Come back to what you know
The recent history of the group has seen problems in its Chinese supply chain and its European distribution. In response it has spread its supply across different sites in China, and moved areas of its production and distribution back to the UK. For example, its Humbrol model decorating range was moved back in 2012, while a new group distribution centre near Canterbury is seen as the solution to its European distribution problems. But all this reorganisation has dragged on recent performance. A £1m write-off following a stock take at the new distribution site has been part of a trading profit deterioration that has dragged management into discussions with lender Barclays (BARC) to avoid breaching its debt covenants.
Finding tomorrow's hobbyists
I'll leave the question of whether private investors should consider this company a basket case or bargain bucket buy to Bearbull. But there is a longer-term challenge to hobby stocks such as Hornby and collectibles group Stanley Gibbons (SGI): can they reach the next generation of consumers? Current and former Hornby management has been keen to expand in the much larger toys market, but have faced challenges. Poor sales of its London 2012-branded products - including a Team GB Scalextric velodrome - led to an overall £1.3m loss in its results for the 2013 financial year. Currently, there is hope that a new set of battery-operated trains for children aged five to eight years old will help the top line.
The evolution of 'digital play'
It is understandable that past and present Hornby management is keen to get a slice of a bigger pie. The UK toy industry is the largest in Europe, valued at about £3.2bn by market researcher The NPD Group. It is also in good health, growing 5.9 per cent in 2015, following growth of 4.4 per cent in 2014. But the way children play is changing fast. Official statistics show more than half of three- and four-year-old children are now using tablets, but the evolution of so-called 'digital play' does not necessarily mean more screen time, according to Lydia Plowman, professor of education and technology at the University of Edinburgh.
Professor Plowman says: "Digital play has conventionally been seen as screen-based but as a growing range of objects are tagged with sensors or have embedded computer chips, there will be more toys that respond to children's touch and movement, potentially stimulating new forms of imaginative, physical and exploratory play." The most recent developments, she adds, combine the features of traditional tools - they are tangible, collectable and shareable with friends - with computer gaming.
I want the one from the TV
This mix of the digital and non-digital game now often comes with a film or TV link. The colossal performance of the Lego franchise speaks for itself. Indeed, five of the top 10 selling UK games in 2015 were associated with a movie or series, and seven in 2014. Hornby, of course, has its Thomas the Tank Engine train set. Character Group (CCG) has brands including Peppa Pig and Fireman Sam, and has been made the global toy partner for the recently relaunched Teletubbies, with a set of toys launched earlier this year. US groups Mattel (US:MAT) and Hasbro (US:HAS) have strong brands and products among the 2015 top sellers. If Hornby is to make sizeable in-roads away from its core, grown-up market, it is likely to need to pull on either brand allure, or interactivity.
