British market-leading music and entertainment retailer HMV Group plc this morning issued a profit warning and unveiled a "radical" three-year review of the company's operations.

The company's stockprice fell 11.29% in morning trading to £1.35 ($2.60) on the London Stock Exchange, after the company warned that trading conditions have "deteriorated further" since its most recent financials warning in January.

The merchant levelled particular blame at the performances of its affiliates overseas and its Waterstone's bookselling chain, and notified investors and the media that it expects total music and DVD markets to decline further.

"The markets in which we operate are undoubtedly very challenging," commented group CEO Simon Fox. "Waterstone's and HMV are great brands, but have not adapted quickly enough to the way customers are now buying and consuming media. Our performance has suffered as a consequence."

The company says its board has taken a "cautious view" for the seven weeks until the close of its financial year, and it now expects full-year profits to be below the current range of market expectations.

"The three-year transformation plan which I will outline today is exciting, radical and far-reaching," Fox says. "There is a great deal to do and I have every confidence that this plan will turn the business around."

As part of its strategy, HMV has identified a three-point area of focus across its U.K. business, comprising a mantra of cost savings, protecting its core business, and growing new channels.

The company said it planned to achieve cost savings of £40 million ($77 million) each year by 2009/10, through a string of initiatives including the simplification of the HMV U.K. supply chain, and a review of its store portfolio in Britain.

Also, a new HMV store "format of the future" is in development, and is expected to be tested in Britain this fall. Moving forward, HMV U.K.'s outlets will carry a broader, enhanced range of portable digital products.

And in an innovative new media project, the retailer is to launch a social networking site for music, film and games aficionados. The SNS will provide revenue streams from advertising, sponsorship and paid-for content. Universal Music and 20th Century Fox have already struck strategic content partnerships, HMV says.

"Underpinning these various developments will be a re-energised HMV brand that will allow us to get closer to our customers," adds Fox.

Today's announcement gives industry observers the first glimpse of Fox's blueprint for HMV. Fox, former COO of Kesa Electricals, was named successor to long-time HMV chief Alan Giles last year, and joined the retail powerhouse on Sept. 28, 2006.