained to Forbes that CD sales had been struck by lower prices offered by online companies like Amazon.com and by U.K. supermarket chains Tesco and Asda, both owned by Wal-Mart. The continued prevalence of music downloading is compounding HMV's struggles.
The retailer announced in April its intention to begin selling non-DRM digital downloads, including EMI's 'DRM-free" catalogue of over 1 million tracks. "Music fans increasingly expect versatility and interoperability in the way they consume music, and we feel the time is right to acknowledge and act on this expectation," said HMV E-Commerce Director Gideon Lask in a press release.
Sales of the MP3 downloads will begin in September, Digital Media Newswire reported; prices for the 328 kbps songs will start at Ô£0.79. For its planned social networking site, HMV has teamed up with Universal Music and 20th-Century Fox. "[The transformation plan is] bang on target," Fox was reported saying in London's Evening Standard yesterday.
HMV expects 20% of its U.K. sales to come from its website by 2010.
The retailer also confirmed yesterday that it is in talks to sell HMV Japan, which analysts believe could bring a price of up to Ô£75 million; the group has 62 stores in Japan, with an additional seven in Asian locations from Hong Kong to Singapore.
"Against the background of intense price competition, ongoing deflation and substitution by downloads, it will be difficult for HMV to grow profits," Christian Koefoed-Nielsen, a London-based analyst, told Bloomberg News today.
