Games Workshop Share Blog – Final Results Year Ended 2019

Games Workshop has now released their final results for the year ended 2019.

Revenues increased when compared to last year due to a £27.1M growth in trade revenue, a £5.8M increase in retail revenue and a £2.4M growth in online revenue.  Amortisation was up £1.2M, cost of inventories increased by £10.8M and other cost of sales were up £7.2M to give a gross profit £16.2M higher.  Operating lease payments were up £910K, there was a £696K increase in redundancy costs and other operating expenses grew by £8.3M, although a £1.7M increase in royalty income meant that the operating profit was £6.9M higher.  Interest payments reduced somewhat but tax charges were up £660K which meant that the profit for the year was £65.8M, a growth of £6.4M year on year.

When compared to the end point of last year, total assets increased by £19.4M driven by a £4M growth in inventories, a £2.8M increase in deferred tax assets, a £2.6M growth in other receivables relating to royalty income following a change in accounting practices, and a £2.3M increase in plant, equipment and vehicles.  Total liabilities also increased as a £2M decline in trade payables was offset in other areas.  The end result was a net tangible asset level of £89M, a growth of £16.5M year on year.

Before movements in working capital, cash profits increased by £11.5M to £98.3M.  There was a cash outflow from working capital and tax payments increased by £4.1M to give a net cash from operations of £72.5M, a growth of £2.5M year on year.  The group spent £13.7M on fixed assets, £7M on product development and £1.9M on software to give a free cash flow of £50.1M.  Of this, £50M was spent on dividends which meant there was a cash flow of £540K and a cash level of £29.4M at the year-end.

The operating profit in the Trade business was £43.7M, a growth of £10.8M year on year.  Sales increased by 28% with growth in every major country.  Sales to trade accounts which sell primarily online continue to perform well. 

The operating profit in the Retail business was £10.4M, an increase of £3.2M when compared to last year.  The group opened 40 new stores which generated £3M of profitable sales, 19 of which have been in North America and 8 in Asia.  The main focus for store openings in the year ahead will be North America and Germany.  The group opened their first store in the south of China, a multi-man store in Shenzhen which adds to the five stores based in Shanghai. Sales in Japan grew by 22% where they now have eight retail stores and doubled the amount of independent stores. 

The operating profit in the Online business was £29.3M, an increase of £1.4M when compared to 2018.  Sales grew by 5% and this is a key area of focus for the year ahead.  The operating profit in the product and supply business was £18.5M, a decline of £5.4M year on year.

Royalty income was £10.6M, a growth of £1.7M when compared to last year.  This was due to the strong performances of Total War: Warhammer 2 and Warhammer: Vermintide 2.  87% of this income is from PC and console games, 7% mobile and 6% other.  Royalty income now recognises guarantee income in full at the inception of the contract.

During the year the group invested £10.5M into the design studio with a further £3.3M spent on tooling for new plastic miniatures.  Phase 1 of the new factory went live in December.  Phase 2 is scheduled to complete in Autumn 2019 and will deliver an expanded tool room and new R&D capabilities.  The total cost of this new facility, including the purchase of land will be £14M.  The manufacturing investment doubled the number of plastic injection moulding machines they have available.

A project to extend and upgrade the Memphis facility was started in March.  They have extended the lease and agreed to expand the footprint of the facility from 100sq m to 150sq m.  They are investing £5M in new warehousing fixtures and fittings technology which should be completed in 2020.

The group have also outgrown their warehousing facility in the UK and are moving to a purpose built rented facility and will be investing £5M in new warehouse fixtures and fittings and technology.  The project will start in autumn and the current warehouse at the HQ will become their component warehouse, saving on third party costs.  Warehousing costs as a percentage of revenue have grown from 3.1% to 3.7% and this is expected to rise further to 5% following these investments. 

The group are taking steps into the media and entertainment industry and have signed a development agreement with a script writer, show runner and production company to bring one of their stories from the Warhammer 40,000 universe to TV.  This is a story based on Eisenhorn.  Additionally they have finished development and begun production on an animated series, Angels of Death based on the space marines.  They are exploring distribution methods and it might be that Angels of Death launches on their own Warhammer TV. 

There are a number of initiatives to encourage new people to the hobby.  The schools alliance programme is for students between 12 and 18 years old and gives an opportunity for hobbyists to share their passion with other students.  It was developed in collaboration with STEM teachers to complement their approach to learning.  Currently they have over 2,300 schools in the UK, North America, Australia and Asia receiving their school packs.  The group are an official partner to the Scouts in the UK and sponsor the model maker badge.  They are also involved in the Duke of Edinburgh award scheme.

Following the introduction of Blood Bowl and Necromunda, this year they launched Adeptus Titanicus, giant war machines from their Warhammer 40,000 universe, and Middle-Earth strategy battle game covering both the Hobbit and Lord of the Rings films and books, both of which exceeded their expectations. 

After an increase in the dividends the shares are yielding 3.6% but this falls to 3.2% on next year’s consensus forecast.  At the current share price the shares are trading on a PE ratio of 21.7 which falls to 20.9 on next year’s consensus forecast.

Overall then this has been a good year for the group.  Profits were up, net assets increased and the operating cash flow improved with plenty of free cash being generated.  Most sectors grew, although growth in the online sector seems rather lacklustre.  There seems to be plenty of room for growth in Asia and North America and it’s good to see the group investing some of its profits into capex for the future.  The shares are not cheap, however, and the forward PE of 20.9 and yield of 3.2% seems a bit steep to me.

On the 18th September the group announced that trading so far this year has been in line with expectations and cash generation remains strong.

On the 8th November the group released a trading update to the 3rd November.  Compared to the same period last year, sales and profits are ahead.  Royalties receivable are also significantly ahead driven by the timing of guarantee income on signing new licenses.  Prelim estimates for the first half of the year are sales of at least £140M and pre-tax profits at least £55M.


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