HMV has admitted that it has been grappling with "very difficult conditions" as Christmas shoppers fail to add sparkle to sales.
The music and bookshop owner said it expected the high street environment to remain difficult for the rest of the year as it reported group like-for-like sales fell 1.3 per cent during the 12 weeks to December 16.
Chief executive Simon Fox said: "We recognise we face very tough and rapidly changing markets and have to work hard to offset this."
HMV said like-for-like sales at its Waterstone’s chain of stores dipped 3.7 per cent during the period as it was hit by promotional activity in the book market.
Meanwhile, like-for-like sales at HMV shops could only improve by 0.6 per cent as the value of the UK music market declined 14 per cent in October and November.
It meant the company was forced to admit full-year profits would be at the bottom of expectations. Analysts had forecast a range of between #69 million and #89 million.
The comments from HMV echo those made by Woolworths earlier this month after it said the entertainment sector had been its weakest market.
HMV insisted actions taken to lift performance were working well and pointed to a 200 per cent improvement in sales online. It has also enjoyed a boost in market share thanks to a new nationwide price regime, which has seen cuts for DVDs, music and computer games.
The company, which bought Ottakar’s book shops in July, also held out hope for a boost from last-minute Christmas shoppers, especially at the weekend.
Mr Fox said: "We are seeing very positive and tangible results from the strategic actions implemented during the course of the year, including strong market share gains in entertainment, rapidly growing online business and the delivery of synergy benefits from the acquisition of Ottakar’s."
However, HMV also painted a bleak picture at its operations outside the UK with like-for-like sales down 3.8 per cent in Asia and 3.4 per cent in HMV Canada.
Mr Fox said: "We are disappointed that we are likely to come in at the low end of City expectations, but this is down to the tough market rather than failings in the business." He insisted the group was pursuing the right strategy and said its increased market share had shown it had got "more things right than wrong".
Mr Fox said a weak Christmas period had not been helped by the offering from record labels, which he described as "not as impressive" or "exciting" as previous years.
Richard Hunter, of Hargreaves Lansdown stockbrokers, said: "HMV continues to be attacked from all angles and it remains unclear whether they are fully sure which way to turn. The increasing encroachment of internet trading is threatening both its core music and book sales and although Waterstone’s has launched its own online offering, it joins a crowded marketplace."
Stockbrokers Seymour Pierce cut its 2006-07 pretax estimate to #70 million, while for the following year it is now forecasting profits of #74 million.
Richard Ratner, of Seymour Pierce, said: "The dividend yield may underpin the shares in the short-term, but longer-term we see this company as one of 'The Living Dead' category."
"In our view, the company needs a huge strategic rethink which could result in major
surgery to the store portfolio."
Mr Ratner cut his investment recommendation from 'hold' to 'underperform'.
Citigroup said profit forecasts for 2006-07 were likely to be reduced by around 15 per cent to #70 million. Panmure Gordon, however, sliced its 2006-07 pretax profit estimate by 29 per cent to #64.8 million, while for the following year the house has cut its estimate by 31 per cent to #67 million. It said the group could attract some private equity interest, although the risk profile to any deal is rising.
Citigroup believes HMV's results are suffering largely as a consequence of a more competitive pricing strategy. "The good news is that market share loss appears to have been stemmed," it said in an investment note.