Hornby Trading Statement Published 22 April

[MidlandRed]

1 hour ago, spamcan61 said:

yes we're sure, their financial statement indicates they have about 20 million quid of stock on hand, which is a mountain.

I suppose it depends what ‘stock on hand’ means. If they have paid the factory but it’s still in transit is this included? Also I would presume this is more than just railways and includes the other brands (Scalectrix etc etc) some of which will no doubt rely equally, if not more than elements of the rail business on being available for delivery to stockists etc. Hornby also provides ancillaries like track and scenic etc etc - the point is it’s not necessarily £20 million of model locos or rolling stock (as this would be with some makers). 

Edited April 25 by MidlandRed

[spamcan61]

11 minutes ago, MidlandRed said:

the point is it’s not necessarily £20 million of model locos or rolling stock (as this would be with some makers). 

Agreed it's not necessarily all toy trains, but it's still bad news as previously analysed by "Gallows-Bait" a page back.

Edited April 25 by spamcan61

[Roy Langridge]

5 minutes ago, spamcan61 said:

Agreed it's not necessarily all toy trains, but it's still bad news as previously analysed by "Gallows-Bait" a page back.

Yes and no. As @MidlandRedsaid, if that includes stock that is in transit, that may be mostly sold already, but still could show as stock held until it is dispatched to the buyer / retailer and the invoices paid. 
 

Roy

[adb968008]

25 minutes ago, Roy Langridge said:

Yes and no. As @MidlandRedsaid, if that includes stock that is in transit, that may be mostly sold already, but still could show as stock held until it is dispatched to the buyer / retailer and the invoices paid. 
 

Roy

In which case Q1 should be good.

 

Black 5’s all round.

Edited April 25 by adb968008

[ruggedpeak]

Some internet research may help give an indication of the extent of the issue.

 

In Kernow's Bargain section they have 118 different SKU of Hornby OO coaches alone - that is just individual product lines, quantities vary from 1 to "more than 10" aka shedload! The overall total number of Hornby 'bargain' SKU's at Kernow is 285. However put a guesstimate of the average quantity of each SKU and an average value of each item and you don't don't actually get much total value - a rounding error on the £20m accounts figure (say av. quantity 8 per SKU and £30 per item = 8 * 285 * 30 =£68,400). Even if a quarter of the £20m is OO gauge trains (£5m) then the total number of retailers carrying large quantities of these items will struggle to get to a £1m.

 

This is comparable to Bachmann who have 256 SKU's in the Kernow bargain section. Obviously quantities and values will vary so actual value of stock in the bargain bin would require a lot more work (or someone with some good coding skills to scrape the data).

 

But we can conclude

 

1) it is not just a Hornby issue and perhaps calls into the traditional blue and red business model for trains

2) even with a number of retailers carrying or having access to significant amounts of the surplus stock, it may not even be touching the sides of the problem.

 

[JohnR]

1 hour ago, ruggedpeak said:

Some internet research may help give an indication of the extent of the issue.

 

In Kernow's Bargain section they have 118 different SKU of Hornby OO coaches alone - that is just individual product lines, quantities vary from 1 to "more than 10" aka shedload! The overall total number of Hornby 'bargain' SKU's at Kernow is 285. However put a guesstimate of the average quantity of each SKU and an average value of each item and you don't don't actually get much total value - a rounding error on the £20m accounts figure (say av. quantity 8 per SKU and £30 per item = 8 * 285 * 30 =£68,400). Even if a quarter of the £20m is OO gauge trains (£5m) then the total number of retailers carrying large quantities of these items will struggle to get to a £1m.

 

This is comparable to Bachmann who have 256 SKU's in the Kernow bargain section. Obviously quantities and values will vary so actual value of stock in the bargain bin would require a lot more work (or someone with some good coding skills to scrape the data).

 

But we can conclude

 

1) it is not just a Hornby issue and perhaps calls into the traditional blue and red business model for trains

2) even with a number of retailers carrying or having access to significant amounts of the surplus stock, it may not even be touching the sides of the problem.

 

 

Thats probably why it will prove difficult to offload some of that stock in the Hornby warehouse - the retailers are already carrying some of it.

 

Of course, in years past, Hattons would have taken a lot of stock of Hornby's hands (at the right price), and bailed them out of a mess. Thats not an option any more. 

[Les1952]

4 hours ago, adb968008 said:

In which case Q1 should be good.

 

Black 5’s all round.

 

Q1 would have the same issue with the next lot of "in transit" stuff showing as in stock....

 

That aspect is one they can't win other than getting stuff made closer to the UK, and, barring World War III,  that isn't going to happen in any large amounts any time soon.

 

Les

 

Edited April 25 by Les1952

[andyman7]

10 hours ago, ruggedpeak said:

Except that traditional physical retail (i.e. actual shops) requires stock sitting on shelves otherwise people won't come to the shop.

 

 

Yes, but in a perfect retailer's world they would be steadily selling the stock and successfully restocking with new supplies. What instead happens is they have shelves of (say) 1st class or Brake end coaches they can't sell, but can't order any more of the 2nd class ones that are needed to shift the others as they sold out straight away.

[The Stationmaster]

20 hours ago, ruggedpeak said:

I think you just returned to the hobby 2 or 3 years too early! In a couple of years it should be very different.

 

Personally as a piece of high risk NPD i think they have done an excellent job with TT and would guess sell through etc is probably noticeably better than OO. As they say, overnight success takes about 10 years!

Hornby definitely needed to find a niche and really TT was all that was left to them and it struck an old chord of course.  They were seriously looking at going back into TT 7-9 years ago but got a poor reception from TT/3mm scale modellers when they started to sound them out so nothing happened.  The present TT120 has been a long time in the making and development and has cost them a lot of money especially after what one source described to me as serious mistakes in their first stab at it - when all the design was done in China.  

 

Hence it's seemingly come later than it should have done but apart from under resourcing stocks at first and making some model choices which don't appeal to the railway modelling fraternity I think they have done the right thing.   But I do wonder if it's a bit too close to N in scale terms - 'Gallows Bait's remark on that was very interesting I thought.  But it's here and I'm sure that it will stay and ultimately be financially very positive for them especially by opening new markets.

 

I suspect they didn't really understand what direct selling would cost them in support etc terms plus the sheer number of additional labour resources they had to inject into their organisation.  So no surprise that they have decided to let in stockists in the model railway trade.   And hopefully they will get sets, if nothing else, into the wider retail market especially at Christmas - if they can get the right price point and retailer margins.

[ruggedpeak]

12 hours ago, andyman7 said:

Yes, but in a perfect retailer's world they would be steadily selling the stock and successfully restocking with new supplies. What instead happens is they have shelves of (say) 1st class or Brake end coaches they can't sell, but can't order any more of the 2nd class ones that are needed to shift the others as they sold out straight away.

I agree. Which raises interesting questions about retailers stocks, turnover of those stocks, cashflow etc that we won't get answers to, but comes back to my earlier point about retail premises.

 

If the bulk of sales and margin/profit is from pre-order or rapid sellout items, what is the point of a retail store full of stock on shelves which only moves very, very slowly as you describe and what are the economics of that? In theory it is a financial drain on the business, Hornby have a financial drain on the business from excess/wrong stock and pass some of it onto retailers who end up with some of that excess/wrong stock costing them retail space and cash. Hence retailers moving into the secondhand market etc en masse and finding other ways to generate profitable revenue streams.

 

Could be worse though, could be trying to sell EV's 🤣

[The Stationmaster]

16 hours ago, ruggedpeak said:

Some internet research may help give an indication of the extent of the issue.

 

In Kernow's Bargain section they have 118 different SKU of Hornby OO coaches alone - that is just individual product lines, quantities vary from 1 to "more than 10" aka shedload! The overall total number of Hornby 'bargain' SKU's at Kernow is 285. However put a guesstimate of the average quantity of each SKU and an average value of each item and you don't don't actually get much total value - a rounding error on the £20m accounts figure (say av. quantity 8 per SKU and £30 per item = 8 * 285 * 30 =£68,400). Even if a quarter of the £20m is OO gauge trains (£5m) then the total number of retailers carrying large quantities of these items will struggle to get to a £1m.

 

This is comparable to Bachmann who have 256 SKU's in the Kernow bargain section. Obviously quantities and values will vary so actual value of stock in the bargain bin would require a lot more work (or someone with some good coding skills to scrape the data).

 

But we can conclude

 

1) it is not just a Hornby issue and perhaps calls into the traditional blue and red business model for trains

2) even with a number of retailers carrying or having access to significant amounts of the surplus stock, it may not even be touching the sides of the problem.

 

Don't forget  - unless things have changed - that Bachmann out out to retailers every year a list of what amounts to unsold stock being offered at a lightly reduced trade price.  Hence any retailer who takes up that offer (and not all do) will have stock bought in at reduced price and therefore saleable at more than the usual discount below RRP.

 

I don't think Hornby did the same but simply allowed the stock mountain to grow, and grow, until one lot of past management decided to reduce it by means of 'fire sales'.  Unlike Bachmann's approach I believe - and am obviously open to correction - that this sort of heavily discounted stock was not offered to all retailers but (in some cases??) was left to reps to sell to those whom they expected would both be interested in it and able to pay for large amounts of it.

 

I suspect that more recently when Hornby have been selling surpius stock at reduced prices they have followed the Bachmann approach.  I don't follow all the retilers but I know that both Hattons and Kernow have bought such stiock and I also know that someone else, in a smaller but still quite busy, way of business has had such stock offered to him but hasn't bought any.

[The Stationmaster]

Changing the theme away from the surplus stock mountain a change at Hornby made public yesterday.  Lyndon Davies will 'for personal  health related reasons' step down as non-exec Chairman of Hornby PLC on 30 April.   John Stansfield will takeover the role pending seeking a new non-exec Chairman.  LD will remain as a non-exec Director

 

I hope that Lyndon is not suffering serious health problems.  And now sorry to hear what happened to him.  Having recently had two eye operations I know, in a very minor way, understand what it's like to be without the sight in one eye for no more than a day; losing it all must be a terrible blow. 

Edited April 26 by The Stationmaster

[JohnR]

54 minutes ago, The Stationmaster said:

Changing the theme away from the surplus stock mountain a change at Hornby made public yesterday.  Lyndon Davies will 'for personal  health related reasons' step down as non-exec Chairman of Hornby PLC on 30 April.   John Stansfield will takeover the role pending seeking a new non-exec Chairman.  LD will remain as a non-exec Director

 

Some might say  that 'the changing of the guard'  is still gradually proceeding but I hope that Lyndon is not suffering serious health problems.

 

As reported by Oxford last month

 

https://www.oxforddiecast.co.uk/blogs/news-1/an-update-on-taff?_kx=X_INYaM5Xx0uzP7tlRHRUMZQzzlTlBdzAR6oYq5jowA.UvyHL7

[smr248]

1 hour ago, The Stationmaster said:

Hornby definitely needed to find a niche and really TT was all that was left to them and it struck an old chord of course.  They were seriously looking at going back into TT 7-9 years ago but got a poor reception from TT/3mm scale modellers when they started to sound them out so nothing happened.  The present TT120 has been a long time in the making and development and has cost them a lot of money especially after what one source described to me as serious mistakes in their first stab at it - when all the design was done in China.  

 

 

I seem to recall a comment that the TT 08 was designed in China.  That would explain a few things.

The overstock thing put me in mind of Hattons.  No doubt the situation is rather different and I do hope that Hornby's position is more "sustainable".

[The Stationmaster]

3 hours ago, JohnR said:

 

As reported by Oxford last month

 

https://www.oxforddiecast.co.uk/blogs/news-1/an-update-on-taff?_kx=X_INYaM5Xx0uzP7tlRHRUMZQzzlTlBdzAR6oYq5jowA.UvyHL7

Very sorry to hear that and he'd looked so well when I'd seen hom on the Saturday at Warley talking to folk on one of the stnands there.  Now he really needs to rest and take his ease while doing the best fr his health.

Edited April 26 by The Stationmaster

[adb968008]

There seems to be a cycle, starting around 2012, where by they were over stocked, but with Sanda Kans demise they were understocked by 2017, and arguably catalyst to new entrants emerging,  and having their own “supplier woes”, but by 2022 they were back in an over stocked position again.

 

it takes years to develop a product, and 2027’s range is probably on the drawing board now, if the financial outlook is struggling, could we by 2027 be looking at being understocked once again ?

Edited April 26 by adb968008

[The Stationmaster]

1 minute ago, adb968008 said:

There seems to be a cycle, starting around 2012, where by they were over stocked, but with Sanda Kans demise they were understocked by 2017 and having “supplier woes”, but by 2022 they were back in an over stocked position again.

 

it takes years to develop a product, and 2027’s range is probably on the drawing board now, if the financial outlook is struggling, could we by 2027 be looking at being understocked once again ?

They've got an awful lot of stuff - whatever it is - to clear out by then (if they manage).  Some of it is clearly starter sets and Playtrain but it must surely include more than just teh railway ranges - slot cars are also a broader market with other companies in teh game at lower price points.

[Gallows-Bait]

10 minutes ago, adb968008 said:

There seems to be a cycle, starting around 2012, where by they were over stocked, but with Sanda Kans demise they were understocked by 2017, and arguably catalyst to new entrants emerging,  and having their own “supplier woes”, but by 2022 they were back in an over stocked position again.

 

it takes years to develop a product, and 2027’s range is probably on the drawing board now, if the financial outlook is struggling, could we by 2027 be looking at being understocked once again ?

Based on the trends and analysis in the graphs there was indeed a peak in 2012 at around 28% of turnover, but I would suggest that the 2017 level was more typical of the prior decade or so rather than being understocked.  As such, stock appears to have ballooned out of control across 2018-2020.  The reduction in the 2021 and 2022 years Hornby have themselves called out the increased demand under lockdown as being able to be met due to their excess stock levels, so does make sense, but it does make the jump back up in 2023 even more noticeable as they clearly banked on a huge seasonal boost that never came, which is really a matter of failing to read all the economic signs.

 

I work in food wholesale and whilst 2023 was bad, we never expected it not to be as inflation has been an issue since at least the beginning of 2022. Not quite sure why Hornby were shocked by it all.

[adb968008]

1 hour ago, Gallows-Bait said:

Based on the trends and analysis in the graphs there was indeed a peak in 2012 at around 28% of turnover, but I would suggest that the 2017 level was more typical of the prior decade or so rather than being understocked.  As such, stock appears to have ballooned out of control across 2018-2020.  The reduction in the 2021 and 2022 years Hornby have themselves called out the increased demand under lockdown as being able to be met due to their excess stock levels, so does make sense, but it does make the jump back up in 2023 even more noticeable as they clearly banked on a huge seasonal boost that never came, which is really a matter of failing to read all the economic signs.

 

I work in food wholesale and whilst 2023 was bad, we never expected it not to be as inflation has been an issue since at least the beginning of 2022. Not quite sure why Hornby were shocked by it all.

Just a guess ..

 

but lead times for orders can be years.

Back in 2020 A lot of people rushed to the hobby, it was probably the hobbys best year in sometime as everyone was locked up at home.

 

No one knew how covid was going to play out, were we going to be locked up for years ?

Track, scenics quickly disappeared, iirc Peco switched to PPE production.

I recall one retailer phoning me to ask if I needed anything as these items were going to be rationed for a while.

 

A larger than average order for these consumables maybe prudent, afterall track, scenics always sells, so is a safe bet, that it will sell sooner or later. Same thing to for Airfix kits, Humbrol paint etc.

 

I do think though the range of coaches available is enormous, and disjointed.

 

As it were by end of 2021 we were back on the streets again, and the models back in the box… and if the stock arrived 2022, its a headache.

 

I do think the wider hobby has an emerging problem, in that lockdown saw a huge number of new toolings announced, and last count was nearly 60 new locos in 00 alone announced but not yet arrived… once these start landing they are going to need enough buyers with deep pockets to buy them, at a time where interest rates, inflation have climbed… thats where the prepay and deposit buyers are more locked in to commit, and are may become selective around other models arriving as a result, especially if they start arriving enmasse.

 

Its just a guess but in my head it makes sense.

Edited April 26 by adb968008

[stewartingram]

Just a thought, a different take on so-called excess stock, either bya manufacturer, or a retailer buying from said manufacturer.

Let us assume the the business is ticking over nicely, and has a surplus bank balance. Now, firstly in the case of the retailer, he has funds to buy in extra stock, say £10000 worth (just a number, not taken from real life).. Like I said he can afford it. Somehow he manages to stock it, not needing any extra 'warehouse' space, so really it costs him nothing extra, he is not going into debt. In time the majority of it sells, but it could take a long while. Meanwhile his regular intake, chosen carefuly, sells as normal, fairly quickly - lets say £2000 worth. With perhaps £10000 worth of 'excess',. So he sits on £10000 of excess, which over time gradually reduces. But next year, he spends another £2000, some of which replenishes the surplus (having sold £1000 of it), the remainer restocks the normal shelf. This really doesn't cost him anything above his normal expenditure, but, the important thing, he could afford it in the 1st instance.

Thing is, the number of retailers that could afford that are few, Hattons maybe was one of those.

Don't forget too, some of that bulk will appreciate in value as time passes, as the items become scarce.

Now for the manufacturer. A lot is said about storing surplus costing money. I seriously doubt that the manufacturer would need to pay any more for a larger warehouse, it would be normal to have spare space in the warehouse. But, they would have to pay for the production of the goods, and not see a full return on that for a while. However, it is probable that old fashioned thinking would expect to set a (trade) selling price such that the profit is made within a set period (say1-2 years), anything after that period period brings in extra profit as the R&D is paid off. Nowadays they seem to set prices such that the 1st batch is the only one needed before R&D is written off, along with making a profit on that batch. Seems an odd way of working to me? And then, if they can't afford to pay those costs but have loans to pay back, that puts the costs much higher.

[Gallows-Bait]

1 hour ago, stewartingram said:

A lot is said about storing surplus costing money. I seriously doubt that the manufacturer would need to pay any more for a larger warehouse, it would be normal to have spare space in the warehouse. But, they would have to pay for the production of the goods, and not see a full return on that for a while. However, it is probable that old fashioned thinking would expect to set a (trade) selling price such that the profit is made within a set period (say1-2 years), anything after that period period brings in extra profit as the R&D is paid off. Nowadays they seem to set prices such that the 1st batch is the only one needed before R&D is written off, along with making a profit on that batch. Seems an odd way of working to me? And then, if they can't afford to pay those costs but have loans to pay back, that puts the costs much higher.

 

In Hornby's specific case it is that financial cost that is one of the things significantly hurting them.

 

Between March 2022 and March 2023 Hornby's borrowings increased from £300k to £6.9m (Made up for £4.6m in "Asset Backed Lending", effective loans from banks, and £2m from Shareholder Loans (Phoenix Asset Management).  Their cash in the bank dropped from £4.1m down to £1.3m, so we know that what they've borrowed isn't sat in the bank.

 

In terms of how it was spent we can see £4.6m was spent on tooling, this is about £2.5m more than their historic levels of investment in tooling, so I think it's fair to say this extra £2.5m is likely to be largely the spending on TT120. Their actual funds in the bank for 2023 have gone down by closer to £9.5m, so that means £7m - effectively the entire borrowing - has gone elsewhere.  We know some of it will simply be paying the bills as the company has made a trading loss of about £2.7m (Ignoring the goodwill write down of £4m which implies one of the brands Hornby has purchased in the past is struggling badly but that money is already spent in the past).  The remaining biggest single movement is £4.8m of additional stock.

 

So it's not unreasonable to then assume that £4.8m out of the £6.7m of borrowing has been spent on that stock, which is about 72% of the loan.  Total interest paid in 2023 on those loans was £690k, so 72% of that is just under £500k.  So the cost of that warehouse even if there's no increased cost to the operation of the warehouse, that stock is costing half a million pounds a year sitting there doing nothing.  Add to the fact that that £4.8m could have actually earned 2-3% in interest and the actual cost of doing nothing is closer to £600-700k.  And that's just if they do nothing but put it on short term deposit in the bank.  More realistically they could have spent the money doing something that earns more income, after all it's the same amount of money as they've spent on tooling for the whole year.

 

 

As an aside, Tooling investment spending in 2021 and 2022 was also much higher than normal which probably indicates how much time and money has gone in to preparing the ground for TT120 as total tooling is around £6m higher than average across the last three years.

[nightstar.train]

10 hours ago, The Stationmaster said:

I suspect they didn't really understand what direct selling would cost them in support etc terms plus the sheer number of additional labour resources they had to inject into their organisation.  So no surprise that they have decided to let in stockists in the model railway trade.   And hopefully they will get sets, if nothing else, into the wider retail market especially at Christmas - if they can get the right price point and retailer margins.

 

3 hours ago, stewartingram said:

Now for the manufacturer. A lot is said about storing surplus costing money. I seriously doubt that the manufacturer would need to pay any more for a larger warehouse, it would be normal to have spare space in the warehouse. But, they would have to pay for the production of the goods, and not see a full return on that for a while. 

 

It's been discussed on here before that Hornby have entirely outsourced their warehousing and direct sales. Under this arrangement every thing they have at the warehouse is a monthly cost. And for direct sales they will have to pay a fee for the items to be picked and packed. I've not bought anything direct from Hornby, and obviously I'm not a retailer so I can't say how good the service is. 

 

They're certainly not the only company to do that. Judging by the emails I get at dispatch time Accurascale use a similar arrangement with an outfit in Birmingham. The place seems very efficient and certainly gets through the stock when a shipment arrives. Undoubtedly Accurascale will be paying for that service though. On the other hand Rapido do seem to have their own warehouse and when a new shipment arrives it all hands to the pumps packing parcels. 

[adb968008]

11 hours ago, Gallows-Bait said:

 

In Hornby's specific case it is that financial cost that is one of the things significantly hurting them.

 

Between March 2022 and March 2023 Hornby's borrowings increased from £300k to £6.9m (Made up for £4.6m in "Asset Backed Lending", effective loans from banks, and £2m from Shareholder Loans (Phoenix Asset Management).  Their cash in the bank dropped from £4.1m down to £1.3m, so we know that what they've borrowed isn't sat in the bank.

 

In terms of how it was spent we can see £4.6m was spent on tooling, this is about £2.5m more than their historic levels of investment in tooling, so I think it's fair to say this extra £2.5m is likely to be largely the spending on TT120. Their actual funds in the bank for 2023 have gone down by closer to £9.5m, so that means £7m - effectively the entire borrowing - has gone elsewhere.  We know some of it will simply be paying the bills as the company has made a trading loss of about £2.7m (Ignoring the goodwill write down of £4m which implies one of the brands Hornby has purchased in the past is struggling badly but that money is already spent in the past).  The remaining biggest single movement is £4.8m of additional stock.

 

So it's not unreasonable to then assume that £4.8m out of the £6.7m of borrowing has been spent on that stock, which is about 72% of the loan.  Total interest paid in 2023 on those loans was £690k, so 72% of that is just under £500k.  So the cost of that warehouse even if there's no increased cost to the operation of the warehouse, that stock is costing half a million pounds a year sitting there doing nothing.  Add to the fact that that £4.8m could have actually earned 2-3% in interest and the actual cost of doing nothing is closer to £600-700k.  And that's just if they do nothing but put it on short term deposit in the bank.  More realistically they could have spent the money doing something that earns more income, after all it's the same amount of money as they've spent on tooling for the whole year.

 

 

As an aside, Tooling investment spending in 2021 and 2022 was also much higher than normal which probably indicates how much time and money has gone in to preparing the ground for TT120 as total tooling is around £6m higher than average across the last three years.

If you borrow money, the lender usually requires an asset to secure against.

May 2022

https://www.securetrustbank.com/our-news/business-finance/Hornby-on-the-right-track-with-12m-facility-from-secure-trust-bank
 

£6mn accounts, £6mn inventory.

 

Would it be reasonable to assume borrowing against stock would come with limits on how you can dispose of that stock (for example not dumping it in a firesale, or maintaining certain limits ?)

 

Making a whole rake of LNER and LMS Coronation toolings isnt going to be cheap…and I do wonder their longevity after a first run.. they are not exactly mark1’s used nationwide for 50 years and 30 liveries… my guess theres 7 figures invested in metal right there. The 2nd run LMS coaches are in that “instock” inventory not exactly selling out fast, its not for want of a loco either, as thats also in the current “instock” inventory for quite some time too.

 

my thoughts are they may want to invest in a laser printer like Rainbow Railways and start doing some specials as theres a few things on the Hornby website I dont forsee flying out of the door in the colours they are in.

Edited April 27 by adb968008

[Gallows-Bait]

45 minutes ago, adb968008 said:

If you borrow money, the lender usually requires an asset to secure against.

May 2022

https://www.securetrustbank.com/our-news/business-finance/Hornby-on-the-right-track-with-12m-facility-from-secure-trust-bank
 

£6mn accounts, £6mn inventory.

 

Would it be reasonable to assume borrowing against stock would come with limits on how you can dispose of that stock (for example not dumping it in a firesale, or maintaining certain limits ?)

 

That is a very revealing article.

 

As to the first point, yes the loan will be secured.  Looking on Companies House, there is a registered charge there, but effectively it is a very wide ranging blanket description.  Effectively the bank get first dibs on anything the company owns in order to make good the debt in the event of anything going wrong.   There's complex wording with the debt being divided between a fixed charge element (effectively secured against property) and floating charge element (secured against the constantly changing parts of the business, debtors, cash, inventory and so forth). 

 

https://find-and-update.company-information.service.gov.uk/company/01547390/charges/AnOBl1Jfy7TEGwaQZ8nFEI2yTMo

 

There is a second charge listed for the loan from Phoenix which is similarly worded, but it is done specifically with reference to the STB loan, so that the bank loan still takes precedence, so effectively Phoenix have second place in the queue in getting thier money back.

 

https://find-and-update.company-information.service.gov.uk/company/01547390/charges/G-TMFITVTYzEu_I0AKOdg4YwxrA

 

What is really interesting about this is less the debt itself and more the way the lending has been structured and it's limits.  With STB being in a position to lend £12m in total (not all of which Hornby have needed to draw down as at March 2023), but being split for specific purposes, so £6m of the loan is designed for buying in more stock and the other £6m is more operational cash.  That implies that building up stock was a very deliberate decision and that the Hornby management team must have believed there were a large volume of sales to be won but that they just needed to bring in more product to meet demand.

 

This seems consistent with the bouyant expectation of growth continuing that Hornby seem to have had at the time.  In fact the March 2023 CEO's report indicated that they missed their revenue target by about 10% in the year.  Ultimately expecting around £5m of sales that never materialised does go a long way to explaining the stock build up and extrapolating the need to continue to meet that higher level of demand going in to 2024 would presumably also have required further stock increases.

 

We're also able to learn more about the loan from Phoenix.  In fact Hornby's half year update from November 2023 (for trading up to September 2023) details this as a maximum facility of £11.25m, so the £2m borrowed in March 2023 is also only part of the money they can draw down.  Across both loans this means Hornby could borrow up to £23.25m.  In fact by September 2023 we can see that total borrowing has jumped from £6.9m to £15.8m.  With the borrowing come mostly from the Phoenix loan, presumably it's the cheaper of the two facilities.  This was also the point when Stock peaked at it's highest at £24.1m, some £2.8m higher than March 2023.  £1.25m was also spent on acquiring 25% of Warlord Games in that time period.

 

As such it does appear as others have suggested, that there is an unavoidable time delay in slowing down the manufacture of goods back to the levels needed to support more realistic expectations of volume going forward.  However, at least based on the April 2024 trading update, with stock levels having reduced by around £3m and their borrowings not increased further, it does seem likely that the worst has passed.  Though it's taken 6 months of trading to bring the stock level down by £3m and as I've estimated they really need to bring it down by another £9m, so that's at least another 18 months to 2 years of carefully managed promotions and offloading of stock if they're to avoid losing too much money in the process.

[Widnes Model Centre]

@Gallows-Bait

 

What is not obvious is that when we settle our invoices, the money is paid direct to Secure Trust Bank, not Hornby.