HMV Raises Doubt About Future With Probable Breach of Covenants

HMV Group Plc, (HMV) the U.K.’s biggest retailer of CDs and DVDs, raised fresh doubt about its future after saying it will probably breach debt covenants next year amid continued losses and lower-than-expected Christmas sales.

The company probably won’t comply with agreements on its borrowings in January and April, HMV said today in a statement, adding that full-year results are unlikely to meet expectations.

“This represents a material uncertainty which may cast doubt upon the group’s ability to continue as a going concern,” the Maidenhead, England-based company said in the statement. HMV “may be unable to continue to realize assets and discharge liabilities in the normal course of business.”

HMV shares plunged as much as 44 percent in London, the most ever. The company, which has been hurt by competition from supermarkets and online retailers such as Amazon.com, is reshaping its business as more consumers download music and movies rather than purchase CDs and DVDs.

“We continue to see HMV as a value trap with potentially insurmountable structural issues,” Freddie George, an analyst at Seymour Pierce with a sell recommendation, said in a note.

Music producers and game developers delayed their release schedule this year as suppliers avoided adding new products during the London Olympics and the Queen’s Jubilee celebrations, HMV said today. The fiscal third quarter, when the retailer normally gets about 46 percent of revenue, will be even more important this year as HMV seeks to boost sales, it said.

The company reported a net loss of 36.2 million pounds ($58 million) in the 26 weeks through Oct. 27.

Call of Duty

“We’ve been very focused around establishing strong relationships with our suppliers, key stakeholders and banks,” Chief Executive Officer Trevor Moore said in a phone interview. HMV is looking to turn around the business by adding more space for games like Call of Duty after the collapse of Game Group Plc, and training staff more on products and customer service.

Finance Director Ian Kenyon said suppliers continue to support the company with inventory, availability and promotions. He wouldn’t comment on whether the retailer would still meet 10 million-pound pretax profit estimates this fiscal year.

“People are choosing more carefully, their purchases are more considered,” Moore said, citing the popularity of deals such as two chart CDs for 20 pounds.

The shares were down 33 percent at 2.75 pence as of 8:52 a.m. in London. They’ve fallen 21 percent in 2012, after losing almost all their value in the previous two years.

To contact the reporters on this story: Thomas Mulier in Geneva at tmulier@bloomberg.net; Sarah Shannon in London at sshannon4@bloomberg.net

To contact the editors responsible for this story: David Risser at drisser@bloomberg.net; Celeste Perri at cperri@bloomberg.net

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