Analyst Blasts Warner Music, Recorded Music Prospects

Influential analyst Richard Greenfield remained bearish on the record industry this week, and reiterated a sell rating on Warner Music Group.

Greenfield, a founder of Pali Research, noted that US-based second-quarter totals are mostly aligned with first-quarter results, a development that reaffirms projections of a far broader decline in recorded music sales.  That includes calls for continued drops for the rest of the year, though it also foreshadows a problematic slide in 2008.  “We are increasingly skeptical that the rate of CD decline will slow in 2008, as CDs increasingly become less relevant to the daily lives of the core music buying population,” Greenfield asserted.

Consumer behaviors are clearly changing, though the response of big-box retailers remains absolutely critical to major labels.  Currently, a number of major retailers are preserving meaningful floorspace for CDs, though zones are being threatened by sagging sales.  “Big-box retailers still offer a surprisingly broad selection of music in their physical stores,” Greenfield asserted while pointing to a Best Buy footprint of roughly 8.5 aisles (or 17 rows) of music and a total of over 9,000 slots, at an average of 6-8 CDs per slot.  “The question is how quickly will chains such as Best Buy shrink their music floor space to Wal-Mart like levels of only 1 aisle (2 rows) with 700 CD slots (6-8 deep)?” Greenfield posed.

The analyst projected declines in recorded product of roughly 20 percent in 2008, sharper than an earlier estimate of 15 percent.  Greenfield also reiterated a sell rating on Warner Music Group, a move that follows a string of negative assessments. “We believe it will be quite challenging to organically grow revenues in this environment,” Greenfield noted, while pegging a $14 price target on WMG shares.  WMG landed at $14.86 at the closing bell Thursday, just above a 52-week low of $14.69.