Games Workshop Group (GAW)
Games Workshop: In denial
There’s bad news about revenue and profitability in Games Workshop’s half-year report and no adequate explanation. Maybe the company’s in denial.
Games Workshop failed to report the one thing I was looking out for in the half-year to November 2015, an increase in revenue, although on a constant currency basis it did rise (by less than 1%). Operating profit was flat too, although it was rescued by royalty income from other firms, for example app and computer game producers who use Games Workshop’s fantasy worlds. Profit from the sale of miniatures and games, the company’s core business, fell 15%.
Irritatingly, Games Workshop didn’t provide an explanation, which is surprising since, in its previous full-year results, it had promised a sales drive.
Delving into the segmental results in note 2, which are admirably thorough, it’s easy to pick out a culprit from the line-up. Games Workshop’s trade channel made an operating profit of £5.8m and its mail order channel made a profit of £6.2m, but its retail channel made a loss of £2.5m, more than double the loss it made for the same period the previous year.
Sales, the company, says are roughly flat on a constant currency basis, but it opened 25 new stores and only closed 13.
The retail channel is Games Workshop’s Hobby Stores, which are being rebranded Warhammer and are present in many UK and European towns and cities. They’re of particular interest because of the strategic emphasis put on them, and because of how much they cost to run.
Games Workshop designs, manufactures and retails fantasy miniatures which must be assembled and painted, either for the fun of it, or to play its Warhammer games. The company eschews advertising and relies primarily on word of mouth and its stores to encourage new hobbyists who can model and play there as well as spend.
It’s just completed a multi-year store rationalisation program, relocating to smaller, cheaper premises, and converting stores into low-cost one-man operations. The strategy was a response to a period of expansion when higher costs almost completely stymied profit, and it successfully restored profitability at Games Workshop.
Store running costs are over half of all Games Workshop’s operating costs, reflecting, presumably, their importance not just as a sales channel, but as way of recruiting new hobbyists who might go on and buy products through mail-order (which includes the company’s Internet site) and other retailers. The trade and mail order channels are far less expensive to operate.
Kevin Rountree, the company’s chief executive, has previously said improvements in sales depend on recruiting the right store managers, and that failing to do so is the biggest risk facing Games Workshop. He has recruited a recruitment specialist to help him.
Maybe that’s all there is to it. But maybe the company can’t recruit managers of sufficient calibre because running a one-man store is too much work for one man. Maybe one man cannot show people how to model, run games, and serve paying customers at the same time. Trials of larger multi-man stores in Sydney, Munich, Paris and Copenhagen suggest, at least for locations where there are lots of customers, one man stores are not the answer.
I also worry that despite the unsubstantiated claim that Games Workshop has launched some “great new products”, the company’s new version of Warhammer, Warhammer Age of Sigmar, is not doing as well as hoped. This new simpler version is intended to revive the original Warhammer game, which for many years has trailed its more futuristic sibling Warhammer 40,000.
Perhaps by focusing too much on maximising profit through cost cutting, the company is neglecting the recruitment of new hobbyists. Or perhaps the much smaller armies of rival fantasy wargaming and modelling companies and the armies of illegal clones sold on the Internet are chipping away at Games Workshop’s franchise. In a more competitive world profitable stores in less popular locations may be oxymoronic.
The company routinely denies competitive threats and aggressively squashes business that steal its intellectual property, but the longer it fails to lift revenue profitably the more credible these alternate realities become.
My previous article on Games Workshop was also my most popular article, it accumulated a staggering number of comments. That gives us an inkling of how strong a hold the company has over modellers and gamers, which is what attracted me to it as an investment.
But when I read Games Workshop’s results, I wonder about what the company says, and what it doesn’t say, and whether I’m mad or it’s delusional.
To my mind, the business is stuck in a rut, but it needs to grow to justify the asking price. A share price of 549p values the enterprise at £226m, about 16 times adjusted profit.
You may be wondering why a so-called long-term investor is worrying about half-year sales. I’m not.
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About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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