The Investment Column: US blow to Bluebird Toys

The higher they fly, the harder they fall. And Bluebird Toys has certainly taken a dive. Shares in this one-time glamour stock soared to 375p two years ago. Yesterday the price sank nearly 20 per cent to a near five year low of 81.5p when the company issued its second profit warning of the year. This is not the kind of early Christmas present chief executive Chris Burgin had in mind.

The latest warning was caused by a bombshell from Mattel, the US toy giant which distributes Polly Pocket, Bluebird's best selling toy outside of the UK. It has decided not to sell Polly Pocket at all in North America next year ahead of a relaunch of the brand in 1999. This is a serious blow for Bluebird as sales of Polly Pocket in North America will account for 7 per cent of group revenues this year.

Investors should be concerned on two counts. One is the immediate impact on the bottom line. Profits are expected to come in at around pounds 5m-pounds 6m this year compared to previous forecasts of some pounds 8.5m.

The second issue is whether Mattel will work as hard on marketing Polly Pocket outside the US when it is not being sold in its main market. Given that Polly Pocket accounts for almost half of Bluebird's annual sales, this is a serious concern.

It may be that Mattel is cooling on Polly completely and will decide not to relaunch it in the US after all. Given a plethora of other, reasonably priced goodies to tempt children these days - the Tamagotchi virtual pet for one - Polly Pocket may have run out of puff. A rescue bid or management buy-out is a possibility, particularly with the company valued at little more than its pounds 15m cash pile.

On a forward multiple of just 10, the share price reflects these worries. The crucial Christmas period also looms. Unattractive on fundamentals.