Games Workshop designs and manufactures miniature figures and games and distributes these through its own network of retail stores, independent retailers and direct via the internet and mail order. The group has manufacturing activities in the UK and sells mainly in the UK, Continental Europe, North America, Australia, New Zealand and Asia. Most revenues are recognised at the point of sale, but the revenue for magazine subscriptions is recognised on a straight line basis over the subscription period. The group also earns revenues from royalties.
There are three different business areas. The trade division sells globally to independent retailers and also includes the group’s magazine newsstand business and the distributor sales from the group’s publishing business. The retail division includes sales through the group’s retail stores, the visitor centre in Nottingham, and global exhibitions. The mail order division includes sales through the group’s global web stores and digital sales through external affiliates. It has now released its final results for the year ended 2015.
Revenues declined when compared to 2014 as a £971K growth in mail order revenue was more than offset by a £3M fall in trade revenue and a £2.4M decrease in retail revenue. There was a £607K increase in the amortisation of development costs and a £483K growth in the cost of inventories but other cost of sales declined so that gross profit fell by £4.6M. The amortisation of software increased by £524K but operating lease costs fell by £1.2M and we also see a £337K decline in the loss from sales of tangible fixed assets and a £309K fall in the loss from the sale of intangibles and £2.6M lower redundancy costs. We then see the lack of a £4.5M European restructuring charge that occurred last year which meant that the operating profit grew by £4.2M. Interest income was broadly similar and the tax charge was slightly lower so the profit for the year came in ay £12.3M, an increase of £4.3M year on year.
When compared to the end point of last year, total assets declined by £5.2M driven by a £5M fall in cash and a £1.1M decline in deferred tax assets, partially offset by a £1.6M increase in freehold land & buildings. Total liabilities also declined during the year as a £2.5M fall in provisions was partially offset by a £1.2M growth in deferred income. The end result was a net tangible asset level of £41.8M, a decline of £3.4M year on year.
Before movements in working capital, cash profits increased by £462K to £25.3M. A slight cash inflow from working capital and a tax payment that almost halved, gave a net cash from operations of £23.3M, a growth of £3M year on year. The group then paid £4.6M on product development, £6.8M on the purchase of property, plant & equipment including £3M on production equipment and tooling, £2.4M on the visitor centre and £800K on 34 new stores and three refurbishments, and £1M on computer software to give a free cash flow of £11M, an increase of £2.5M when compared to last year. The group spent £16.6M on dividend payments so that there was a £4.8M cash outflow for the year to give a cash level of £12.6M at the year-end.
The operating profit in the trade division was £11M, a decline of £3.8M year on year. There was a £2.2M decline in non-core trade activities which comprised export, non-strategic accounts and magazine sales with the rest of the decline as a result of adverse currency movements. The operating loss in the retail division was £1.1M, an improvement of £586K when compared to last year and included a £700K decline in non-core retail due to the redevelopment of the visitor centre in Nottingham. The group aim to offset this decline with the opening of a new visitor centre and events programme in 2016 having been opened in May 2015.
The operating profit in the mail order division was £14.2M, an increase of £99K year on year. The operating profit in the product and supply division was £8.6M, a growth of £8.4M when compared to 2014, although last year did include a £4.5M exceptional cost. They made an operating profit of £1.1M through royalties, which was flat year on year. During the year the group have signed 17 new licensing details with 44 currently in place to produce more than fifty interactive products. A major tie-up included one with Sega to develop a real-time strategy game, Total War Warhammer. The royalty income overall is split between traditional PC games (52%), mobile (27%) and card, board and role-playing games licenses (21%).
Overall the detrimental movements in foreign exchange reduced operating profit by £2.5M during the year. The restructuring across Continental Europe was delivered on time, within budget and delivered the cost savings that were planned. It has taken some time to get this region back to its normal levels as the group had to recruit a new trade team of account developers in Nottingham servicing all of Continental Europe in the local languages. In the second half of the year that team delivered sales growth of 1% but the impact in retail has taken longer than planned to recover with the key issue being store manager recruitment.
The exit of loss making stores in North America has been a challenge, they closed nine stores in the year and have not delivered a net increase in stores in the region in the year. These closures hare now complete and subject to finding the right managers, they will be embarking on a store opening programme in North America next year.
The group is some way through a “Great Master Plan” which involves cutting costs, becoming more efficient and paying dividends. One aspect that remains unrealised, however, is sales growth. The board have identified the fact that the large infrastructure changes that have been taking place have been disruptive and some trade accounts across Europe no longer trade with them. They also indicate “truly dreadful” trading conditions with the strength of Sterling against both the euro and dollar adversely affecting the group. The CEO has asked the staff to take a pay freeze until December 2015 with any increases being back dated to June if they deliver sales growth in H1 2016.
The visitor centre is an interesting concept, where visitors are being charged £7.50 to see many of the group’s products and miniatures in one place. The design studio in Nottingham creates the miniatures, art work, games and publications that are sold and during the year the group invested £7.7M in the studio, including software costs, with a further £2M spent on tooling for new plastic miniatures. The board are committed to a similar level of investment every year. They have also been planning a project to upgrade the core IT systems that interface with the manufacturing equipment and systems; and started a project to upgrade the IT infrastructure and software for the warehouse that supports the mail order store based in Nottingham.
Over the last five years, the group have been focusing on ensuring all of their stores are profitable by exiting expensive locations and converting the others to one man stores. It is believed that this project is in effect complete, they have 324 one man stores and 94 multi-man stores, which are constantly reviewed to ensure they remain profitable.
The group are also looking at reviewing their product range with a view to resetting the ranges. They will not be reducing the RRP of their products but are apparently looking at offering a broader range of price points – that’s management speak if ever I heard it, I suppose they meant they are introducing a cheaper range of products? This is still early days, however, and the board do not know when the change will be introduced.
There is a plan to open more stores, mostly in the one man format in greenfield cities in North America and Continental Europe. They are also looking at opening more stores in Japan, Singapore and Hong Kong with the global goal set at a net 30 new stores globally. A trial of new stores in high footfall locations has also been proposed, like the one opened in Tottenham Court Road in April which is a multi-man format with an extended shop fit; mainly new till format, mobile tills, better use of merchandising space, new web terminal and next day stock delivery to the store for in-store orders. The aim is to pilot one each in Boston, Sydney, Munich, Paris and Copenhagen during the year ahead.
They are also looking to open more stockist trade accounts with a particular focus on North America; and to explore new core trade opportunities in toy, craft, book and comic stores; and finally they will be replacing the European ERP system in Nottingham that has been used over the last fifteen years and has come to the end of its useful life. This project will give them the opportunity to drive synergies throughout their back office functions by removing complexity, re-engineering their processes and delivering their services at a lower cost. The product and vendor has now been chosen with the project expected to cost £6.4M. This is obviously a complicated project with the risk of widespread business disruption if not implemented well.
The group has some £447K of capital expenditure contracted for but not yet incurred and there are £19.3M of operating leases outstanding, of which £7.3M is due within the year. There are currently three major projects being implemented including a European ERP replacement at a cost of £6.4M; a new Forge mail order store on the same platform as the Citadel mail order store at a cost of £1.1M; and a mail order warehouse system replacement estimated to cost £800K.
The board have indicated that they have no intention to acquire other companies or dispose of any that they currently own but they are at the start of a rebrand away from Games Workshop to Warhammer with 13 stores having been rebranded at the year-end.
The group has a modest amount of susceptibility to exchange rate changes. A 10% appreciation of the US dollar would increase income by £27K whereas a 10% appreciation of the euro would reduce income by £35K.
At the current share price the shares trade on a PE ratio of 15.3 which reduces to 14.5 on next year’s consensus forecast. The shares are yielding 8.9% which reduces to 6% on next year’s forecast. There were no utilised borrowings at the year-end so the net cash position currently stands at £12.6M compared to £17.6M.
On the 7th December the group released a trading update for the first half of 2016. Trading on a constant currency basis has been broadly in line with both the board’s expectations and the first half of 2015. There has been modest sales growth at constant currency but the adverse impact of a stronger pound will result in a small decline in reported sales.
Overall then, this has been a mixed year for the group. Profits did increase during the year but when last year’s European restructuring is discounted, profits fell, not helped by detrimental movements in forex. Net assets also declined but cash profits did improve, generating a decent amount of free cash. The trade division seems to have been responsible for the decline in profits with the other businesses showing improvements or no movement, although it should be noted that the retail business is still making a loss.
The group seems to be having a real problem growing sales which is probably to be expected given the cost cutting that has occurred in recent times. They do need to be careful to not cut too far and kill the goose that is laying the golden eggs (as it were) as the company’s customers are very enthusiastic about the products and the social aspect of the games and I can’t help thinking that the move from two man stores to one man stores is having a bit of a detrimental effect on this perception. The international growth and trial of the high-footfall stores does sound interesting though but it should be noted that the new ERP system upgrade comes with some risks.
The recent update shows that trading in the first half of 2016 is subdues and although the group has a net cash position and a generous forward dividend yield of 6%, the forward PE of 14.5 doesn’t really leave much room for error and I am not sure this company is one that is growing at the moment.