Profits at HMV, the music retailer that owns Waterstone's, plunged by 73 per cent to £21.6 million over its last financial year but the struggling group revealed today that current trading is showing signs of improvement.

The company, which announced a restructure in March, also confirmed today that it is in talks with a potential buyer for its Japanese business, which could fetch between £75 million and £100 million.

Pre-tax profits for the year to April 28, 2007, plummeted from £80.2 million in the previous 12 months to £21.6 million, dragged down by a poor performance in the UK and Ireland, where operating profits plunged 59.8 per cent to £24.3 million.

Like-for-like sales, excluding gains from UK and Irish stores opened during the year, fell by 3.4 per cent.

Asia, which includes the soon-to-be sold Japanese group as well as a small number of stores in Singapore and Hong Kong, reported a 37 per cent fall in operating profits, to £4.9 million while like-for-like revenue contracted by 3.4 per cent.

Over the past year total sales rose by 3.8 per cent to £1.8 billion, but like-for-like revenue declined by 3.5 per cent. HMV's Waterstone's chain saw the largest decline in like-for-like sales, falling by 4.1 per cent, while comparable revenues within the music group shrunk by 3.3 per cent.

Despite a difficult year, HMV has reported a strong start to the year, with like-for-like sales up 3.8 per cent. Its UK and Ireland operation has performed well in the first eight weeks of the new year, with like-for-like sales up 8.8 per cent. While Asia performed well this year, like-for-like growth at its Canadian operation fell 5.4 per cent. But the company said that it is committed to retaining its Canadian division, and will be investing in the business.

While other retailers are reporting a slow down in consumer spending as the four rises in interest rates since last August tighten purse strings, Simon Fox, the chief executive at HMV who joined last year from Kesa Electricals, said: "It is getting tougher for customers but we are yet to see that."

In March, HMV announced that it was shutting down 30 of its 300 Waterstone's sites and so far has closed down 10 outlets. The company also outlined its turnaround strategy, which included introducing the sale of electrical products such as MP3 players in its stores as well as investing in its online offering.

Annual net debt ballooned from £15.6 million to £130.6 million, pushed up by an exceptional charge related to last year's acquisition of the Ottakar's book chain.

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