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HMV to shut stores, issues profit warning

Retail giant HMV is to go on a serious diet this year following a sharp fall in sales as buyers eschew the high street and hunt for bargains online, with up to sixty stores due for the chop in 2011.

The company has issued a warning after like-for-like sales dropped almost 14 per cent in December, which follows the company's report of a massive £40 million loss in the first half of the financial year. Worse, the company has warned investors that its poor cashflow may result in it going outside the terms of its lending agreements - potentially leading to banks and investors calling for immediate repayments.

To stay afloat, the company is planning to close sixty of its 700 stores across the UK and Ireland - thought to include both the company's own-brand entertainment stores and Waterstones book stores, despite a drop in that group's sales of just 0.4 per cent in December. The closures will result in significant job losses.

Speaking to The Guardian (opens in new tab) about its current financial situation, the company claimed: "The challenging entertainment markets, combined with the severe weather over our peak trading period have had a negative impact on our trading year to date.

"Given the difficult trading conditions over Christmas and the 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 during the next four months to address this."

If the closures and other money-saving measures don't turn the company's fortunes around, it's thought that it will have to split into separate entities - possibly selling off the Waterstones brand to save the HMV mothership.

With consumers increasingly turning to web-only retailers for many purchases, largely due to discounts offered thanks to low overheads and vastly reduced staffing costs, the future of HMV as a high street presence looks uncertain. Additionally, an increase in VAT to 20 per cent is unlikely to encourage people to increase their entertainment spend.

The company's shares dropped 25 per cent in morning trading as news of its struggles broke.

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