Hmv Group Regulatory News (HMV)

14 Jan 2009 17:00



THIS ANNOUNCEMENT IS NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION, DIRECTLY OR INDIRECTLY, IN OR INTO THE UNITED STATES, CANADA, AUSTRALIA, SOUTH AFRICA OR JAPAN

Announcement of Interim Management Statement, Trading Update and Strategic Initiatives

14 January 2009

HMV Group plc today announces its interim management statement for the 10 weeks ended 3 January 2009, and provides an update to the market on its trading performance for the five-week Christmas period and on a number of important strategic initiatives.

Christmas Trading (five weeks ended 3 January 2009)

Group total sales up 2.9%, including like for like growth of 0.5%

HMV UK & Ireland total sales up 5.8%, including like for like growth of 3.0%

Waterstone's total sales down 0.9%, including like for like sales decline of 2.0%

Gross margin expected to be flat for the full year in both HMV UK & Ireland and Waterstone's

HMV International total sales down 3.6%, including like for like sales decline of 6.6%

Market update

Significant recent changes to the high street retail environment provide market share opportunities albeit against an uncertain consumer backdrop

Acquisition from administrator of 14 Zavvi entertainment stores

Strategic update

Equity placing

Proposed equity placing of up to 5% of HMV's issued share capital

Proceeds will be used to fund the new strategic initiatives and, together with our £220m bank facility to 2011, will provide for the maintenance of a strong and prudent balance sheet

Commenting, Chief Executive Simon Fox said:

"It is pleasing to be able to report that the Group performed well over Christmas against a very difficult consumer environment. Indeed, HMV UK enjoyed its biggest ever Christmas. Whilst trading conditions continue to be challenging, HMV Group is focused on delivering against its plan and taking advantage of the opportunities arising from the reshaping of the competitive landscape, and we are on track to meet our expectations for the full year.

"I am also pleased that we have taken our first steps beyond the current three year plan. Music is very much part of our DNA, and by extending the HMV brand into the growing live music and entertainment market, our customers will be able as never before to access and experience music in all of its forms via HMV."

Adam Driscoll and Dean James, Co-Chief executives at MAMA commented:

"We are delighted to be entering this joint venture agreement with HMV, the UK's leading entertainment retailer. The venues are already key destinations for artists, promoters and fans and through this venture we will be able to augment the experience for all of them."

Enquiries

** All enquiries on 14 and 15 January 2009 should be directed via Brunswick.

TRADING AND OPERATIONAL UPDATE 

The Group's trading performance for the five and ten weeks ended 3 January 2009 is set out below:

1. The five-week period ended 3 January 2009 reflects trading over the key Christmas period, while the 10 weeks ended 3 January 2009 covers trading since the half year. The corresponding periods last year are the five weeks and the 10 weeks ended 5 January 2008.

2.  Like for like sales (decline) growth and total sales (decline) growth are stated at constant exchange rates. 

3.  HMV International comprises the results of HMV Canada, Hong Kong and Singapore.

Operational highlights during the period include:

Encouraging progress on turnaround initiatives, including HMV UK & Ireland product mix where games and other new categories increased to 27%

Good gross margin performance

Tight stock management, with HMV UK & Ireland and Waterstone's exiting Christmas with less stock than last year 

Continued growth of online - hmv.com up 25% and waterstones.com up 50% at Christmas

Successful launch of pre-played games in HMV UK

2.5m Waterstone's loyalty card holders; successful pilot of Pure HMV loyalty scheme to be followed by national roll-out in 2009

ACQUISITION OF ZAVVI STORES

Following the entry into administration of Zavvi on 24 December 2008, HMV has been in discussions with the Administrators concerning the potential acquisition of a number of Zavvi stores, primarily in locations where HMV does not currently have a store.

As a result, HMV has agreed to acquire for £0.7m, subject to certain conditions, 14 profitable Zavvi stores from the Administrators, consisting of 9 stores in the UK and 5 stores in Ireland, and their associated stock. In the year to 30 November 2008, these stores had unaudited sales of c. £55m and unaudited adjusted EBITDA of £2.7m (1)

HMV expects the cost of this acquisition to be approximately £2.0m, including fit-out and rebranding but before stock which will be separately valued. HMV is confident that it can deliver significant profit uplifts from the stores acquired following their conversion to the HMV brand.

ENTRY INTO LIVE MUSIC

Strategic background

HMV continues to focus on the execution of the Group's three-year transformation plan to protect and revitalise stores, drive cost efficiencies and grow new revenue channels.

Whilst achievement of the goals of this plan remains the near term objective of the Group, the Board has been considering how the Group's business should be developed beyond this plan to take advantage of its key strengths and position the Group for long term growth.

Following detailed analysis, the Board has concluded that the live music market represents a potentially exciting opportunity for HMV:

An approximately £1bn market in the UK which has shown strong growth in recent years

A product that is of very strong interest to HMV's core customers and which has powerful synergies with HMV's current product offering

A product that gives the customer a unique experience which cannot be replicated

To start positioning itself in this market, HMV has entered into a strategic partnership with MAMA Group plc for live music venues.

MAMA Group joint venture 

HMV has agreed to partner with MAMA Group plc, the UK's second largest multiple live music venue operator, and will acquire 50 per cent of a new joint venture company, containing 11 MAMA Group live music and entertainment venues in the UK. The agreement includes some of the UK's best-known live music venues, which attract around two million concert-goers each year, including the 5,100 capacity Hammersmith Apollo in London, which will be renamed the HMV Apollo. Further properties owned by the joint venture include the London venues Forum, Garage, Jazz Café, Borderline, and MAMA's 67 per cent stake in Heaven, G-A-Y and G-A-Y Late together with The Picture House in Edinburgh, Institute (formerly Sanctuary) in Birmingham and Moshulu in Aberdeen.

The joint venture will retain MAMA Group management expertise to operate the venues, and will actively seek expansion where high-quality, larger size venues become available.

In addition to the Apollo, the agreement includes 10-year naming rights for the Forum, The Picture House and the Institute together with rights for a further four venues as they are acquired by the joint venture. 

HMV is investing an initial cash consideration of £18.25m, including the 10-year naming rights, for a 50 per cent share of the joint venture. A further adjustment to the final consideration of up to, plus or minus, £3.28m will be made depending on the joint venture's operating profit before depreciation and amortisation (EBITDA) for the year to October 2009. A clawback of up to £3.28m will be triggered if EBITDA is between £3.1m and £4.0m for the period, or a further £3.28m will be payable if EBITDA is between £4.4m and £5.3m for the 12 months ended October 2009.

Ticketing

HMV has also entered into a separate ticketing arrangement with Seatem, a leading UK ticket agency, to sell tickets through its 250 stores and online via hmv.com to events at the joint venture and other MAMA Group venues, as well as a wide range of other events and venues, including theatre tickets, music and entertainment performances and some sports.

Benefit to HMV

The new ventures partner some of the best UK venues with the UK's leading entertainment retailer, and uniquely links tickets, tracks and merchandise. 

The significant new operational and brand synergies include:

Leveraging HMV's in-store and online traffic to market live events

Driving additional event-related footfall to HMV stores and hmv.com

Creating opportunities for combined merchandising in venues, stores and online

Driving greater value from HMV's loyalty card through the provision of content and access to 'money can't buy' rewards

These initiatives, which provide HMV with a low risk entry strategy into the live music market, are expected to provide cost synergies of approximately £1m per annum and be earnings neutral and cover the Group cost of capital in their first full year of operation. 

Notes:

About HMV Group plc

HMV Group is the UK's leading retailer of music, DVD and games and the leading retailer of books in the United Kingdom and Ireland in terms of total sales. As of 26 April 2008 it operated 379 HMV stores selling music, DVD and games in five countries and 313 Waterstone's stores, principally in the United Kingdom and Ireland. All of the Group's operations, both in the United Kingdom and internationally, are wholly owned.

About MAMA Group plc

MAMA Group Plc is the parent company of a diverse range of music and marketing businesses. The two key divisions are live music and artist services. In the live music sector the Group operates a number of leading UK venues, including the Hammersmith Apollo, The Forum, The Jazz Café, The Edinburgh Picture House, Heaven, G-A-Y and the Barfly chain. MAMA Group has 67 per cent interest in the Heaven and G-A-Y venues, with the balance held by Jeremy Joseph. The artist service business is responsible for the direct management of over 40 musical artists and via MAMA's stake in Nettwerk Music Group in North America, works with a further 60 artists from that territory. The Group has additional interests in publishing, marketing, merchandising and sponsorship and is viewed as one of the UK's leading independent music businesses.

About Seatem

The Seatem Group is an international entertainment travel and ticketing group. For further information on the Seatem Group see www.seatem.net

(1) EBITDA has been adjusted to reverse the benefits of rent free periods at a number of stores.

Notes:

About HMV Group plc

HMV Group is the UK's leading retailer of music, DVD and games and the leading retailer of books in the United Kingdom and Ireland in terms of total sales. As of 26 April 2008 it operated 379 HMV stores selling music, DVD and games in five countries and 313 Waterstone's stores, principally in the United Kingdom and Ireland. All of the Group's operations, both in the United Kingdom and internationally, are wholly owned.

About MAMA Group plc

MAMA Group Plc is the parent company of a diverse range of music and marketing businesses. The two key divisions are live music and artist services. In the live music sector the Group operates a number of leading UK venues, including the Hammersmith Apollo, The Forum, The Jazz Café, The Edinburgh Picture House, Heaven, G-A-Y and the Barfly chain. MAMA Group has 67 per cent interest in the Heaven and G-A-Y venues, with the balance held by Jeremy Joseph. The artist service business is responsible for the direct management of over 40 musical artists and via MAMA's stake in Nettwerk Music Group in North America, works with a further 60 artists from that territory. The Group has additional interests in publishing, marketing, merchandising and sponsorship and is viewed as one of the UK's leading independent music businesses.

About Seatem

The Seatem Group is an international entertainment travel and ticketing group. For further information on the Seatem Group see www.seatem.net

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