HMV, the music-to-books retailer, has blamed the imploding CD market for a 73 per cent slump in pre-tax profits.

Shares in the retailer fell 4 per cent yesterday after the group failed to convince investors that it was on the road to recovery, despite making a strong start to the financial year.

The company, which owns the Waterstone’s book chain, is at the start of a three-year recovery plan after pretax profits fell to £21.6 million for the year to April 28, 2007, from £80.2 million in the previous 12 months.

Profits were 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.

The company attempted to stem the decline last year by cutting its prices, which sent annual sales up 3.8 per cent to £1.8 billion, though like-for-like revenues, which strip out gains from new stores opened during the year, fell by 3.5 per cent.

HMV said the slump was a result of consumers increasingly opting to download music. As part of its turna-round plan, HMV is shifting its products mix to compensate for falling CDs sales, by selling more electrical goods such as MP3 players as well as investing in its online sales by offering music and video downloads.

By 2010, HMV hopes 20 per cent of its sales will be online and that 13 per cent of stores sales will be generated from electrical products.

Simon Fox, chief executive, said HMV had not been hit by the effects of rising interest rates on shoppers’ budgets. “It is getting tougher for customers but we are yet to see that,” he said.

HMV also disclosed yesterday it was in talks with a potential buyer for its Japanese chain that could fetch as much as £75 million. The company will use the proceeds to pay down some of its borrowings after its net debt rose from £15.6 million to £130.6 million following the acquisition of Ottakar’s, the book chain.

HMV will pay a final dividend of 5.6p, making a total dividend of 7.4p, the same return as last year. Its shares fell 3.28p to 118p yesterday.

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