Sometimes companies, especially with long histories, can be left for dead and buried, hobbling along in the emergency room for years amid endless profit warnings, their business model written off as hopelessly outdated. Sometimes those companies make a surprising comeback. It is the case of Hornby (HRN:LN), legendary pioneer of British toy-making manufacturing, with over a century of history. Hornby manufactures miniature train, plane and car models for hobby enthusiasts under its own brand, Airfix and Scalextric (among others). Hardly a sexy, appealing prospect for investors in the digital age.
In fact, Hornby had run into a plethora of problems in recent years. Its previous chief executive, Richard Ames of Ladbrokes fame, had joined in 2014 and lasted only two years, victim of the worst trading day in the toymaker’s history in February 2016. The company was beset by supply chain, image, and debt problems. The 1990 decision to relocate production from Margate in Kent to China to cut costs, after some initial success, went badly astray. Hornby attempted to move away from a single supplier, but this caused delays to supplies and costs to soar, prompting the company to bring back some of its production to the UK. A back-office and distribution systems reorganisation also ended in delays and helped create a poor customer service image for the toymaker. A campaign to sell London 2012 Olympics memorabilia misfired, as the company grossly overestimated sales.
The finances tumbled: in 2015, Hornby was forced to tap the capital markets and raise £15 million for debt repayment, and then again this summer a further £8 million to service its debt restructuring plan. The company board announced it would reorganise its business, cutting half of all product lines and retaining only the ones which were most profitable after discovering that the top half of product lines generated 90% of revenue.
Now, as a result, revenue performance for the financial year was ahead of the board’s expectations, with especially “the fourth quarter showing an improving trend”. Improvements are particularly noticeable in its cash flow, which went from £-7.2 million last year to a positive £1.1 million this year. The company said they were “confident” in the “underlying trading momentum” of the business, especially after a “solid January sales period” which offset the total 25% loss of revenue last year.
Shares in the group were 10% higher at 34p in late afternoon trading in London, before closing the week at 33p, or up 7.32%. The company has a market capitalisation of £27.9 million and 94.6 million shares outstanding.