The Kent-based company behind Thomas the Tank Engine and Pocher car model kits, said a "disappointing sales performance" in the New Year is expected to result in a trading profit deterioration of between £2.5m and £3m, with around half due to its UK performance.
The group has had to write off £1m of stock from its warehouse and now expects to report a wider underlying loss before tax of between £5.5m and £6m, bringing its turnaround plan put in place last year to a halt.
As a result Hornby said there was a risk it could breach a covenant of its banking facility in March of this year. It is currently in discussions with its lenders.
Shares have nosedived by 53 per cent to 38.2p on the back of the announcement, which comes just three months after it issued a profit warning and predicted a £2m loss.
Under chief executive Richard Ames the company has been taking steps to bring the business back on track after being hit by recurring delays at its manufacturer in China and the collapse of one its main retailers, Modelzone, in 2013.
The company has overhauled its supply chain, brought some of its manufacturing back to Britain and moved to a new warehouse in Canterbury last year. The overhaul caused disrupted both international and UK sales over the autumn.
However, Hornby said trading improved in the run-up to Christmas, with UK like-for-like sales up by 17 per cent overall year-on-year over December. But sales have gone sour since then, with the company attributing it to a disappointing response to January product promotions.
Ames said: "This has been a real year of change at Hornby. Undoubtedly this is a disappointing result, but we have a strong portfolio of brands that we are determined to see flourish.
"The feedback from customers at the recent International Toy Fairs was encouraging and we are facing the future where, with the right platform, we can build value for our shareholders and drive the Group's recovery."