HMV, the troubled music and Waterstone's books retailer, gave warning that a deterioration in sales since January would hit its profits.

Simon Fox, the new chief executive, said that it would have to close up to 30 underperforming Waterstone's stores and was aiming to start selling electronics items, such as iPods, at its music stores to try to diversify out of CDs and DVDs, which are being hit by internet downloads.

Even in the core HMV stores in the UK, margin improvements and targeted costs savings had not been reached.

Mr Fox unveiled a three-year plan to try to turn the chains around.

He is targeting cost savings of £40 million per annum by 2009.

Waterstone’s will grow its children’s book offering and sell a range of high-quality gift stationery.

HMV will also launch a social networking site for music, film and games enthusiasts, providing revenue streams from advertising, sponsorship and paid-for content.

Strategic content partnerships have been agreed with Universal Music and Twentieth Century Fox.

HMV UK is also partnering with 3, the mobile phone company, providing content to its 3.75m subscribers.

A number of HMV’s larger UK stores will also play host to 3 in-store concessions.

The group expects that growth in HMV.co.uk and Waterstones.com will be accelerated by increased marketing, enhanced functionality and closer integration with stores.

A strategic review of operations in Japan is under way.

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