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Another fantastic year for Games Workshop profits


Back in January 1975, three housemates were winding down from work with their regular ‘beer and board games’ night in a Shepherds Bush flat when the discussion came around to setting up a business. They were fairly jaded at the work they were doing and wanted to do something that they had a passion for.

Games Workshop LSE:GAW was spawned from that session and soon after Steve Jackson, Ian Livingstone and John Peake started selling copies of new game Dungeons & Dragons in the UK.

Today Games Workshop is a venerable dreadnought of the high street, selling fantasy and sci-fi miniatures to hobbyists, games systems, books and digital IP. Games Workshop is truly a story of bedroom to boardroom.

Although the original founders had left by 1991, the company was taken to the next level after a MBO by Tom Kirby and Brian Ansell. It was acquired by private equity firm ECI Partners and floated on the stock exchange in October 1994.

A constituent of the FTSE250, the Nottingham-based company’s share price today (26th July) opened at 7,531.77p and has offered a year-to-date return of -25.58% and a one-year return of -37.86%. The company has a market capitalisation of GBP2.47bn.

Profit rise and future confidence

In the publication of its results this morning, Games Workshop reported that its fiscal 2022 pre-tax profit and revenue both rose, and it was confident for the future. For the 52-weeks ended 29th May, pre-tax profit rose to GBP 156.5m, up from GBP 150.9m for the previous year.

Basic earnings per share was 391.3p up from 372.7p in 2021. Games Workshop declared a dividend of 90p per share, in line with the policy of distributing truly surplus cash. The dividend will be paid on 12th September 2022 for shareholders on the register as at 5th August 2022.

Kevin Rountree, chief executive said: “It’s been another astonishing year. I once again take great comfort that some things don’t change – our staff and customers love Warhammer. I thank you all for helping make this another very successful year.”

The company said it moved into fiscal 2023 with a clear strategy for its core and licensing business and a good operational plan to build upon its progress, and it looks to the future with confidence.

Russell Pointon, an analyst for Edison Group, said: The core revenue performance was strong following the superior growth rates achieved in FY21 and would have been greater without disruption to sales in Australia due to freight, the forced pausing of activities in China, and lost revenue from Russia which management estimates the latter to be GBP4m in a full year.”

Loaded dice

He continued: “There was a strong return to revenue growth – up 23% -in retail in the year, whilst trade’s growth continued, up 10% but online saw a decline of 3%. All enjoyed improving momentum from H1 to H2. Despite the strong revenue growth, core operating profit declined by around 4% to GBP 131.7m, a margin decline of 470bps to 34% as a greater inventory provision, freight and carriage costs including post-Brexit costs into Europe, and investment in staff all impacted gross margin, offset by lower opex relative to revenue mainly due to a lower profit share to staff.”

The share price has taken a bit of a tumble recently, falling around 35% in the last year, which is the first long-term fall since 2017. In some respects the Covid-19 pandemic helped Games Workshop, as people, consigned to their homes, were looking for things to do and started to take up the hobby of miniature painting and wargaming.

It was not helped by stores closing but had a strong online presence and numerous channels including a publishing arm producing books, novellas and digital art; its miniature business and its wargaming systems.

Over the longer term an investment in Games Workshop has been like casting a loaded dice, the company was trading at 2,633p at the end of 2017 and hit 11,940p in May 2021. The company has enjoyed robust earnings growth, whereas other consumer discretionary stocks have seen earnings tumble post-lockdown, Games Workshop has forged ahead.

Being in the game for so long, Games Workshop has strong IP. It has licenced its IP to several games developers, royalties from video games came in almost 72% higher than the previous year at GBP 28m.

Pointon said: “Outside the sale of physical products, management was historically cautious about leveraging its IP into other media due to its desire to protect the integrity of its IP or the potentially prohibitive internal investment required to develop content in specific media, such as films or television programmes.”

Licensing represents valuable revenue stream

He continued: “This has changed in recent years as management has invested resource in  understanding how the media and entertainment industries work, as well as investing in staff, including the addition of own licensing staff in China, to develop new partnerships.”

Pointon explained that Games Workshop’s greatest success during the past 20 years has been in video games, which have represented the majority of royalty income, but also includes board games and accessories.

By the end of 2020, the company had 73 video games licences and was typically signing a new licence every two to three months. With respect to other media, in July 2019, GAW announced that it had signed an agreement to develop a TV series based on one of the Black Library novels, Eisenhorn. Management admits that progress in media and entertainment has been slower than it would have liked. Games Workshop is regularly in discussions with potential new partners while continuing to invest in recruiting people with media experience to accelerate the development of the business.

Rountree said: “We are looking to add more long-term partners to help us globally reach even more fans of our IP. The year ahead looks reasonably exciting with three major launches in the period.”

Games Workshop is also the distributor for other content, such as Lord of the Rings leveraging on Peter Jackson’s successful film franchise, turning the content into a table top strategy wargame.

There are challenges ahead. 3D printing, could upset its dominance in the creation of miniatures, but to date technology has not created a product on par with Games Workshop’s table top miniatures.

Pointon said: “3D printing technology is obviously improving all the time, but for the consumer the choice comes down to a balance of cost and quality against detail for home printing and Games Workshop’s offer is better quality as well as a boasting a wider universe of IP.”

The company is fairly inflation proof, as it has reasonably low capital requirements (about 1% of cash generated), this is obviously a boon in the current economic climate.

Games Workshop, from humble beginnings has become a high street stalwart. Questions about its relevance to new customers, especially young people who have a multitude of other distractions to entertain themselves remain. However, the company has shown time and again its innovation, and the challenges ahead could be seen a great opportunity for the company to grow and reach new markets and customers.

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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