Gallows-Bait

This is because the evidence indicates that for the most part, it is. In March 2023 they had £21m in stock. In September 2023 they had £23m in stock. In March 2024 they had £20m in stock. Up until 2018 they averaged 20-22% off turnover as a stock level, a consistent business metric for nearly two decades. The last 2 years is been nearly double that. This isn’t a one off blip. It’s also consistent with the fact that Hornby have taken out a bank loan specifically for the purposes of buying stock and also consistent with the admission that they massively overcalled their sales targets for 2023 (also not coincidentally roughly by the amount of money they borrowed for stock). It’s also consistent with their declared intention to bring stock levels back down. We’re not making guesses here, there are clear patterns in the financial statements that are consistent with Hornby’s own comments and actions that confirm stock is a problem right now.

Just to say I recently purchased an N gauge class 28 from Derails, not only was the price fantastic but the care and attention to packaging was second to none. Will be shopping again in future.

The biggest issue for companies is the expectations of shareholders once you become publicly listed. A smaller owner operated business may be content to take home a modest earning and keep reinvesting some of the profit for the future, gradually building up reserves to cover the bad times and keep them on a course for longer term success, after all their motivation is usually a business for the long term. The problem is once you introduce publicly tradeable shares, the pressure is on for the company to deliver profit and issue dividends, not only does this then potentially deplete those reserves that might have weathered the occasional rainy day, but there is a pressure to continue to grow those earnings simply because investors expect a consistent return on their shares or else they sell those shares and invest in some other company with a bigger return. The risk of those shares going down in value then becomes an existential threat. If you don't keep the price up and keep paying dividends, someone might start buying up the shares and once they do, they might decide to do something different with the company, or push the management out the door. Add in that the same management team are motivated by the fact part of their earnings from the business is given in either shares or the option to buy shares, and there's a huge incentive to wring every penny out of the company right now and not look too far into the future. After all, the future is the next CEO's problem.

Within the company I work for we've had similar arrangements in the past. Effectively all the incoming monies go to the lender to top back up the amount of cash that the borrower can then draw down out of the loan and then the borrower can draw it back out up to the limit of the loan. It provides security to the lender that the borrower isn't hiving off cash anywhere else as effectively they're then controlling the bank account on behalf of the borrower, meaning they're always first in line to get back the cash because it's paid in directly by the borrower's customers. Pain in the neck from an administrative point of view on all sides though.

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.

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.

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.

It's interesting, because in some ways I feel like I am part of that new market Hornby was attempting to tap into. I only have the vaguest memories of model trains. My dad had a model railway when I was very young, but I had limited interaction with it and never had my own model trains. His layout was packed up in a house move before even my teenage years and I've not seen it in thirty plus years since. My youth was instead lining up lego soldiers and the like before moving into wargames and other miniatures. I literally chose to look into this hobby because I'd seen TT120 on Youtube and had a vague feeling of nostalgia for grubby BR blue diesels and naff catering sandwiches that kept it nagging in the back of my head for months. Driving past the Doncaster show by random chance back in February and seeing hundreds of happy faces, mostly clutching bags of purchases, made me look into it properly. As someone new to the hobby I also face challenges I'm sure many people have. Mainly the big barriers to the hobby are time, money and space. Luckily my kids are growing up fast, so I'm getting my free time back and my job is at least comfortable enough that I can at least start out bit by bit into the hobby. So it's only really been space that's the major hurdle, which was why the idea of TT120 appealled at first, but then I realised that N gauge ticked that box as easily, if not better, so it really came down to what products were out there for me right now. As such, yes potentially whilst a new customer drawn in, if I had gone into TT120 it would only really have been over N gauge, so there is that potential cannibalisation of the market. But unlike some people, I suppose I knew that not everything in the hobby is Hornby, so I wasn't limited by that perception and gave the N gauge ranges a look over too. It feels like Hornby could just as easily have given all the same reasons and justifications for tooling up and joining in a big push for N gauge as much as making TT120 as I really don't see that much difference between them. However I can appreciate for Hornby that an entirely fresh market would be more tempting if bold enough to try it. On the positive side for Hornby, if customers come in to TT120, if they want almost anything, they're very likely to buy the Hornby version if it exists. Track, lineside, locomotives, rolling stock and so forth. The only problem is, they can only do it if it exists. I almost feel that Hornby have actually been too cautious. They're released a lot, but, for me at least, not enough. A bit more in the range at launch and I think they could have seen even more success. But hindsight is 20:20 as they say. They could just as easily have ended up having to write off millions in unused toolings if it had sunk without a trace.

This is something that as a recent newcomer to the hobby I've been frustrated by, and not just with Hornby. When I decided to enter the hobby I initially thought to do a modern container freight layout and hoped to start out in TT120, but the length of time to have to wait before getting to the era of locomotives I was interested in was offputting. Some of them were at least available for pre-order, but there was almost no suitable rolling stock to even pre-order alongside it. This does somewhat seem to have been addressed in the April announcements, but even these will not be available until around 6 months after the locomotives become available and a full year after I made the decision to build a model railway. Perhaps I'm in the minority as I wasn't interested in the various pacific steam train sets and they do seem to be continuing to sell strongly, but I'm willing to suggest people like me wanting to model what is the biggest single form of freight on the modern railway cannot be that uncommon. Hornby has missed out anything modern from TT120 for the best part of 2 years, with the HST now the only real choice (Yes I know there's the 08, but I would be reluctant to pay what is almost the same price as any other loco for a smaller model with no lights and only a 6-pin DCC socket (for which no Hornby decoder is yet available) and that desperately needs a stay alive over points. In the end I've chosen to go into N gauge rather than wait, but even here you can see manufacturers like Bachmann/Farish falling prey to the same issues. It seemed easy enough with so many modern liveried freight haulier locos, but this has meant second hand container wagons that are available for at best only a fraction under their original retail prices, which indicates there simply aren't enough of them about. I did subsquently discover Revolution's container wagons which look excellent and are actually cheaper new than the Farish ones are second hand, but this shouldn't be something that it needs a small entrant to fill the gap for, it's literally modelling one of the most common sights on the railway in the present day. Also within N gauge, Rapido scored (from what I can see online and in forums), a big win with their decision to release Conflat P wagons alongside the Class 28 so that people could actually model the Condor freight trains of the past (QA issues aside, which it appears Rapido also dealt with in a prompt manner). Yet even here the brake van that would have been part of this prototypical train is the Stove R, for which the only current offering is via the N Gauge Society (fair play to them, I have one now and it is lovely). As a newcomer, both these poor ranging decisions by the perennial manufacturers and the limited runs of smaller pre-order focused entrants does make it much harder to get into the hobby when you realise that modelling even half of what you see on the railways around you in real life means months of scouring ebay for second hand products or waiting six months to a year for a pre-order.

On this I agree. A pre-order focus is largely fine for a manufacturer, managing distribution costs would be challenging if the size and scale of the operation grows as few warehouse functions can flex capacity and workforce quite that dramatically, but for what is a relatively small industry it is appearing managable to these entrants so far, as such the only real challenge is cashflow, where sales will only be coming in periodically, you have to have enough cash to fund development and operations between those peaks. For a retailer, who simply cannot flex their capacity and costs, such periodic releases result in significant challenges, especially so for bricks & mortar based retailers with fixed premises costs. As such retailers are forced to widen their net as far as possible, capture pre-orders for as many manufacturers as possible and hope that such releases are staggered throughout the year reliably enough to keep the lights on all year round. The one benefit a retailer might have would be a reduction in the level of cash needed to keep stock on the shelves, but empty shelves themselves are a challenge. Retailers would also need to seek out and stock the widest possible range of perennial products such as crafting materials, paints, electronics and so forth to keep footfall up so that customers will place their pre-orders with them instead of online.

Certainly there are limitations to the strategy of "burst" releases. Primarily there will be a finite number of times it can be done before all of the viable products have been issued and there are only less profitable gaps in the market left to go after (more obscure or less desirable eras, items already made by other manufacturers and so forth). I think the potential mitigating factors to this limitation are what we're seeing in the market at present. Manufacturers moving into new scales so that more of these lucrative gaps in the market are open to them. Whether conventional decisions such as Rapido's first N Gauge products (quite straight forward given their North American experience in that scale), or Bachmann's (more niche and experimental) recent NG7 launch. Even Hornby's TT120 decisions make real sense in this context and I believe if it stays even modestly successful for the next couple of years we will see other entrants looking to join in this potentially very appealing open space. Manufacturers seeking to differentiate their new toolings sufficiently to draw in a large enough customer base to justify a release of an already available product (or one that is still widely available second hand from previous production runs). This encourages innovation and experimentation and I think the hobby is seeing a real frenzy of this activity, such as the fireboxes, lamps, underframe detailing and anything else that can be thought of to make the product stand out. For consumers this has both positive and negative aspects. A broader range of products across even more scales creates massive amounts of consumer choice, though this is limited by the challenges of "pre-order or miss out" production run sizes, which feeds higher prices in the second hand market as a result. Similarly consumers benefit from more detailed, more accurate and more interactive products, but these come at higher costs and so higher prices. Additionally pushing the acceptable ceiling for prices will consquently make it easier for others to pull up the pricing of lower end products as they will still appear comparably as cheap, thus raising the prices for all.

I suppose the point I was trying to make was that there are no inherent barriers to Hornby doing what the other companies are doing and then having the advantage due to their scale, so Hornby's failure is not due to the other companies doing things that they can't. Though I concede that it is perhaps harder for Hornby simply by virtue of customers having different expectations from them due to their market position. I think you make a very valid point which is that Hornby perhaps have not responded to the changing trends in the market and have been slow to change their business practices accordingly. They have relied on their long standing principles that "it'll sell in the end" to make large runs of small numbers of liveries, helping keep their costs down. Perhaps their past experiences show that people will "make do" with certain liveries, but then buy new ones down the line when drip fed onto the market in later runs, resultiing in more sales. In addition as a longstanding and big player in the market, customers may tend to expect Hornby to have a wider range of available products, which leaves Hornby in an even more difficult position when they are perhaps not making as many production runs as people think, instead meeting demand through past stock that they've been holding onto for longer. I suspect if there were less limitations on scaling up manufacturing offshore then they could balance this better, but the demand for the limited number of slots in the production calendar hamper making such a shift. This longer term approach to running tooling over multiple runs over several years also doesn't seem to be the approach other entrants are taking, instead favouring a big splash of a wide range of liveries in order to make bigger batches with the tooling and reduce cost that way. It's resulted in an expectation from customers that they can get their preferred liveries and eras without having to wait for later runs potentially years down the line. Similarly there are perhaps less expectations for newcomers to have a constant range on hand. Consumers have knowingly (though perhaps not willingly) bought into a market model of "when it's gone, it's gone" through pre-ordering, which means no one expects a perennial range from those smaller manufacturers. As such they can focus on individual products, sell the whole batch and move on without people asking when it'll be back in stock. There's also another factor which I noticed in the various documentaries and TV shows, which is that Hornby feel an inherent obligation to introduce children to the hobby, so that in later years they come back to the hobby. It's an obligation that newer companies don't have, meaning they're not also trying to balance their contemporary high detail ranges with ranges such as Playtrains, which appears to have struggled in the market.

If they take control or responsibility of the stock either on leaving the factory (potentially an ex-works basis) or at some point en route to the UK (possibly a Free on Board or similar basis on loading on the ship) then yes this would need to be included in their stock valuation much earlier than terms based on arrival at the UK port or even delivery to their warehouse. It will really depend on how their contract works. For the industry I’m in we don’t take control until the goods arrive at our warehouse, so wouldn’t include them until then, but the approach varies a lot depending on which party is willing to handle the shipping, insurance, import duties etc. It all adds to the costs the same but often one party will have more experience in handling these things than the other.

Greetings all, Late to the party, but had to take a look at this juicy financial thread. The accounts to me at a first glance are a mixed bag, but one in which I'd take the actual manufacturing and sale of model railways as a general positive, albeit offset by a pretty poor investment property result. Overall revenue is up on manufacturing sales (323m HKD up from 302m HKD) which is over 6% growth, much better than the sluggish 2% of Hornby. Whilst rental income for their office building is almost completely flat. That also doesn't include the change in exchange rates which can blow in either direction, but have also trended in a positive direction from the previous year, so their growth in sales isn't simply revaluation caused by the movement in HKD, although without more detail it's unclear whether it's price increases or actual volume of goods, but in the current economy it's likely to be driven by inflationary price increases. Additionally the core costs have also decreased, again indicating that volume might be down, especially with much of the cost savings driven by having fewer staff, so again an indication that growth is in prices rather than volume of production. The fact that Profit/(Loss) from Operations would still have been around a 15m HKD profit in 2023 vs a 7m HKD loss in 2022 once you take out the currency exchange gains & losses from the two years is a pretty good sign that things have improved and it looks pretty solid to me this year. Unfortunately this is dwarfed by the challenges in the investment property. The bad news comes in three areas. The first seems to be losses in their associates, which have remained consistently loss making. As they're not a full subsidiary nothing has to be disclosed, so it's hard to know who this might be or why they're still loss making. It effectively wipes out the profitability of Kader before even considering the next two issues. The finance costs have more than doubled, which is more than I'd expect. Their bank loaks have increased from 509m HKD to 647m HKD, which is a lot less than doubled, so it implies whatever they're borrowing now is expensive, which is going to make it a priority for them to pay down those borrowings as quickly as possible. The high level of debt makes them quite vulnerable, especially as their key asset to secure their borrowing will be the building, which is going down in value. Ultimately they're at the mercy of a declining market in Hong Kong for investment property, with buildings going down in value due to higher levels of vacancy and reducing rental income. The accounts do mention a planned turnaround due to "revitalisation" of the Kader Building, but I couldn't really see any evidence of much spending to revitalise the place, so I assume they're banking on the market conditions improving to make the site more attractive, rather than actually investing in improvements. Which is a shame as the market opinion seems to think the Hong Kong rental market will get worse before it gets better, with vacancy rates expected to grow throughout 2025-2027 (Separate Savills report on Hong Kong commercial property market here: https://www.savills.com/research_articles/255800/215306-1#:~:text=Overall vacancy rate reached 14.7,7.5% for the entire year.). As such I think things could continue to worsen for Kader in the investment property area, which makes their borrowing all the more worrying. I guess ultimately they could sell the building if they ever had to, but you can guarantee they'll try anything to avoid that as they will believe that eventually it'll recover and result in more profits than they're likely to make with just the model railways, so they'll be trying to grow the profit on sales to try and pay the loan interest, which will either mean cheaper product or higher prices or both I fear.

That is an extremely good question. It really depends what the stock is I suppose. Their strategy so far has reduced stock by about £3m but whether that's just producing less or selling the old stock isn't clear. To avoid disruption it may need to be very slowly, holding back price increases on older lines for example might help. But if it's tat like 30 year old railroad level 0-4-0s then its going to take a lot of Beatles and other gimmick products to shift them.