Analysts say figures 'worse than expected.'

HMV Group plc is predicting a slump in profits of up to £36 million ($67 million) for the year ended April 29, 2006.

The music retail giant issued a pre-close statement today (May 9), ahead of the July 4 publication of its preliminary full-year results.

In the statement, HMV said it was "confident that group profits before tax and exceptional costs for the full year will be in the middle of the range of analysts' expectations, which is £93 million-£103 million [$173 million-$191 million]."

In the comparable 52-week period in 2004/2005 ending April 24, 2005, profit before taxation and exceptional items was £129.3 million ($240.3 million).
The group's share price on the London Stock Exchange rose in morning trading today after it issued the statement. It began at 172.25 pence ($3.20) and ended the morning at 173.25 pence ($3.22).

According to HMV's statement, total group sales fell by 1.5% in 2005/2006, but comparable stores sales fell 5.7%. Detailed figures will not be available until July 4, but group sales over the comparable 52-week period in 2004/2005 totalled £1.86 billion ($3.46 billion).

The group said persisting "difficult sales trends" in the United Kingdom and a resultant slump in sales at the group's powerhouse HMV U.K. & Ireland division contributed to the 2005/2006 fall in profits.

The division's comparable stores sales fell 10.8% over the year and by 11.4% in the final 16 weeks. Its sales in 2004/2005 were £986 million ($1.83 billion).

London-based analyst Richard Ratner of Seymour Pierce notes that the U.K. figures were "worse than expected." Seymour Pierce expects the final profits to be around £96 million ($178.4 million), he adds.

"Looking forward, we're cutting our [HMV profits] estimate for the 2006/2007 financial year," says Ratner. "The business is still very cash-generative, but we're cutting our estimate back from £104 million [$193.3 million] to £90 million [$167.3 million]. It's a very tricky, highly-competitive market."

In an attempt to compete on price with British e-tailers and mass merchants, HMV is currently trialling a new pricing strategy in six U.K. stores. In the statement, the group said the initial results of the trial were "encouraging."

Although the U.K. figures were disappointing, there was better news from HMV's Asia Pacific and Canada divisions, with full-year comparable stores sales up 8.5% and 4.9% respectively. In 2004/2005, Asia Pacific sales were £280.9 million (522 million), and sales in Canada -- at that time, classed as North America and including HMV's now-closed U.S. stores -- were £158.3 million ($294 million).

Sales at the group's U.K. bookselling chain Waterstone's were down 5.8% on a comparable stores basis. Sales in 2004/2005 totalled £440 million ($818 million). In recent weeks, U.K. retail veteran Tim Waterstone made an unsuccessful attempt to buy the books chain, which he launched in 1982 and HMV has owned since 1998.

U.K. regulator the Competition Commission is due to announce a final decision on a proposed merger of Waterstone's and rival bookseller Ottakar's by May 22. The HMV statement says the group "has yet to decide whether or not to make a new offer for Ottakar's."

Ratner notes, however, that "we still think [HMV] will go for Ottakar's -- they need the economy of scale."

HMV Group also announced today that Waterstone's would launch its own online retailing service this fall.

The new site will replace an existing service operated since 2001 in conjunction with Amazon at www.waterstones.co.uk. The partnership with Amazon is to be terminated.

The group says "good progress" is being made on the appointment of a successor to CEO Alan Giles, who announced Jan. 12 that he would retire from his role in December 2006.

That announcement coincided with the release of an interim trading note to the London Stock Exchange reporting a sharp decline in HMV's first-half operating profit and a slump in sales over the Christmas trading period.

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