Games Workshop Group (GAW)


Games Workshop: Inflection point

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The modelling and fantasy wargaming company has changed the way it sells miniatures so it’s more profitable. The problem is, it’s selling less.

I have just got back from my annual pilgrimage to the local Games Workshop store. It was full of people painting fantasy miniatures. Others were just talking. The lone storekeeper was busy shifting boxes. Of course, some of the customers had weirdly coloured hair and wore grungy tee-shirts, that’s they’re style. The shop windows and shelves are a bit creepy too, stacked with models strange creatures. It’s a bit intimidating if you don’t fit in, but the clubby or cultish element is one of the attractions if you do.

One-off visits can be misleading though. It’s the holidays, and many of Games Workshop’s customers are teenagers, many of them boys or young men. They’ve got time, and in an affluent city like Cambridge, money to spend on their hobby.

In its recent annual report for the year to 2 June, Games Workshop reported revenue down 4%. Adjusted profit fell 5%.

New chief executive (and former chief operating officer) Kevin Rountree said the fall in revenue and profit was due to adverse exchange rates and poor trading in Europe. About half of the fall in revenue was deemed “non-core” by the company.

The strong pound made exports from Nottingham, where Games Workshop miniatures are made, to Europe and the USA more expensive.

In Europe, the company has closed its regional headquarters removing middle management, centralising its trade sales teams at home, and continued rolling out the one man store format, which involves shutting down larger stores and opening smaller ones carrying less stock and with reduced opening hours. Rountree says in the second half of the year the trade sales team, which sells to independent hobby stores, grew revenue very slightly in Europe. The company’s own European stores are taking a little longer to recover than planned.

The savings from the European restructuring and a similar one in North America has reduced costs but Games Workshop says revenue will only recover when it can recruit the right staff, essentially entrepreneurial enthusiasts, for new one-man, stores. Until sales start growing again (this year it hopes), staff pay has been frozen.

Renewed impetus may also come from the newly relaunched Warhammer Fantasy game, “Warhammer: Age of Sigmar”. The company is rebranding its stores “Warhammer” too because Games Workshop is Warhammer to its customers.

A share price of 580p values the enterprise at £236m, about 17 times adjusted profit. The earnings yield is 6%.

My view
By cutting costs, Games Workshop has remained highly profitable. Return on capital in 2015 was 15%, slightly above the six year average. The company thinks modest growth will resume when the disruption from the restructuring abates and revenue from new, more profitable, stores it plans to open kicks in.

I don’t think Games Workshop’s management has been candid with shareholders about the extent of the disruption in previous statements. Perhaps it didn’t foresee it, but in this year’s annual report chairman and former acting chief executive Tom Kirby says, somewhat alarmingly:

We knew that the huge infrastructure changes we have been making these last few years… would be disruptive, so we are not surprised that many trade accounts across Europe no longer trade with us.

Judging by reports on the Internet (including the comments on this post), which are partial, the changes have antagonised trade and retail customers. Games Workshop might say you can’t bake a cake without breaking eggs, but the combination of discontent and poor results may indicate the process could have been managed better.

The result is a greater reliance on fewer staff, stores open at weekends and on some evenings, when customers have the free time, and closed some weekdays, and much of the morning, when teenagers are at school or in bed (and when the lone store keeper is ill).

The essence of the changes, more efficient distribution, makes sense, but only if Games Workshop invests enough to maintain the cult, which is to an extent a social activity centred on its stores. Customer alienation is not a good sign.

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The problem is that Age of Sigmar just isn't going to be profitable. Not unless some massive changes occur with regards to rules and armies. The players purchasing the models right now aren't interested in the changes, and new players still think getting into the model army business is too difficult or complex, despite simplifications.

Changing schedules is a good idea though, and I would've thought that was already the case that their stores were kept open longer than the norm.

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