Ten years ago, you could have sold your Hornby Plc (LON:HRN) shares for 265p, whereas today they are on offer at 32p, so unlike the eponymous train sets, the shares are not appreciating in value.
There are many reasons why the iconic British toys maker may never see its glory days again.
A train set in every care home
Many of its core customers will be – how can we put this delicately? – not around or will be living in care homes in 20 years’ time. Hornby’s got some fondly remembered brand names – Airfix, Scalextric, Humbrol, Corgi – but do they resonate with a new generation?
When a company says, as Hornby did in this morning’s trading update, it is launching a commemorative Austin Mini die-cast model in celebration of the Queen’s 90th birthday that gives a heavy hint about the typical age of the core customer group.
Read this morning's trading update
Start taking the tablets
Can physical model train sets compete with the likes of PC software Train Simulator? For a tenner, kids can get Train Simulator 2017 Special Pioneers Edition that comes with four ready-made real-world routes.
More than half of three and four-year-olds are now using tablet computers, so that means less time crawling around the floor pushing a chuffa-chuffa along a track. Admittedly, many of the educational programs on tablets also combine some element of traditional tools (think of designs that could be built with Lego bricks), so there is scope for Hornby to exploit this trend, plus the company has its own Hornby E-Link and Railmaster app, both of which link control of a railway layout with computers and mobile devices.
Sadly, the suspicion is that the only sort of tablets most of Hornby's customers are using involve reducing cholesterol ...
Has it got the right controller (fat, or otherwise)?
After the debacle of Hornby's over-optimism regarding how keen tourists would be on buying tat themed on the 2012 London Olympics, and the problems with its over-reliance on a single Chinese manufacturer, Richard Ames became chief executive (CEO) in April 2014.
He was railroaded out of the business by February 2016, and finance director Steve Cooke took over as CEO. Was that because he was the best man for the job or because no-one of a higher calibre wanted to touch a company seemingly locked in the past?
It’s too soon to tell whether Cooke will turn the company’s fortunes around, but we wish him the best of luck. He’s doing all the usual things turnaround specialists do, such as cutting costs, and focusing on the most profitable and cash generative areas of the business, and despite the slightly precarious state of Hornby’s finances he has still found £1.2mln to invest in new product tooling and £300,000 to spend on beefing up the company’s information technology systems.
The turnaround is late and may have even been cancelled
Back in mid-2011, the business was “in great shape”, according to long since departed chief executive Frank Martin, with the company excited by securing the worldwide licence for a range of Star Wars Scalextric products.
Now, in 2016, turnover has still not recovered to pre-London Olympics levels. Revenue is expected to decline significantly year-on-year in the second half of the current financial year as the planned rationalisation of product lines, channels and certain international brands takes effect.
Revenue for the seven weeks to 20 November 2016 was 22% lower than the prior year.
Even after cutting back its product line by some two-fifths, it will have some 1,400 product lines, but not many – if any – are going to make the average Minecraft gamer sit up and take notice.
Taking a pounding on forex
The group purchases goods in US dollars and sells in sterling and euros as well as US dollars, so is therefore exposed to exchange rate fluctuations.
With a former finance director in charge, it is small wonder the company continues to hedge short-term currency exposures up to 12 months ahead.