When Simon Fox took over as chief executive of HMV, the retailing empire comprising the eponymous music store and book sellers Waterstone’s, in 2006, many seasoned City observers claimed it was a short-term job predicting that the chain would wither on the high street.

Three years on, and two years into a turnaround plan, those predictions have proved utterly wrong. Rather than retiring, the 88 year old retailer, formerly known as His Master’s Voice, is enjoying a new lease of life.

Instead it was competitors MVC, Music Zone, Tower Records and Fopp that fell by the wayside, boosting HMV’s like for like sales by an additional one per cent in the aftermath, while the recent demise of both Woolworths and Zavvi also benefited HMV. It has just announced a 4.4 per cent growth in sales to £1.95 billion in the year to April 25 and an 11.5 per cent jump in pre-tax profits (before exceptionals) to £63million.

It has also acquired 25 former Zavvi stores, reopening them as HMV, a move which Christopher Walker, analyst at Nomura, estimates will increase sales space for the record chain by 6.5 per cent, adding about £55million to the top line. While its move into children and family DVDs, with special promotional events around key dates (such as Father’s Day), is designed to capture Woolworths’ customer base. (An earlier move to expand the children’s book range at Waterstone’s has proved

Even the demise of music legend Michael Jackson has had a positive impact on HMV. There was an 80 fold jump in sales of Jackson’s material on the day after his death – a week-on-week increase that exceeded previous surges seen after the deaths of both Elvis and John Lennon – although it is unlikely to affect HMV’s full year performance.

To be sure, when Fox first took the hot seat there were grounds to be sceptical about his potential success. Private equity firms, which had been rebuffed just one year earlier, were circling as HMV reported three profits warnings within seven months of his arrival.

By then, Fox had got to grips with both the business and his problems – of which there were many. He set out a three-year plan, which initially left the City distinctly underwhelmed. The first phase was to move HMV’s headquarters from London’s Wardour Street to Waterstone’s base in Solihull and consolidate back office functions, close up to 30 underperforming Waterstone’s branches – or almost ten per cent of its network - and to revamp the supply chain to slash costs by £40million a year.

Mentioning supply chains is enough to make any analyst glaze over, but Fox had a real problem with Waterstone’s. Each store operated, in effect, independently, accepting up to ten separate deliveries a day – wasting both manpower and storage space. Fox introduced a book hub, which simplified the supply chain by consolidating orders from multiple publishers into one delivery per store. It is expected to save at least £5million every year, while the staff who previously spent time unloading deliveries have been charged with selling to help customers ‘discover the book they wanted and the book they didn’t know they wanted’.

Similarly, a new distribution centre has been opened for HMV with state of the art stocktaking facilities, enhancing stock availability in stores.

The first phase also included establishing new sales channels. Even though the music industry had been hit by a digital revolution, with downloads rapidly replacing CDs and DVDs, HMV’s online channels were piecemeal and antiquated. Last year, sales at the newly revamped hmv.com rose 16 per cent while sales at waterstones.com leapt 60 per cent. The bookseller also launched a loyalty card (which provides valuable customer intelligence for HMV), which last year had 2.5million members – against a three year target of 1.5million. A purehmv loyalty card has just been launched, after a successful regional pilot, focussing on highest spending customers.

But Fox recognised that HMV was more than either a music or book store. It was an entertainment retailer. He introduced the slogan ‘listen, watch and play’ to communicate the change in approach.

Play is a key element of the turnaround strategy. Fox watched the success that retailers selling computer games were enjoying. He expanded HMV’s range to include games and MP3 players, and revamped certain stores for the ‘next generation’, introducing areas where customers could try out new games or play on the latest Wii and download kiosks. The strategy has proved successful. The first next generation store in Merry Hill, West Midlands produced 25 per cent like-for-like sales growth in the year following its makeover. (The new look has since been rolled out to an additional 14 stores.) Last year, games and technology – such as iPods and Sony Readers, accounted for 24 per cent of HMV’s sales, up from 20 per cent. (Music remains about 28 per cent, down from 30 per cent, reflecting the continued decline in the CD market.) A new initiative to sell second hand reconditioned games, which has higher profit margins than new games, has also been successful.

But that’s not all Fox is doing to the stores. In the autumn, HMV will open a three screen, all digital cinema in the ‘fallow’ space of one of its prime stores, offering opportunities for merchandising and bar facilities. About 20 stores will launch mini cinemas if the model proves successful.

And in January, HMV announced a new strategy to enter the £1 billion live music and ticketing market by acquiring a 50 per cent stake in Mean Fiddler Group and establishing a joint venture company, comprising 11 live venues, including Hammersmith Apollo, Edinburgh’s Picture House and the Forum in London, which have since been rebranded HMV.

Although HMV has invested £20million, Fox believes that this is a low risk way to enter the live music market. He expects to cover costs in the first year as the group promotes events and sell tickets online, introduces in-store box offices (there are currently 25) and creates event-related promotions in store. The joint venture also provides the opportunity to sell events’ merchandise online and instore. Loyalty cardholders will be offered the chance to attend exclusive ‘not for sale’ events.

It may be moving a long way from His Master’s Voice, but it seems to be working. Fox is certainly outwitting Nipper the dog. Nomura’s Walker adds: ‘HMV continues to outperform, taking market share and benefiting from capacity fallout. Waterstone’s remains challenging, but management expects the new book hub to drive cost savings next year.’ He expects full year profits of £74.7million next year, but concedes that HMV could top even that chart.

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