Strategy Update

26 March 2010

HMV Group Investor Update

HMV Group plc is today updating analysts, investors and media on its new medium-term strategy.

Ø The Group's previous three-year transformation plan, set out in March 2007, has successfully rebuilt profitability, with consensus forecasts for earnings per share of 12.5p for the year ended April 2010, up from 8.7p in 2007. Consequently, the Group is approaching its new strategic plan on a strong financial footing.

Over the last three years, HMV UK has outperformed the music, visual and games markets and rapidly developed as an entertainment brand. New and related entertainment product categories have been successfully introduced into its stores; and, as the value in the music market has increasingly moved to live, so too has HMV, through the ownership of venues and related ticketing activities.

Building on this progress, the Group's medium-term strategy is clearly focused on:

Ø further transforming HMV's offer by increasing sales of new product categories, and continuing to outperform the changing markets for music, visual and games

Ø growing rapidly in live and ticketing following the acquisition of MAMA; and building a bigger presence in digital through our joint venture with 7digital.

Ø a turnaround at Waterstone's, including: revitalising the brand; repositioning the range and local branch offer; maximising the Borders sales transfer opportunity and realising the benefits available from the hub

By combining these strategic initiatives with the continued tight management of costs and margins, the Group's target is to continue to deliver earnings growth over the medium term, and to maintain the current level of dividend as it rebuilds cover.

Commenting, Simon Fox, Group Chief Executive, said: 

"Having rebuilt profitability over the last three years, we have a clear strategy to continue the transformation of the Group and to ensure it has a vibrant and sustainable future, even though the markets in which we operate continue to change.

"We will continue to evolve HMV as a brand able to offer our customers a wide range of entertainment products and related experiences to be enjoyed at home, live and on the move. We have a clear plan to quickly revitalise the performance of Waterstone's, and to maximise its position as the high street's last remaining book specialist."

There is no trading update with today's strategy presentation. The Group's next trading update will be with the pre-close statement on 29 April 2010.

A webcast of the presentation will be available to view from 9am, and will be available on replay, at www.hmvgroup.com

At today's presentation, Simon Fox, Group Chief Executive, will deliver a new medium-term strategy for the Group, the key elements of which are:

HMV UK

HMV will maximise its position as the last remaining high street entertainment specialist with a clear plan for continuing to outperform the markets for music, visual and games. In addition, the mix of products in HMV stores will continue to evolve, with new and related entertainment categories, including technology and entertainment-inspired fashion, increasing from 9% of sales to 21% in 2012/13. Through these initiatives, the Group expects to maintain HMV UK's net margin over the medium-term at 5.0-5.5%

HMV Live

The value chain for music is moving into live, with the total live music market expected to be around a third larger than recorded music by 2012. HMV Group is uniquely positioned to benefit from this channel change following the recent acquisition of MAMA Group, currently the UK's second largest multiple venue operator, and a leading operator of live music festivals.

The Group expects this new division to grow organically through driving utilisation, occupancy and related sales at the existing venues, and adding new venues at the rate of 2-3 per year. In the festival market, new events have been added for 2010, including the Next Big Thing festival at MAMA venues and the 'High Voltage' rock festival.

A significant opportunity also exists in the market for tickets, where the Group is targeting the sale of three million tickets for MAMA and third-party venues in 2012/13.

In total, the Group is targeting EBIT of c. £15m from its activities in live in 2012/13.

Digital

Following the acquisition of a 50% equity stake in 7digital in September 2009, the Group is leveraging this technology expertise and platform to enhance its own digital offers in entertainment and e-books. New digital download stores have already launched in the UK and Canada, and a new e-books store for Waterstone's will launch in May 2010, building on Waterstone's strong start in this rapidly growing market.

7digital is also a leading B2B provider of digital entertainment, with a client base that includes Spotify, BlackBerry, Samsung and numerous FMCG brands. Although the Group is not including any financial upside from these activities in its medium-term plans, we believe that 7digital's growing presence in the B2B market, combined with our own activities in digital, could over the long term provide a meaningful contribution to Group profits.

Turnaround at Waterstone's

As the last remaining specialist bookseller on the high street, Waterstone's has a clear plan in place to outperform the high street book market, focused on the following areas:

·; Revitalise the Waterstone's brand to reflect its specialist appeal

·; Reposition the range to enhance availability and rebalance promotions

·; Segment the branch offer, with branches of all sizes empowered to mount local promotions

·; Increase non-book sales from 6% to 10% by 2013

·; Maximise the Borders sales transfer opportunity

·; Drive efficiencies through the business, including realising benefits available from the hub.

By focusing on these initiatives, the Group expects net margin at Waterstone's to improve in the short-term to 2-3% and, in the medium-term, to 3-4%.

Financial Impact of Plans

The Group's new medium-term plan is underpinned by a flexible cost base, from which a further £25m of savings has been targeted by 2012/13, including £10m in 2010/11, These savings are expected to offset underlying cost inflation to give broadly flat like-for-like costs over the next three years. Furthermore, £4-5m of savings will come from the Waterstone's book hub in 2010/11.

The Group also has greater flexibility to manage its property costs, with average lease lengths in the UK now less than seven years. Approximately 42% of the store space has a lease expiry within the next five years, which enables the Group to target improved terms at lease renewal.

The Group maintains a robust capital structure, with current leverage levels reflecting the recent acquisition of MAMA. However, this will improve gradually over the medium term, such that in 2013 we expect the Group to be debt-free. We expect total capital expenditure of £40m per year, which includes spend of £5m per annum on live to reflect our growth plans for this new division.

The Board expects to maintain the current level of dividend and to rebuild cover to around 2.0x.

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