Soaring internet sales take their toll on HMV

City analysts blamed increased competition from the internet – where almost £5bn (€7.3bn) was spent in November and December, compared with £3.5bn (€5.1bn) a year earlier – as well as lower prices in supermarkets.

Shares in HMV fell 10% today as investors also digested news that chief executive Alan Giles will retire in December after eight years in charge.

Like-for-like sales at HMV fell 5.5% in the five weeks to January 7 on the previous year, while like-for-like sales at Waterstone’s were down 2.4%.

The decline was made even worse by heavy discounting in an attempt to lure shoppers back into the stores, which in turn slashed profit margins.

Matthew McEachran, an analyst at Investec Securities, said: “HMV has faced stiff competition from other players such as the supermarkets and Woolworths.

“And it has been hit by increased sales of CDs coming from the internet and by downloads, although that still represents a very small part of the market.

“Waterstone’s also faces competition from the internet but it has bigger clout with its suppliers than HMV so it has not been hit to the same degree.”

Mr McEachran added that the main problem HMV faced was its inability to deal with the increased competition.

HMV said it was “complete rubbish” that Mr Giles, 51, was leaving because of recent results, and Seymour Pierce analyst Rhys Williams said the decision was “a disappointment” and Mr Giles “would be sorely missed”.

One of the most popular websites over the festive season was Amazon.co.uk, which celebrated a record Christmas haul as it delivered as many as 480,000 gifts a day in the UK – many of them books and CDs.

As well as hurting HMV, smaller music and video store MVC almost went bust before Christmas, with administrators blaming supermarket and internet sales.

But this did not stop HMV’s high street rival Virgin Megastores posting a 3.2% increase in like-for-like sales on last year in the five weeks to January 7.

Waterstone’s bid target Ottakar’s outperformed its larger rival by achieving the same like-for-like sales in the four weeks to January 7 at its 136 bookshops as it did the year before.

The decline in Christmas sales followed tough trading conditions throughout the autumn, which saw HMV’s group operating profits slump to £2.8m (€4.1m) in the six months to October 29 from £15.7m (€23m) a year earlier.

Like-for-like sales dived 6.1% in the period, although growth from new stores ensured that total revenues were only £500,000 (€731,700) down at £759.7m (€1.1bn).

Mr Giles said: “The competitive pressures faced by our UK businesses made trading very difficult during the autumn period.”

HMV makes about 90% of its profits in the second half of its financial year, which includes the key Christmas period, and Mr Giles said he was “cautious” about the company’s outlook.

Evolution Securities analyst Nick Bubb downgraded his full year pre-tax profits forecast from £110m (€161m) to £90m (€131.7m), compared with £136.2m (€199.3m) last year.

Mr Giles pledged to invest “more aggressively and more heavily” in HMV’s new online retail arm hmv.co.uk “because it is obvious that one of the winners over the Christmas period in 2005 has been the internet as a channel of distribution”.

Sales on HMV’s website increased 78% over Christmas, although it only represents a small part of the business.

In contrast, Boots today said its internet business boots.com now sells more goods than its largest store, while Tesco said a record one million customers shopped at tesco.com for gifts, food and alcohol in November and December.

Department store John Lewis banked sales of more than £100m (€146.3m) from its online and catalogue business in 2005.

Internet retail group IMRG chief executive James Roper forecast that £10bn (€14.6bn) would be spent online each year in the UK in five years.

“The growth is driven by consumer demand and the consumers like internet shopping because of convenience, choice and better prices,” he said.