HMV, the UK’s biggest music retailer, on Tuesday predicted that CD sales would be hit by market turmoil and promised to target social networking, iPods and digital downloading in response.

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Tom Braithwaite on HMV’s plans to turn around business in the wake of its latest profits warning

The 86-year-old music chain has failed to adapt to a digital revolution in the music industry. In a bleak assessment, it predicted physical music sales in the UK would decline in value by 26 per cent in the next three years.

Simon Fox, who became chief executive in September, was forced to include another profit warning along with a “radical” strategic review.

The announcement came a year to the day since HMV’s previous management rejected a 210p-a-share offer from Permira, the private equity group. On Tuesday, the retailer’s shares – which have been battered by regular downgrades to forecasts - sank a further 24p, or 15.7 per cent, to 128¾p.

The immediate spur was HMV’s admission that “trading conditions have deteriorated further” since it announced a first-half loss of £36.4m ($70.3m) in January; analysts slashed their forecasts for full-year pre-tax profit by almost 20 per cent to about £50m.

Like-for-like sales at its Waterstone’s book chain fell 6.1 per cent in the nine weeks to March 10, while HMV music stores in Asia suffered a 7.2 per cent like-for-like decline and HMV Canada was down by 7.6 per cent.

HMV UK & Ireland, the division that is thought to face the most grave long-term prospects, added 1 per cent to like-for-like sales. But most of Mr Fox’s strategic review was focused on replacing the revenue streams lost by the faster-than-expected demise of CDs and DVDs.

He will sell more portable digital products, introduce a loyalty card and trial a “refreshment hub” that would allow customers to download music and burn it to a CD while sipping soft drinks. HMV will also launch its own social networking site and sell music via 3, the mobile phone network operator.

HMV also aims to cut costs by £40m a year by restructuring the supply chains at the music and book chains, combining purchasing and selling 20-30 Waterstone’s stores and a handful of HMV stores.

Philip Dorgan, analyst at Panmure Gordon, said: “The suspicion is that it will be a case of rearranging the deck chairs on the Titanic but there are some good ideas in the review,” he said.