Music retailer HMV and its wholly-owned book chain Waterstone's are struggling to grow their business in Ireland amid cut-price competition and online retail formats, new filings reveal.

HMV Ireland disclosed that its annual operating profits in Ireland dropped by almost 18 per cent to €7.7 million as "challenging" conditions in the year to April 2006 held sales at €70.3 million, only 1.2 per cent stronger than the previous year.

Separate accounts for Waterstone's show that its profit in Ireland grew by only €100,000 to €2.1 million while sales fell 0.5 per cent in the same period to €27.3 million.

As HMV's parent in London expressed confidence yesterday that its profit in the current year would be in line with expectations after a profit warning in March, its Irish filings show that the main HMV business suffered a drastic cut in profit margins in spite of the boom in retail sales.

With supermarkets offering cut-price competition and growing numbers of music consumers turning to online retailers, post-tax profits at HMV Ireland fell to €7 million from €8.2 million.

Waterstone's post-tax profit in Ireland was €1.9 million, only €200,000 stronger than in the previous year. "The markets in which the company operates continue to be highly competitive and there is ongoing upward pressure on property and labour costs," said a note with both sets of accounts.

In a trading statement yesterday, the HMV group said its sales in Britain and Ireland fell 0.5 per cent in the 52 weeks to April 28th last while like-for-like sales were down 3.4 per cent in the same period.

While the group admitted it had struggled during recent weekends as hot weather kept shoppers off the high street, chief executive Simon Fox said he was hopeful new releases such as the CD by the Arctic Monkeys and the last Harry Potter book would help sales.

"The markets in which the group operates have continued to be extremely tough," Fox said in a statement.

"However . . . I am confident that the initiatives we are putting in place to reduce our costs, revitalise our core business and grow our revenues are being pursued at pace and will lead to a turnaround of the group's performance."

HMV embarked on a three-year turnaround plan in March which will focus on "interactive". Mr Fox said there was great momentum within the company to make these changes happen. - (Additional reporting Reuters)