Thursday, 18 February 2016

Is Games Workshop about to collapse?

This issue of the Games Workshop financial position popped into my head after you tube recommended a video this week titled 'GW 2016 Financials are in. The company is in a tailspin, Games Workshop is closing?' 

The evocative title did just what it was supposed to and made me open it to watch the video. It focuses on the half year result and then went onto talk more widely about GWs business issues. I’ve have been seeing these kind of thoughts for a long time and I wanted to share my thoughts on them.
Ok, let me reassure you before we go any further; GW ain't closing and isn't in a tailspin but there are plenty of amateur analysts out there who would like us to think so. Many of these reporters seem to be motivated by their umbrage with annual price hikes, GWs lack of communication with the community or the discontinuation of their line of models. That said, there is some truth in what they say which I would like to explore. 

The latest results largely show a status quo position. Two of the most important figures for investors and those of us with a healthy interest in seeing GW go on for the rest of our lives (or in my case my kids too I hope), are revenue (income) and profit (I'm gonna avoid going into any of the available investment industry KPIs as they are hard to follow if you are not into that). I will also look at share price as that is a reasonable equalizer of all the metrics that could be applied. One other caveat; I have worked in the financial industry for many years so a I know something about business analysis but I don't claim to be an expert, this is just my personal view. 


Revenue data is available from 1989 which is great for showing longer term trends. If we look at revenue today at c.£125m per annum compared to 1989 c.£12m p.a. we can see a huge improvement. No need to worry right? Well not exactly, income peaked at £152m in 2005 with the release of the Lord of the Rings game but since then has hovered between £110m and £135m. The inability to improve this level of trading has been an issue for the business and investors ever since. I wouldn't say this was something for us to worry about. However, investors do want to believe in growth and it does make you worry about the state of the market. 
That said, what does impress me about this is that most of those customers who joined and started spending on the run up to 2005s high point have largely remained / been replaced by similar spending customers. That it reassuring in itself. 

What would I do in Kirby and Rountree's shoes (Tom Kirby is Chairman and Kevin Rountree is CEO)? Not obvious I must admit. The rapid growth in the run up to the big 2005 result (and for a few years after) was largely driven by the opening of lots of stores. Seems obvious to just open more stores then right? I don't think so, investor communications over the period point to many of those stores being loss making and this hurt the profitability of the company, something investors hate more than declining sales! Since 2005 many loss making stores have closed and the emergence of cheaper to run one-man stores has become a key feature. These grow local interest whilst keeping costs low - not great if we want a Warhammer store with 20 tables and gaming nights all week, but good for the sustainability of the business. 

I can understand their thinking on dropping the idea of the stores as gaming centres. These must be expensive to run and social media has allowed gaming clubs to thrive so perhaps running 'gaming' stores just isn't necessary anymore. Indeed, there are very few stand alone gaming centres in the UK where a business owner has been prepared to invest in a lease to provide a venue just for gaming – I think this is strong evidence that such a market does not really exist and in this I can support GWs move away from larger stores (don’t get me wrong, I wish it wasn’t true but there just isn’t the evidence to support it).
One solution for revenue growth may be to take on another fantasy/sci-fi genre with mainstream appeal. It’s a shame they didn't pick up on Star Wars prior to the new movies or before everyone else did, something like Game of Thrones might provide that opening now? That has worked in the past and could again. How about a Horus Heresy movie? Let's make Warhammer more mainstream! The interest off the back of that would be huge. Nothing they haven't thought of I expect and it may be that technology is still a way off from making this feasible (ie affordable CGI given the movie would be unlikely to have heavy backing early on). 

Somehow, GW needs to find a way of increasing customers in at least a modest way, increasing revenue and therefore keeping investors happy and giving us all more buddies to play with in the process!


This is key to investors and all of us. We all need GW to make enough profit to keep the people it borrows money off (investors) happy, enough to invest in products and processes to keep us lot happy and enough to have enough cash to cope with small ebbs and flows in demand. 

The operating profit shown in the chart has had a bumpy ride since 2011, it has been better and the full result for 2015-2016 may tell us differently but given the heavy investment in infrastructure in 2014 a dip in form was to be expected. Profit in the first 6 months of 2015-16 shows that it is in largely in line with 2014.

Share price

This is another key indicator of a companies future likelihood of success.  Put simply, most people/institutions buy shares so that in the longer term (5+years) they will grow in value better than comparable investment opportunities ie putting it in the bank or (if you have enough spare cash) something like property investment. 

GW shares in 2011 were just under £4.00 per share. Today they are worth £5.30 each. So you could say that investors think that GW is a better prospect now than it was 5 years ago right? It's not quite that simple as macro-economics come into it, emotions of investors play a part as do the ramblings of Chairpersons and CEOs but on an intrinsic level this is a good news story. 

It's not all good news though, in 2013 shares peaked at £8.00 and have been falling since. Again the wider world plays a part in this and the big investments (which took focus from growth) by GW in 2014 probably scared off a lot of investors and drove the price down. It's even possible the shares were crazily overvalued in 2013 but nevertheless something has happened to reduce investor confidence in the past few years. 

Overall though, the share price is fairly high, over 6 years has seen an overall growth trend so generally speaking this is good news and no cause for calling it quits anytime soon. 

In Conclusion
I think GW are doing fairly well. They have managed a post-LOTR decline well and maintained cash and profitability, the profit levels have remained good enough to continue to interest investors and to allow for further investment in the product ranges. Its hard to remember back to the time a few years ago when we would wait months for a new product release, now I can barely keep up and I think this has been great for creating more buzz and excitement around the business.

The big question is whether Kevin and Tom can figure out how to grow the business again whilst keeping all the great new products a buzz coming. Good luck to them I say!


  1. I've said this often and I'll say it again, coming from the bicycle business and owning a bicycle company with it's own retail store that sells through other dealers - GW needs to close their stores and reinvest their support of the FLGS. These are the people supporting the community, these are the people building their brand and these are the people who are selling the lion share of their product. I don't understand how anyone at GW can't see that competing against your best customers (the FLGS) is a bad thing. It's bad for not only the FLGS' business but for their own. Remove all of the retail overhead from the GW stores, reinvest that into community driven programs and events and FLGS support. Lower costs by a small margin, enough to make the barrier of entry lower (I used to be able to buy minis with the money I saved up mowing lawns as a kid, not anymore). Then watch the profits grow.

  2. That's a really good point and makes a lot of sense

  3. Hi Warhost. That's a great point I had never thought of. A couple of initial counterpoints from me but I need to give this some more consideration as I think you are onto something.
    GW invests in a high street location for its stores, giving them a 'mainstream' high street marketing channel - this must be worth something considerable, at least in their view although I've no evidence to back this up.
    Secondly, in all the towns and cities I have lived in there has always been a GW store, even some of the smaller places. It was accessible and a constant. FLGS whilst I love them they are rarely as accessible - even when I lived in London. Whereas GW has always been there in a central location and for most of the past 2 decades.
    Lastly, I think it does offer them some control of their 'market' - they can market as they want, they can control prices and control the 'customer message' through their staff.
    That said I think you make a great point and I too wonder if all of the above is worth it in money terms.
    I think you have to try and do a sum of lower running costs which mean lower model prices bringing more customers in (but losing the high street visibility) and higher costs but more people seeing GW and therefore becoming potential customers. I expect GW are constantly trying to measure the best approach to this.