HMV Group: Bad assets, good management?

Investors are currently getting very excited about HMV Group, the UK cd, dvd and game retailer. Their two main high street competitors - Woolies and Zavvi - have recently gone bust. In theory this should create a big uplift in demand at HMV stores located near to a Zavvi or Woolies. HMV have also bought a number of new stores from the administrators. We saw management yesterday and they were pretty impressive, very clear about where they want to go with the business and the brand.

It is a nice story and I can see why people are pilling into the shares. However, I cannot help but be reminded of Buffett's famous saying: "I would rather own good assets with bad management, than bad assets with good management". I fear HMV could be a case of the latter. Even with two main high street competitors out of business, they are still operating in a declining industry - cd sales are falling and dvd prices are deflating (even with the Blu-Ray uplift). Management's plan to expand into live music - to the move the HMV brand into the "experiential" realm - is surely the right idea, but there is no guarantee of success. And the valuation is not particularly compelling. Even on the (arguably) inflated 2009 earnings numbers, it trades at a premium to comps.