HMV's new strategy pays off … but City yet to be convinced

HMV has banked a double-digit rise in profits and talked up prospects for the key festive trading period after ditching its image as a "one-dimensional retailer".

The group, which runs more than 400 outlets under its own name as well as 314 Waterstone's bookstores, has faced intense competition from music and video downloading, online retailers and the big supermarket chains. Those same pressures caused rivals Woolworths, Zavvi and Borders UK to go under as consumers tightened their belts during the recession.

HMV has responded by cutting costs and widening its focus. Earlier this year, it set out a plan to boost profits by further expanding its product mix, including into new fashion lines, growing the business in live music and ticketing, and turning around Waterstone's.

Annual results, released yesterday, show the group made a pre-tax profit of 74.2 million in the year to 24 April - up 18 per cent on a year earlier and ahead of most City hopes. The surge came despite a sharp fall in fourth-quarter sales.

Chief executive Simon Fox admitted current trading had been impacted by the World Cup, but said the group's "three-pillar" strategy of new products, live music and reviving the Waterstone's book chain was showing early signs of success.

"We are no longer a one- dimensional retailer facing rapidly changing product markets," he said. "Our strategy is on track, but it will be, I think, the Christmas period when we prove that. It is early days for the strategy and there are lots of doubters out there, but I do believe our share price is dramatically undervalued."

During the year, group sales charged up 3.1 per cent to a record total of just over 2 billion. However, sales at HMV UK and Ireland stores open over a year were down 2.4 per cent, while like-for-like sales at Waterstone's fell 6.2 per cent.

The firm maintained its dividend payment at 7.4p a share.

Fox said the release schedule for the run-up to Christmas was stronger than the season before, with DVD releases including Sex and the City 2, Ironman 2 and Toy Story 3 and new albums from Kylie, Take That and possibly Amy Winehouse.

Some analysts have speculated that if HMV's shares do not get re-rated, then the business could be broken up or bid for by private equity.

Nick Bubb, a retail expert and analyst at stockbroker Arden Partners, said: "HMV management continue to think that if they deliver their strategy that the profits will follow and that the share price will also follow. The stock market is clearly highly sceptical."

UK retailers are emerging from a period of deep recession, but they expect measures from the new coalition government to rein in a record public deficit will hit consumer confidence.

The latest GfK NOP Consumer Confidence Index showed consumer confidence had fallen for the fourth month in a row in June. HMV's Waterstone's business has been hampered by problems with its "book hub" distribution system and drafted in new management in January.