HMV Group plc

Announcement of Full Year Results

The UK's leading retailer of music, DVD, games and books, today announces its financial results for the 52 weeks ended 26 April 2008.

Financial Highlights 

Continuing Operations

• Total sales growth of 11.3%, including like for like sales up 7.3%.

• HMV UK & Ireland like for like sales up 11.4%. Waterstone's like for like sales up 3.3%.

• Profit before tax and exceptional items up 25.2% to £56.6m (2007: £45.2m).

• Adjusted eps up 22.8% to 10.1p (2007: 8.2p).

• Final dividend of 5.6p making a total dividend of 7.4p (2007: 7.4p).

• Net debt virtually eliminated at £0.2m (2007: £130.6m).

Total HMV Group

• Sales of £1,936.1m (2007: £1,894.5m). 

• Total profit after tax of £89.0m (2007: £16.1m), including £51.8m exceptional profit on disposal of HMV Japan.

• Total adjusted eps 10.1p (2007: 8.7p). Basic eps 22.1p (2007: 4.0p).  

Strategy Update 

• Strong market share performance across all product categories.

• Games and technology growing rapidly, now 21% of HMV UK & Ireland sales (2007: 14%).

• Successful trial of next generation HMV store format has provided the basis for further rollout in 2008/09.

• Good progress on cost-saving programme.

• Improvements to online offer resulting in rapid growth and increased market share.

• 1.5m holders of Waterstone's multi-channel loyalty card.

• Disposal of HMV Japan for Yen 17bn (£70.6m).

• Non-Executive Chairman stepping down at AGM on 5 September, 2008

Simon Fox, Chief Executive, said:

"One year into our transformation plan, Group profits are up by 25% and we are ahead of where we expected to be.

"We still have much to do, and whilst we are mindful of the challenging economic outlook, the current financial year has started in line with our expectations and I remain confident that we are building a better and stronger business that can prosper in a rapidly-changing market".

Enquiries

*All enquiries on 1 July 2008 should be directed via Brunswick.

Slides to accompany this announcement are available for viewing or download at www.hmvgroup.com/investors/presentations.

The Group's next trading update will be with an Interim Management Statement on 5 September 2008, the date of the Annual General Meeting of shareholders.

Chairman's Statement

In March 2007, we began the journey to transform the performance of the Group, and outlined a three-year plan to accomplish this. I am pleased to report that, at the end of the year, very good progress has been made in our efforts to protect and grow the businesses, while saving significant costs.

Our main focus in 2007/08 has been the revitalisation of our stores business. A year ago, I stated that our brands would strengthen their market positions, and this is being achieved emphatically as trading has materially improved. We have also made good progress with our online initiatives. Recognising the structural changes taking place in our markets, we now have a clear vision of how to grow in new channels and exploit alternative formats to re-balance our business. In addition, we have exploited Group synergies and begun to deliver the cost savings that underpin our medium-term financial aspirations.

Our strong cash generation during the year, combined with the disposal of HMV Japan for £70.6m, equivalent to 9.0x 2007 EBITDA, have reduced our borrowings. The sale of HMV Japan has simplified the Group, enabling us to focus our efforts on those markets where we have a clear leadership position.

Results for the Group for the year ended 26 April 2008 saw an increase in profit before tax from continuing operations of £11.4m to £56.6m, on revenue which grew by 11.3% to £1,874.9m. As a result of strong cash generation, we reduced our year end net debt by £130.4m to £0.2m. Our earnings per share rose by 22.8% to 10.1p and the Board has recommended a final dividend of 5.6p per Ordinary Share. Together with the interim dividend of 1.8p per share, the total dividend for the year is 7.4p, the same as last year.

We have added to the capability of the Group Board by introducing new talent. This year we appointed Gerry Johnson, Managing Director of Waterstone's, who brings his retailing experience, as an Executive Director. Philip Rowley, a former Chairman and CEO of AOL Europe, was appointed as a non-executive Director in September 2007, and has a combination of skills and experiences which are aligned with our technology initiatives.

When I became Chairman at the start of 2006, there were three formidable challenges facing the Group: finding and installing new executive leadership, improving the effectiveness of the Board, and reversing the decline in our businesses.

Almost three years on, I am very pleased with our achievements. We have an executive leadership team which is not only capable of developing creative ways to meet the needs of our markets, but is relentless in executing those plans; the Group Board is more effective in its role of overseeing the implementation of strategic initiatives and monitoring the performance of our businesses; and the numbers tell the story of the substantial turnaround underway in the performance of both businesses, in absolute as well as relative terms.

As the foundations are firmly in place, it is an ideal time for me to pursue new interests. So, today I am announcing that I will step down as Chairman of the Group at the AGM on 5 September 2008. The Board is in the process of searching for my successor and an announcement will be made in due course.

The Group and its businesses are in capable hands, and I have confidence that they will continue to deliver on their plans.

Strategic Review

We are pleased to report that we completed the first year of our turnaround plan ahead of our expectations, having stabilised the Group's operating and financial performance and made good progress on all of the strategic initiatives contained within our three-year plan. 

Protecting and revitalising our stores business

Our stores business performed strongly throughout the year, demonstrating the strength and resilience of our market leading brands. We continued to plan and adapt for structural change taking place in our markets by refocusing our mix of products to higher growth categories, improving the communication with our customers and enhancing our store environments.

HMV 

HMV UK & Ireland is adapting to the changing ways in which entertainment is being consumed. 

The HMV brand has been reinvigorated by new integrated in-store and online promotions, which invite our customers to 'Get Closer' to the content we sell. This powerful approach to advertising, combined with improved campaigns, especially around the key seasonal gifting periods, has improved customers' perceptions of the HMV brand and helped us to significantly outperform the markets in which we operate. In music HMV UK & Ireland grew unit sales, even though during the period the market saw volume declines, and in DVD our sales volumes increased by over 18% in a market in which units grew 8%.

We also embarked on successful trials of a 'next generation' store format, featuring a social hub providing access to entertainment websites, multi-player games zones and transactional kiosks. All product lines in the trial outperformed the rest of the chain, providing a basis in the coming financial year to convert 10-15 stores and open all new stores in the new format. After the end of the period, HMV Canada also opened its first next generation store in Toronto.

HMV UK & Ireland successfully rolled out a range of technology products, predominantly MP3/MP4 players and related accessories, which have been very well received by our customers. We continued to enhance our credibility with customers and suppliers in the fast-growing games console and software market, and are planning to launch a pre-played games offer in 2008/09. Games and technology products now represent 21% of HMV UK & Ireland's sales mix, up from 14% in the prior year. By taking the key learnings from the UK, a similar focus has been applied in HMV Canada, where these products grew to 7% of sales from just 1% in the prior year.

We acquired seven entertainment stores and various related trademarks from the administrator of Fopp, and opened our first new Fopp store in Bristol in March 2008. The differentiated customer offer and local appeal of these stores have been successfully preserved, offering the potential for a small number of future openings.

Waterstone's

Core to improving performance at Waterstone's was our focus on enhancing our engagement with customers, the emphasis on service in branches and the growth of our online business. 

The biggest single initiative to help build links with our customers has been the Waterstone's multi-channel loyalty card, which launched in September 2007, and now has 1.5 million cardholders. The card enables Waterstone's customers to earn and redeem points in-store and online and to enjoy further benefits, such as meeting authors and the chance to receive and review pre-publication copies of new books.

Engagement with Waterstone's local communities was increased during the year through organising events and other activities in our stores. Over 6,300 events were held, including 1,700 children's events, and the launch of Harry Potter and the Deathly Hallows, attracted over 250,000 visitors to midnight openings at our stores, which helped to double our market share over the previous Harry Potter book. 

The appeal of our product offer and store environment was enhanced during the year by the successful introduction of new children's departments and a high quality range of gift stationery into 100 stores, where these new ranges have performed well.

Growing revenue from new channels

The hmv.com website was enhanced during the period by new branding and customer communication, which contributed to growth of over 40% on the previous year and an increased share of the online market. CD and DVD sales from hmv.com are now approaching 10% of HMV UK & Ireland's total sales.

The choice to purchase physical or digital music albums from a single shopping basket is now integrated into hmv.com. This ensures that, as and when all of the major music suppliers make their catalogues available in the MP3 file format, the site is well positioned to sell downloads which are compatible with any portable digital music player. A subscription service, HMV Jukebox, was also launched to provide unlimited online access to over 3 million music tracks for a single monthly payment.

We commenced trials of a new social discovery website, getcloser.com, through which music and film enthusiasts can share their interests and experience user-generated and copyright content. The site, which will be supported by advertising, sponsorship and e-commerce, will launch in beta on 1 July 2008.

The competitiveness of waterstones.com was enhanced by changes made to delivery and customer communication, and sales from the site grew by over 140% on the prior year and customer registrations are now more than 850,000. The ability to check local store stock and collect orders from local branches are proving particularly popular with online customers, while the Waterstone's loyalty card has added a further, powerful multi-channel link between our stores and the website. Additional benefits to the operation and service of waterstones.com will follow as fulfilment for the site transfers to Waterstone's new book hub in the new financial year.

Driving cost efficiency

Good progress has been made on restructuring the Group's cost base in order to deliver our planned savings by 2010. 

Combining the back office finance and IT functions of HMV UK & Ireland and Waterstone's, and centralising both businesses' procurement of goods not for resale successfully delivered the anticipated savings of £6m for the year. 

Waterstone's appointed Unipart as its supply chain partner, which will lead to a new book hub serving all stores and fulfilment for waterstones.com becoming operational after the period end. The transition from direct-to-store deliveries to the book hub has been de-risked by the phased take on of stores, which will be completed by the end of the new financial year. Consequently, the delivery of cost savings from this initiative will be deferred until 2009/10. The programme to simplify HMV UK & Ireland's supply chain remains on track to become operational during the new financial year.

At the end of the period, Waterstone's total square footage had been reduced by 6.7% out of a three-year target of 10% by April 2010.

Creating value

At the beginning of the year a review of strategic options for HMV Japan concluded that greater value for our shareholders could be created through a disposal of this business. The price achieved of Yen17bn on a debt and cash free basis (£70.6m) was a multiple of 9.0x historic EBITDA, and with the proceeds we significantly reduced the G