The Investment Column: Polly's demotion clips Bluebird

Bluebird Toys has been one of the toy industry's high-flyers in recent years but after the shares hit 375p last November the company has had its wings clipped severely. The shares fell a further 17 per cent to 176p yesterday on lower interim profits and a warning on the second half.

Profits in the six months to June were down more than half to pounds 3.1m (pounds 7.6m) on sales down more than a third to pounds 23.5m. Sales and profits will also be affected in the second half for three main reasons. One is that Bluebird's boys' toy, Mighty Max, has been withdrawn after a long run, slicing pounds 7m off sales. The second is a downturn in the UK and US toy markets which have slumped by 5 per cent year-on-year. The final reason is that retailers have been de-stocking, particularly Bluebird's star product, Polly Pocket, the girls' range of collectibles.

The key here is whether Polly's sales bounce back. Bluebird has made much of the toy's resilience, saying it has the potential for long-term growth of a Sindy or Barbie and is not a two-or three-year fad. But copy- cat versions (such as Pony in My Pocket) are already grabbing retailers' shelf space.

The story is not completely bleak. New products such as the Batman and Disney miniatures only came on stream at the end of the first half. Other new launches such as Spiderman and Space Monkeys are due in the fourth quarter. But these toys are owned by other companies such as Disney and Marvel Comics. If Polly's growth is stalling it will make a bid by Mattel or Hasbro, which holds a small stake, less likely. This would remove another reason for holding the shares. With analysts forecasting full-year profits of pounds 11m for the current year, against previous estimates of pounds 16m, the shares are on a forward rating of 11. They look vulnerable.