HMV shares plunge on closure warnings

HMV, struggling with cut-price competition from supermarkets and the internet, revealed it may breach banking covenants and sales at British and Irish stores slumped 14 per cent in the five weeks to 1 January.

Its shares closed down 6.5p at 26p as it gave warning that full-year profits would be at the lower end of City expectations, currently between 46 million and 60m.

"Given the difficult trading conditions over Christmas and likely outturn for the year, the board now expects that compliance with the April covenant test under the group's bank facility will be tight and is taking further mitigating actions to address this," the company said in a statement.

It is to close 60 stores - about 10 per cent of the total - over the next 12 months and seek a further 10m a year of cost savings. The company acquired the remnants of the Scotland-based Fopp chain.

City analysts said the poor weather had exacerbated HMV's difficulties, but that its underlying markets were also under severe pressure. Rivals such as Woolworths, Zavvi and Borders UK have gone to the wall in the past two years.

David Jeary, a retail analyst with Investec Securities, said: "While adverse weather undoubtedly was unhelpful, the core HMV division remains under considerable stress as a format and it must raise questions over its long-term future."

Nick Bubb, retail specialist at Arden Partners, said that the profit warning was expected but "still depressing", and that a big pruning of the company's final dividend was likely given the challenge of meeting banking covenants.

"The snow disruption pre-Christmas is being blamed, slightly pathetically, but clearly there are other structural factors. Note that HMV was one of the first retailers to moan about the impact of snow in early January a year ago," Bubb said.

Some analysts said they believed HMV might have to break itself up, for example by selling its Waterstone's books subsidiary, to stay afloat. In the festive period Waterstones held its sales fall to just 0.4 per cent.

But Simon Fox, group chief executive, said: "Whilst HMV has had a challenging year, it remains a profitable and cash-generative business and a powerful entertainment brand."