Light at the end of the tunnel: Why Hornby’s turnaround plan is gathering steam

Once the go to company for every boy’s favourite toys - model trains, Airfix kits, Corgi and Scalextric cars - Hornby’s (HRN)Follow | HRN fall from favour has been painful to watch. Changing consumer habits exacerbated by a series of strategic missteps have seen the share price hit the buffers, plunging from a peak of just over 300p a share in 2007 to an all-time-low of 16.5p today. 

The company really began to run out of steam in 2015, and a few years later became the subject of a majority takeover by largest shareholder Phoenix Asset Management, which now owns 72% of the company. The deal saw the board ousted and replaced with members of Phoenix’s team, who began the long journey of recapturing the company’s former glories – a process, they said, which would not show results for at least 3 to 5 years.

Fast forward to 2023, and there are indeed glimpses of light at what has been a long, dark tunnel. In an AGM statement today, it said that sales in the first five months of the year had grown in the low double digits – as forecast in its annual report – and that margins were improving. It said that although the full year outturn was still dependent in a good Christmas, it had been successful in reducing aged stock and that, alongside strong internet invoicing, the order book was healthy even before the launch of new products.

That all sounds good, but it doesn’t yet tell us how close the company is to returning to profitability after slipping to an operating loss of £0.6m in the year to March 2023, from a £1.6m profit the year before. Cash is gushing out of the business too - net debt at the last year end had hit £5.8m, a swing from a net cash position of £3.9m a year earlier.

The company has been far too slow to embrace ecommerce, too: direct to consumer sales are growing fast but still only represent a fraction of overall sales, bad news as it means Hornby doesn’t have data through which to understand its customers, and therefore get stock levels right, or control of its end pricing and marketing. Indeed, while stock levels are falling, inventory remains higher than most retail industry analysts would be comfortable with, and in recent periods it hasn’t had enough of the products its customers really want. A good Christmas is also far from guaranteed given the difficult economic backdrop. 

But there are some signs that the worst could be behind the venerable company, not least the appointment of a new chief executive, Oliver Raeburn, who’s successfully tackled similarly troubled businesses before, most recently taking Paperchase through administration to a sale. He’s also appointed a new Group Sales Director, who can hopefully continue the positive e-commerce trajectory.

Bringing in new blood is important, because arguably Hornby’s problems have been caused just as much by management missteps than by a consumer shift away from physical hobbies. Indeed, the continued success of Lego, or Hot Wheels cars, and the latter success of Games Workshop (GAW)Follow | GAW suggest that physical toys and games are hardly dead at all, despite the rise and rise of video gaming – in fact, the board game market hit sales of $19bn last year, doubling in half a decade.

By the end of the decade, the market is expected to all but double again, and the latest move by Hornby means it might not be left in the sidings this time. In July this year, it acquired 25% of a Nottingham based company called Warlord Games – and the option to buy the whole company - which like Games Workshop makes tabletop games and the figurines that accompany them. Most are based on historical conflicts, but it also licenses in intellectual property from cult favourites such as 2000AD and Streetfighter.    

Founded 15 years ago by two former Games Workshop employees, the similarities are easy to explain. The difference, of course, is that Warlord has a long way to catch up with Games Workshop, which at a market cap of £3.5bn is valued a mere 700 times larger. But it’s already demonstrating financial characteristics that suggest it could bring a much-needed boost to Hornby – high returns on capital, an established distribution network, UK manufacturing, and profitability.

Buying Warlord doesn’t, of course, immediately solve the problems that have dogged the rest of the group for years. But it is a highly complementary business to Hornby’s core, and the deal points to a recognition by new management that a fresh direction needed to be found, which could make it a catalyst for groupwide improvement and begin the journey back to profitability.