HMV Group plc today (Dec. 20) warned that a deteriorating British CD and DVD market would affect the retail chain's bottom line.

In a trading update issued to the London Stock Exchange, the market-leading U.K. music and entertainment merchant accepted that its full-year profits were likely to be near the low end of market expectations.

The value of the U.K. music market, including digital downloading, shrank by 14% during October and November, and trading is expected to remain tough in the lead-up to Christmas, HMV noted. The DVD market has also experienced a decline in value, it added.

As a result of "these very difficult conditions," HMV said its U.K. and Ireland business would generate a rise in like-for-like sales of just 0.6% for the 12 weeks to Dec. 16, while gross margin was expected to be in-line with expectations.

Stock in HMV was down 5% in afternoon trading to 146 pence.

Group chief executive Simon Fox remains optimistic. "We recognize that we face very tough and rapidly-changing markets and have to work hard to offset this," he said. "However, I am confident that the strength of our leading brands, the rapid growth of our multi-channel offer combined with our effective operating systems gives us a real competitive advantage and a platform on which to build."

Fox pointed to "very positive and tangible results" from the company's burgeoning online businesses, the recent acquisition of bookseller Ottakar's, and other strategic initiatives achieved during the course of the year.

In a snapshot of the group's international activities, HMV said like-for-like sales declined by 3.8% in HMV Asia and by 3.4% in HMV Canada, thanks to weak entertainment market conditions. Like-for-like sales were down 1.3% across the group for the 12-week period. International market share in both music and DVD, however, showed rises.