Hornby Profit Warning

[Paul Cram]

The prosecution offers the following into evidence:

http://www.gaugemast...?code=CITY88901

http://www.gaugemast...?code=CITY84005

 

As evidence of what exactly?

[D605Eagle]

It would appear that this is a good strategy for ensuring they always command a high price and therefore profit. Increase the supply and the price may well fall. Basic laws of supply and demand.

Yes, but its the second hand market that is reaping the rewards of high prices. After all Hornby sell them for no more than the rest of the Mk2D range.

[mow]

This is a more worrying take on the Profit Warning quoted in The Guardian.

 

"Jon Copestake, retail analyst at the Economist Intelligence Unit, was also downbeat: Hornby's results reflect the changing nature of demand for toys. Although the Hornby brand is steeped in nostalgia for many adult consumers, the prevalence of console gaming has made it something of an anachronism for younger consumers. Although Scalextric is fun it is difficult to see it competing with the Gran Turismo gaming series.

 

The current economic climate and poor Christmas trading only compound this structural challenge and it is difficult to see how Hornby products can operate as more than collectible or niche items, outside the mainstream, going forward.

 

http://tinyurl.com/guardian-Hornby

[The Stationmaster]

This is a more worrying take on the Profit Warning quoted in The Guardian.

 

"Jon Copestake, retail analyst at the Economist Intelligence Unit, was also downbeat: Hornby's results reflect the changing nature of demand for toys. Although the Hornby brand is steeped in nostalgia for many adult consumers, the prevalence of console gaming has made it something of an anachronism for younger consumers. Although Scalextric is fun it is difficult to see it competing with the Gran Turismo gaming series.

http://tinyurl.com/guardian-Hornby

 

But there is something very interesting in there, I quote

 

'We expect the market to downgrade 2012 forecasts from pretax profits of £7.4m and earnings per share of 13.6p.'

 

Now if I read that 'earnings per share' correctly the implication is that for a spend of £1.04 (now - previously perhaps £1.20 or as high as £1.50) there are earnings of 13.6p: more correctly it is the earnings of a £1 share (irrespective of the current retail price of that share). Obviously not all of that would materialise as a cash return to the investor in the form of dividend but in fact someone appears to be sneering at a drop from a 12-13% return to something (not stated) but lower.

 

Just how many companies are currently making 12% returns on capital invested? Sales in certain areas might not be good because of changed market conditions (or poor marketing) but the return is not exactly bad - although it will now be less than that forecast. At this rate it will soon be worth buying Hornby shares (or a predator might be looking to buy the company).

[Andy Y]

At this rate it will soon be worth buying Hornby shares (or a predator might be looking to buy the company).

 

An interesting parallel arose in a speculative off-forum discussion the other day about whether they should buy back shares to reduce the pressure to appease shareholders with 'budget toys' and get back to basics.

[mow]

It would be interesting to look at some of the profit ratios - ROCE - stock turnover levels.

 

But for truly Mr Irrelevant analysis this is from The Guardian, off the wall but amusing.

 

http://tinyurl.com/cifhornby

[jonathan452]

I have made similar comments before. As a recent convert to N gauge I now spend nothing on Hornby products.

 

However during the last 12 months I have spent a few hundred pounds on Farish, Peco and smaller-suppliers, as well as joining the N-Gauge Society & buying their products. I don't know what proportion of the "model railway" market is made up of N scale sales but whatever it is I'm certain that it is growing and that Hornby are going to miss out if they don't offer anything in this market fairly soon.

 

I still hold shares in Hornby so I want them to be successful.

 

David

Smaller houses (and flats)!

 

Particularly in London and the South-East.

 

Hence why 'N' is the predominant scale in Japan for the same reasons.

 

Indeed although I have a reasonbly large 'OO' collection I have recently started to build up a 'war chest' of 'N' scale models as this is more likely to be a realistic proposition for my future dream layout.

[Revolution Ben]

Hello all, I must admit that I find it baffling that Hornby has not even tested the water with a small N Gauge range, with the exception of the slightly tangential Lyddle End buildings. However, although it is growing, the British N Gauge market remains considerably smaller than OO and with Dapol now well respected and established, and Farish go from strength to strength, I suspect their moment may have passed. I would like to be proved wrong, of course. cheers Ben A.

[Ravenser]

But there is something very interesting in there, I quote

 

'We expect the market to downgrade 2012 forecasts from pretax profits of £7.4m and earnings per share of 13.6p.'

 

Now if I read that 'earnings per share' correctly the implication is that for a spend of £1.04 (now - previously perhaps £1.20 or as high as £1.50) there are earnings of 13.6p: more correctly it is the earnings of a £1 share (irrespective of the current retail price of that share). Obviously not all of that would materialise as a cash return to the investor in the form of dividend but in fact someone appears to be sneering at a drop from a 12-13% return to something (not stated) but lower.

 

Just how many companies are currently making 12% returns on capital invested? Sales in certain areas might not be good because of changed market conditions (or poor marketing) but the return is not exactly bad - although it will now be less than that forecast. At this rate it will soon be worth buying Hornby shares (or a predator might be looking to buy the company).

 

I saw a posting on another forum quoting Hornby's recent operating profits as:

Operating profit (adjusted) £7.90m (2007) £9.38m (2008) £7.08m (2009) £6.04m (2010) £4.91m (2011)

 

So what's being said is that they will not now deliver an operating profit for year to 2012 comfortably above that of 2009. That still leaves them room to end up about £2 million better than last year..... This statement doesn't mean that Hornby are in trouble , or even that their profits are falling - it simply means their profits aren't rising as fast as hoped. In this economic climate would anyone expect them to be reporting anything else?

 

Continental model railway manufacturers think they're having a really good year when they do better than break even.....

[melmerby]

Hornby does, of course, have N gauge products in Europe, so one assumes that making UK N gauge would not be too much of a seismic shift.

 

However although N gauge use is growing in the UK, it is still a smaller market than 00 and already has some pretty healthy competition should they choose to go there.

 

Keith

[Dave777]

And a final aside - this week Nintendo reported a net loss of Y48.4bn in the nine months to end December 2011, compared with a profit of Y49.6 bn (£398m) a year earlier, with a prediction with a 2011 full year loss of Y65bn; their share price has fallen by 56% over the past 12 months. Seems that gaming consoles are yesterday's technology for an increasing number of people.

 

Sorry Mike, that's not really a fair conclusion to draw. Nintendo have an ageing console, a handheld unit in the 3DS that hasn't sold well (but experienced a sales spike when they dropped the price), and a lack of AAA titles (ie, headline/big sellers) over the past year or so. Bung in a strong yen as well which has affected things. To put it into perspective (since we're overlooking the Sony Playstation and Microsoft XBox), it's a bit like saying Hornby's problems indicate model railways are on their way out... which would overlook Dapol and Bachmann.

 

 

I have made similar comments before. As a recent convert to N gauge I now spend nothing on Hornby products.

Hornby are going to miss out if they don't offer anything in this market fairly soon.

 

Not sure if stretching themselves into yet another market would make things better, especially one with two very well established players. Besides which, what would they enter the market with? Much of the major stuff is already snapped up - A4, 9F, Class 47, 37, 16T mineral wagon, Mk I coaches, Mk III coaches...

 

I'll admit that Hornby's seeming preference for glamourous stuff and not the workaday items might give them an angle, but even then I'm struggling to see what they could enter with. Mallard? Flying Scotsman? Tornado? All already available or on their way...

 

 

I suspect their moment may have passed.

 

Could not agree more. When they took over Arnold I think was the time - use that N gauge specialism to enter what was, at the time, a far less developed market.

 

I, for one, wouldn't dare to tell Hornby how to run their business - it does strike me that entering the N gauge market now may not be the right time however. They need to get back to where they were with the OO range first.

[frobisher]

Hello all, I must admit that I find it baffling that Hornby has not even tested the water with a small N Gauge range, with the exception of the slightly tangential Lyddle End buildings. However, although it is growing, the British N Gauge market remains considerably smaller than OO and with Dapol now well respected and established, and Farish go from strength to strength, I suspect their moment may have passed.

 

It probably has What's probably "scaring" them is that they're coming from a standing start. Whilst they have plenty of continental N on their books, the bad old days of continental body with an impression of a UK prototype body on top doesn't pass muster any more. There's not a great deal rescuable from the former Lima range (certainly not on the loco front) so their only ways in are a completely fresh range or an acqusition, and I suspect Dapol are rather happy as they are at the moment.

 

I would like to be proved wrong, of course.

 

Absolutely agree. Hornby could get a lot of traction, very quickly in the market and potentially open it up again (like they did with Hornby Minitrix in the 70's and 80's) and add a lot of value. The downside is that an awful lot of the bread and butter models have been snatched by Farish and Dapol now, and to modern standards as well so there may not be an easy "in" for them any more.

[Essex2Visuvesi]

 

Maybe Hornby are just bad at forecasting?

 

Somewhere up there with Micheal Fish in '87

[Ron Ron Ron]

 

"Gerbils...those Geeky natives are getting restless again. I thought you said you stopped them with your New Year pronouncement. Get out there and fob them off or it's curtains for you".

"Errr yes sir, your holy Frankness. Right away. I'll rally the faithful to post lots of praise on our favourite online fan site".

 

 

.

[7013]

It has been well documented on this and other forums the (railway) woes Hornby have had the last couple of years.The main problems have been with manufacturing which in turn affected deliveries. Then lack of consumer confidence brought on by the CEOs statement last year.

However the new railway products announced in December and a more settled manufacturing base will hopefully reverse some of the problems and give the company a better year. Sadly it appears to be fashionable to put the boot in when a company is down and throw in personal problems one has experienced. But in truth every manufacturer has its problems, usually they are rectified quite easily. Personally when I have had problems with a Hornby loco they have been exemplary with their service and never charged me a penny, they even refunded my postage, whereas Bachmann charged me £15 just to check a loco over. Lets hope and support Hornbys railway manufacturing side at least and hope they get right back at the forefront where they belong.

[Guest dilbert]

(or a predator might be looking to buy the company).

 

A predator? Porsche? Meant to post this yesterday evening http://www.economist.com/node/12523898

 

 

Scary stuff, look at the share price chart... dilbert

[robmcg]

It has been well documented on this and other forums the (railway) woes Hornby have had the last couple of years.The main problems have been with manufacturing which in turn affected deliveries. Then lack of consumer confidence brought on by the CEOs statement last year.

However the new railway products announced in December and a more settled manufacturing base will hopefully reverse some of the problems and give the company a better year. Sadly it appears to be fashionable to put the boot in when a company is down and throw in personal problems one has experienced. But in truth every manufacturer has its problems, usually they are rectified quite easily. Personally when I have had problems with a Hornby loco they have been exemplary with their service and never charged me a penny, they even refunded my postage, whereas Bachmann charged me £15 just to check a loco over. Lets hope and support Hornbys railway manufacturing side at least and hope they get right back at the forefront where they belong.

 

Excellent points. Hornby has what appear to me to be excellent people at all levels, does not appear to be overloaded with top-heavy management, and I hope it does well. I too have had nothing but excellent service when I have very rare problems. In fact I have had more issues with Bachmann quality control than Hornby, and I have bought dozens of detailed steam locos from each in recent years. While the profit warning was a bit worrying, it is too early yet to see how things will go. In the meantime we continue to receive outstanding 00 models from both manufacturers. The recent Hornby B1 and the new run of Bachmann A2s appear to set new standards.

 

Now, what is this curious thing called N guage? Something foreign, I suspect...

 

Rob

 

Rob

[Guest Belgian]

A predator? Porsche? Meant to post this yesterday evening http://www.economist.com/node/12523898

 

 

Scary stuff, look at the share price chart... dilbert

 

What happened next? VW is now trading at around 124 and was over 1000 when that happened, just two months after the great market crash of August 2008! It seems that the German authorities were hammered for a lack of regulation, as opposed to the massive regulation on the London markets. It doesn't seem likely that could happen here. In any event, Hornby is a minnow by comparison with VW and the Porsche action was to protect its position vis-a-vis its principal trading partner. Each now owns about half of the other.

 

JE

[Pugsley]

A predator? Porsche? Meant to post this yesterday evening http://www.economist.com/node/12523898

 

 

Scary stuff, look at the share price chart... dilbert

I know it's off topic, but that was a brilliant ploy on behalf of Porsche, I read about it at the time and was very impressed. I just wish I'd had some VW shares!

[Guest dilbert]

What happened next? VW is now trading at around 124 and was over 1000 when that happened, just two months after the great market crash of August 2008! It seems that the German authorities were hammered for a lack of regulation, as opposed to the massive regulation on the London markets. It doesn't seem likely that could happen here. In any event, Hornby is a minnow by comparison with VW.

 

It illustrates the vagaries of stock markets at an extreme level, but hedging funds don't work simply out of one market, the bets are spread and unspread and that's were things get really scary... to get back on topic, Why are people getting worked up about the Hornby brand and a profit warning ? It's changed ownership on more than one occasion... so what can you do about it ? Well, I'll purchase what I believe is value for money, and what I've purchased to date over the last couple of years I'm not dissatisfied with overall.

 

I've never had to use the Hornby after sales service, and quite frankly, I hope it remains like that (sounds like an alternative tribute)...dilbert

[Guest dilbert]

I know it's off topic, but that was a brilliant ploy on behalf of Porsche, I read about it at the time and was very impressed. I just wish I'd had some VW shares!

 

Just to go slightly more off topic... I sold the small diverse stock shares I had prior to the 2008 crash, these were long term investments for the proverbial rainy day. It was that or take out loans for further education for my two daughters. It hacked me off at the time, but in hindsight it was a decision I shall never regret... dilbert

[Ozexpatriate]

... but rising raw materials and labour costs squeezing at one end with the fact people are keeping their wallets in their pockets especially for discretionary spend at the other is only going to make for a bumpy ride.

Rising costs are an expense management problem that does impact profitiability, but this announcement is about bad revenue / turnover before Christmas.

 

This discussion is academic given, as far as I know, there is no publicly available breakdown of where Hornby is gaining or losing.

Actually, Hornby was quite clear in their press release that the problem was largely related to sales of "high ticket Hornby and Scalextric items" being "adversely affected" over the pre-Christmas period.

 

Some newspapers carry more detail than others. Clear statements of poor pre Cristmas sales can be found quite readily. For example in The Times. "Hornby admitted yesterday that, from it's point of view, Christmas didn't happen".

" Andrew Wade of Numis, blamed the shift on cautious stores failing to hold enough stock, with poor performances from Argos and Toys R Us".

Agreed - this is what hurt them. People may not be putting as many trainsets or racing car sets under the tree.

 

There is one good quote. "Mr martin, however, said the poor performance cemented his view that Hornby's future was not in cheap toys". That comes as a pretty quick about turn.

Interesting quote! That was not in the Hornby press release!

 

The profit warning is bascially telling Mr/Mrs/Ms Shareholder that the final dividend may not meet their expectations based on the current financial year, which has yet to close. ... The current share price is not far off a low point during March 2011 (then ~£105). For the remainder of the year it varied between ~£120 & ~£145.

Agreed. Hornby remains a profitable enterprise, but Hornby executives set profitability expectations for this year with their shareholders that now will not materialize. They are required by the company owners (shareholders) to deliver value in terms of:

1. Dividends (likely going down)

2. Increased share price (going down after this announcement)

 

They do this by some combination of:

1. Increased profitability (higher prices [tick] and/or cheaper, higher margin products [tick: toys and trinkets])

2. Increased turnover/revenue (higher volume [tick: toys and trinkets] )

3. Reduced cost (the really scary one for a company as lean as Hornby is now)

 

All of the cheap toys/licensing schemes etc are part of a executive drive, not to maintain Hornby as a profitable supplier of model railway items for us, but as a public stock company beholden increase value for it's shareholders. Executives must be seen to do something to keep everything going up and to the right. It's not about maintaining the status quo, but increasing shareholder value. Investors can take their money elsewhere.

 

If the plan works - great. Hornby is a stable company that won't likely ignore its roots. But it is a risky plan.

[Ozexpatriate]

Bloomin 'eck !! the stadium looks like something you might find in a "pound" shop.

I'm afraid I can't see them selling many of those.

Yes. I think it looks like an ashtray!

 

I would imagine the buyers of Skaledale Olympic stadia will be people who want a souvenir of their afternoon/evening/morning in the stadium at the Games - quite possibly visitors from overseas.

I don't know how they plan to sell it. At one point it was packaged with one of the Olympics liveried, Class 395s with an Olympics trakmat. I don't think they have their hopes pinned to the resin stadium model.

 

Given that the Olympics have crept up on us with less enthusiasm and froth than for pretty well any other Games in modern times thanks to other current events , it's arguable that Hornby have brought some of the items to market a couple of months too early. By the closing ceremony you may be pushed to get a Skaledale stadium for love nor money , and I predict some very silly auctions on ebay.

Right now that's hard to imagine, but stranger things have happened. Time will tell.

 

I think we can safely say the Pound shops will be where they are on sale by the end of the year!! What is amazing to me is that my local boxshifter (Gaugemaster in Ford) has a display stand with the Hornby produced Olympic tat on it which stands out like a sore thumb with its basement level quality (and that is being generous) and outrageous pricing!! I think it is something like fifteen quid for a gaudily decorated version of the old Corgi mystery scale Concorde model!!!

I can't see Olympics patrons flocking to the Gaugemaster in Ford to get their memorabilia, so I can well imagine your Gaugemaster's stock being remaindered after the closing ceremony.

 

The make or break places the tat will (or won't) sell are places like Knightsbridge and Heathrow and the tourist trap shops that sell tea towels and ceramic biscuit jars made to look like phone boxes. Hornby is also the official sales channel for the Royal Mint's commemorative coins of the games.

 

They will probably sell a lot of Corgi cabs and Routemasters.

[The Stationmaster]

The more I think about this the more convinced I am becoming that all of this is just smoke & mirrors (and deliberate fodder for some of the shareholders who seem to have a limited understanding of the company they own). Thus although the company seems to have a sound basis with a good return on capital its 'pre Christmas sales' did not reach the level which had been expected' - which is where the smoke & mirrors seem to enter the picture.

 

I dropped in to collect a mag today while Mrs Stationmaster was at the dentists and thought it might help to check on something I posted the other day so I asked the retailer when he ordered his Hornby stock for the year? - January. Does that include Christmas stuff? - yes, it's the order for the year. So basically Hornby will know by now how many trainsets they have on order for this year (although admittedly they could well receive later orders if what they have supplied is insufficient for a surge in demand beyond what the retailers are expecting and have ordered for). And equally of course they would have known at this time last year how many trainsets, among other things, were ordered for 4th quarter delivery, i.e they knew back then what their sales were going to be although not what might come in late/additional orders.

 

Some further chat and what came then was 'but they would have been able to sell a lot more (of various items, in total) if they had delivered it when promised and that was still the problem last year (but it should be ok this year)'

 

So maybe in a year's time we will overhear Hornby telling its shareholders that it had a better Christmas 'because the market has picked up' - but in fact what will have happened is that it delivered on time and its 4th quarter budgetted sales actually materialised in the 4th quarter.

[Taz]

...so I asked the retailer when he ordered his Hornby stock for the year? - January. Does that include Christmas stuff? - yes, it's the order for the year. So basically Hornby will know by now how many trainsets they have on order for this year (although admittedly they could well receive later orders if what they have supplied is insufficient for a surge in demand beyond what the retailers are expecting and have ordered for). And equally of course they would have known at this time last year how many trainsets, among other things, were ordered for 4th quarter delivery, i.e they knew back then what their sales were going to be although not what might come in late/additional orders.

 

 

 

That may be the case for model shops, but could it not be a different set up for the bigger outlets such as Argos, Toys R Us etc?

I would have thought these sort of establishments would have a very different order/supply mechanism in place compared to a shop which may order no more than half a dozen (if that) of any particular set.

 

I would also have thought these sort of places would account for the bulk of Hornby's christmas surge in sales?