Music retailer HMV is expecting its online business to account for a fifth of its sales within the next three years and will launch its own social networking site to drive sales.

The company, which also owns bookseller Waterstone's, announced sales of £1.9 billion in its annual results for the year ending 28 April, up 3.8% on last year. But HMV admits it is operating in difficult market conditions, and has seen a 3.5% fall in like for like sales over the year.

In a statement released with the results, chief executive Simon Fox said the company must grow by adapting to a new multichannel environment, and signalled a strong focus on the internet.

"We are investing in our existing transactional sites, hmv.co.uk and Waterstones.com, by integrating them into our stores and increasing the level of marketing support they receive," Fox said.

"By 2010 we expect hmv.co.uk to become 20% of HMV U.K.'s sales and Waterstones.com to represent 9% of Waterstone's sales."

HMV would integrate both traditional CDs and digital music into its website to allow customers to buy either a physical or downloadable product from a single site, he said.

The company would launch its own social networking site to boost sales to consumers who are increasingly "absorbing entertainment content from non-traditional channels and sources", Fox said.

The website will let users create home pages, meet others and access film previews, behind-the-scenes footage and music performances.

In the past year HMV has also integrated recent acquisition Ottakar's into its Waterstone's business. The integration was "completed successfully and on time," with the Waterstone's stock management system introduced into all stores and Ottakar's back office integrated with Waterstone's in time for the busy Christmas period, the company reported.

Further consolidation of back office systems and centralisation of procurement across the HMV Group is expected to deliver cost savings of £40 million a year by 2010.