Hornby sounds warning note over Christmas sales derailment

Hornby, the toy train and Scalextric car racing business, has told shareholders not to expect a merry Christmas and warned that indications for festive trading "are not encouraging".

The company's chairman, Neil Johnson, said at yesterday's first-half results that he had been forced to "sound a cautionary note" in respect of trading in the company's second half. It reported sales in the six months to 30 September of £18.5m compared with £19m in the same period last year. Operating profits were £2.61m versus £2.63m.

Its shares fell 7 per cent to 207.5p. However, over the past five years, Hornby has been a star performer on the stock market, rising from a low of 26p exactly five years ago, reaching a peak of 284p this time last year.

The rise has been on the back of a fundamental shift in operational strategy at the company, moving production of its iconic model trains and toys to China and acquiring businesses overseas, notably in Italy where it bought a company called Lima a year ago.

The Lima deal not only gave Hornby geographic spread, it gave it an entry into a new gauge size of model railways. Previously it specialised in the "00" gauge size, popular in the UK, which is equal to a 1:76 scale. Lima makes model trains in the "HO" gauge that is equal to a 1:87 scale. However, Lima's British models are made in the UK standard "00" scale, making the deal even more attractive for Hornby.

It has produced one of the most successful sellers at Christmas time over the past few years and its caution over trading at Christmas will send a chill through many retailers already worrying about this year's seasonal business.

Mr Johnson said: "Against difficult market conditions in its main market, the UK, Hornby has made a creditable start in the current financial year. However, market indications for Christmas trading in the UK are not encouraging and I must therefore sound a cautionary note in respect of trading in the second half."

Analysts believe the most positive outcome for Hornby will be to match last year's full-year operating profit figure of £7.7m. Turnover should be supported by the performance of its Italian business. It is also experimenting with a stand-alone concept store format, the first one of which has been trading for a year in Seattle, on the west coast of the US, as a way of breaking into the American market.

Despite the cautionary tone on short-term trading, the company increased its dividend by 15 per cent to 2.3p-a-share at the halfway stage.