Hornby, the train-set maker, warned yesterday that it may be forced to increase prices if sterling does not recover from its recent slump.
The 102-year-old company said the pound's dramatic fall against the dollar would squeeze margins in the coming year as it alerted investors full-year results would be at the low end of expectations. Hornby shares fell 20 per cent to 76.5p, their lowest in more than six years.
Hornby, which also produces Airfix kits, Scalextric motor racing and Corgi toy cars, said customers had already absorbed one round of price rises, but that continued weakness for the pound could force it to lift them again.
"Unless sterling strengthens from its current rate, we would anticipate a material erosion to our margins in the year to 31 March 2010," Hornby said in a trading update. The company buys 90 per cent of its products in currencies linked to the dollar and sells only a quarter in dollars or euros.
Hornby said strong trading in late December and early January was unable to make up for low consumer and retailer demand in the run-up to Christmas. The company added it was operating within its banking facilities and had excellent relations with its bankers.
Sterling, which was above $2 in March, sank to a 23-year low below $1.40 last week as fearsgrew for the British economy and the country's banking sector.
Analysts at Altium Securities cut their earnings forecasts for each of the next two years by a quarter and warned the company may come under pressure to cut its dividend. Yesterday's share fall was the biggest for at least 10 years.
Hornby, whose toy trains include the Hogwarts Express from the Harry Potter books, said potential for growth in Italy, Spain, and France could limit the damage caused by sterling's weakness. The company said demand in Europe had been encouraging, but that sales had been constrained by supply problems.
The toy maker suffered delays and unreliable service in the autumn from its biggest supplier in China, which was weighed down by debts and management changes. Hornby said the supplier had been acquired, stabilising its supply base.
Hornby's chairman, Neil Johnson, said: "We are pleased with the performance of the group in what was generally a difficult pre-Christmas period.
"Strong demand in the early weeks of 2009 gives us further confidence that our hobby-based businesses will continue to demonstrate their defensive characteristics in what is likely to continue to be a challenging economic climate."
Most of Hornby's products are sold to adults who are avid collectors. The company said this gave it some protection against the recession, because the collectors were prepared to sacrifice other spending instead of missing out on a new toy or model.
The company was founded by Frank Hornby as Meccano Ltd in 1907 and started producing motorised toy trains in 1920. Hornby became a public company in 1986.