British entertainment retailer HMV is targeting earnings growth over the medium term by increasing sales of new products in music, visual and games and raising its presence in live music and ticketing.

In a strategy update, the firm pledged a turnaround of its Waterstone's bookstore business, which traded poorly over Christmas.

"Having rebuilt profitability over the last three years, we have a clear strategy to continue the transformation of the group," said chief executive Simon Fox.

The firm expects to maintain HMV U.K.'s net margin over the medium term at 5% to 5.5% and improve Waterstone's to 2% to 3% in the short term and 3% to 4% in the medium term.

Shares in HMV have fallen 39% over the last year, underperforming the FTSE General Retailers index's rise of 57%. But the stock was up 7.2% at 84.5 pence ($1.26) at 1126 GMT, valuing the business at about £363 million ($541 million), as investors warmed to the update.

HMV, which faces the same competition from supermarkets, online retailers and digital downloading that caused rivals such as Woolworths, Zavvi and Borders U.K. to fall during the recession, has responded by cutting costs and widening its focus.

The firm, which runs 420 stores under its own name as well as 313 Waterstone's stores, has entered live music and ticketing markets, forming a joint venture with venue operator Mama Group before buying the firm earlier this year. It expects the total live music market to be around a third larger than recorded music by 2012 and is targeting EBIT of £15 million ($22.4 million) in this area in 2012/13.

HMV has also built a bigger presence in digital through a joint venture with 7digital, is trialing digital cinemas in partnership with Curzon, and is selling mobile phones through a deal with France Telecom's Orange.

Plans for HMV stores include raising the proportion of new categories, including technology and entertainment-inspired fashion, from 9% of sales currently to 21% in 2012/13.

The firm plans to revitalize the Waterstone's brand, reposition its ranges and increase non-book sales from 6% to 10% by 2013.

HMV is targeting a further £25 million ($37.3 million) of savings by 2012/13, including £10 million ($14.9 million) in 2010/11.

These savings are expected to offset underlying cost inflation to give broadly flat like-for-like costs over the next three years.

HMV added that by 2013 it expected to be debt free despite anticipated capital expenditure of £40 million ($59.6 million) a year.