Shares in Hornby Plc (LON:HRN) zipped higher on Wednesday as investors were lifted by the news that the model trains maker’s turnaround strategy is on track.
The company, which is trying to get back to profitability, has halted its dividend for another year but reported an improvement in its medium term outlook.
Reporting its full-year results for the 12 months to the end of March, Hornby saw pre-tax losses narrow to £9.5mln, down from £13.5mln in 2016. Revenues also slipped, falling 15% to £47.4mln.
Hornby, which also makes Scalextric cars, has been on a drive to reduce its cost base and trim its product range in order to focus more on its key brands.
It said today that its stock were by 29% to what it call an “appropriate level”.
The first phase of the turnaround plan also included bumping up gross margins by focusing on the more profitable products.
Even with the liquidation of stock, second half gross margins rose to 40% from 36% in the first six months of the year.
“Our results to March 2017 provide solid evidence of our delivery in phase one of our Turnaround Plan; notably in terms of cash flow performance and gross margin improvement during the year,” said chief executive Steve Cooke.
“Much remains to be done to return the business to sustainable profit and positive cash generation but we are confident that the changes delivered last year will underpin the progress we plan to make.”
Stage two of the turnaround plan
As for stage two of the turnaround plan, Hornby has a couple of objectives in mind.
It wants to build on the “strong profitability” of its Hornby, Airfix and Humbrol brands while improving the performance of tis Scalextric business.
Hornby will look to grow its European and US businesses, two key markets where the company believes there is a lot of untapped potential.
Cost control and management of working capital will also remain an integral part of the second phase of the turnaround strategy, which should help to further improve cash generation.
Current trading in line with expectations
Sales both in the UK and the States have been “down slightly” so far in the new financial year, although they’re still in line with management expectations.
European sales are down by almost 50% in the 11 weeks of the new year. This is mainly because of the timing of new product releases as well as the lower levels of investment in international rail brands, Hornby said.
Gross margins have continued to head higher and are up to 41%.
In terms of dividends going forward, the toy maker said its policy was “under review” after it suspended payouts last year.
Shares surged 3.5p, or 11.2%, to 34.75p in early deals.