Music retailer Golden Discs, the biggest Irish-owned chain, has reported "challenging" trade in the Christmas season, months after it slipped into the red with an operating loss of €60,000 in the year to March 2006.

As music retailers in many western markets suffer the double blow of price deflation in the important compact disc market and aggressive online competition, Golden Discs said its sales fell 4 per cent to €36 million last year.

Managing director Steve Fitzgerald declined to say whether a further fall in sales or recovery was on the cards in the current year in a chain which has 27 stores.

"We continue to compete effectively in what has become a very challenging environment. It's difficult to ascertain at this time, but the industry has weakened in the past year, primarily driven by price deflation and further erosion of margins," he said.

The day-to-day losses at Golden Discs last year reversed an operating profit of €706,000 in the previous period. Only a once-off €5.6 million gain on the surrender of the lease on its Grafton Street outlet to Marks & Spencer helped the chain avoid a bottom-line deficit.

Mr Fitzgerald said the chain was branching out into other products in an effort to retrieve sales and profit margins. "We're looking to get into areas such as digital lifestyle products, iPods in particular and MP3 players. There's a whole sub-industry in related products and paraphernalia," he said.

T-shirts, music accessories, books and mobile phones are also likely to feature in Golden Disc's range. "If it's a related product, we're looking at it."

Mr Fitzgerald has been in charge of the business since mid-2006 when his father John Fitzgerald and businessman Tom Rogers, the co-founders of the chain, retired. One of his brothers and two of Mr Rogers's sons became non-executive directors.

Mr Fitzgerald also said he aimed to seek cost savings and efficiencies, and would cease trading in unprofitable branches, "where it makes commercial sense" to do that.

"Rents continue to exponentially increase year on year. In some of our sites it no longer makes sense to operate there."

He said the number of unviable stores was "undefined" but indicated that the chain wanted to open new stores where appropriate. The business "increasingly seems to be moving towards suburban and regional centres and off the high street".