22nd Jun 2016 08:30
LONDON (Alliance News) - Hornby PLC posted a significantly wider annual loss on Wednesday following a tough year for the models and collectibles retailer but also laid out a turnaround plan, including a new equity fundraising.
Hornby shares lost nearly half their value back in February when the group warned it would face a "substantially wider" trading loss than previously forecast following weaker-than-expected sales in the UK and internationally.
The company, known for its miniature cars and model train sets, said a strong performance in the UK in the run-up to Christmas was reversed by a disappointing response from customers to its January product promotions, plus softer underlying sales.
Following the warning on its results, Hornby Chief Executive Roger Ames left the business and was replaced by Steve Cooke, previously Hornby's finance director, who was tasked with leading the company's strategic review and formulating plans to change its fortunes.
On Wednesday, Hornby said its resturcturing plan will reduce the scale of the business and its cost base. This will involve Hornby turning its focus to the most profitable and cash-generative parts of the business, a move which is expected to cut the group's revenue by around a quarter.
Hornby intends to maintain its key brands in the UK, including Scalextric, Airfix and Corgi, but will retune its European business to focus only on its most profitable model rail brands. In addition, European operations and product development will be centralised in the UK, significantly cutting the cost base of the European business. Hornby said it will retain its US presence.
While maintaining key brands, Hornby also plans to reduce the number of individual product lines it sells by around 40% over the course of the 2016 calendar year, turning its focus to higher-margin lines. Product lines will be streamlined further in 2017, the company said, though new product launches are still planned.
Hornby also intends to exit the majority of its concession arrangements in the UK, again to try to focus on profitable channels to market and to improve its customer service, another overarching part of the strategy shift.
The other key component for Hornby's self-help programme will be careful management of its stock levels. Having shifted less product in financial 2016 than expect - combined with the forthcoming rationalisation of its product range, concessions exit, and contraction of the European arm - Hornby is holding a higher level of stock than necessary.
Hornby said it plans to reduce stock levels in a staged and managed way over the course of 2016, which should generate cash and help stocks to return to normal.
Implementing the new business plan will give rise to exceptional costs of around GBP1.7 million for the 2017 financial year, Hornby said. The company anticipates the plans will improve margins from the 2018 financial year and, for that year, will cut costs around 33% from current levels.
The turnaround plans will be partly financed by an GBP8.0 million share sale, by which Hornby will issue 29.6 million shares at 27.00 pence per share, a discount to its 32.00p closing price on Tuesday. Shares in the company were down 0.2% to 31.95p on Wednesday morning.
Phoenix Asset Management Partners Ltd, a private investor and major shareholder in Hornby, will subscribe for 16.9 million of the shares on offer. Hornby Executive Chairman Roger Canham is also a director on the board of Phoenix.
Canham will not be purchasing any shares himself in the placing or open offer.
Phoenix currently holds a 29.7% stake in Hornby and this stake will be between 29.6% and 39.2% following the placing, dependent on how many of the open offer shares are taken up by qualifying shareholders.
In addition to the placing, the refinancing includes an amended three-and-a-half-year revolving credit facility of GBP10.0 million that the company has agreed with lender Barclays.
Hornby said the funds will be used to strengthen its balance sheet, provide working capital and to back the investments required under its turnaround plan.
Hornby tabled its plans as it said it reported a pretax loss of GBP13.5 million in the financial year to the end of March, much wider than the GBP200,000 loss made a year earlier. It booked GBP7.9 million in exceptional items over the course of the year as it restructured its operations to cope in a tough environment.
Revenue was lower, down 4.0% year-on-year to GBP55.8 million from GBP58.1 million. The year was disrupted by the implementation of new IT systems. Hornby said that while it benefited from a strong Christmas sales period, this deteriorated sharply thereafter.
UK sales held up well, Hornby said, as it continued to benefit from demand from its core hobby customers, but European revenue sunk due to supply chain issues in the first half which impacted the supply of model rail in the business.
"Last year was difficult and disappointing as we faced significant challenges during the continued turnaround and improvement of the business. We were pleased with the progress made in modernising many of our systems and processes, but much of the change last year resulted in substantial unplanned disruption which had a significant adverse impact on trading performance," said Steve Cooke, Hornby's chief executive.
"The board has now completed a thorough review, which has identified that many core parts of the group are stable, profitable and cash generative, driven by iconic brands with strong market positions. The review has also identified areas that require fundamental change. The turnaround plan is intended to return the business to sustainable profitability and cash generation," he added.
By Sam Unsted; [email protected]; @SamUAtAlliance
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