Friday, January 7

GW Corporate discussion

Ok, so the other day I spent some time looking over the latest Games Workshop Annual Statement and earnings report and some really interesting stuff came out to me.  But before I get into that I want to give you a little background on myself, Im not just some fan boy who doesn't know anything about Corporate workings.  My MBA is in finance and accounting, as well as my undergrad, both from very well qualified schools, where I graduated with honors. In addition also a CFA (Chartered Financial Analyst) level 3 as well as a series 7 and 66. I also have been working in the investment banking and private equity worlds for a decade.  Not to pat myself on the back, just more of a disclosure so you know where I am coming from, I might not be right... But I do have a lot of background at looking into these things.

Anyhow, here are some of the really interesting things that I found.

So let’s talk about GW and their annual report (July 2010). Mostly I want to focus on the CEO (Wells) and Chairman (Kirby) comments… The financial data and charts will be covered in another post (maybe). There was just so much mess in their comments that I thought it would be too much to comment on their words and the financial statements in one post.

“We make things. We are a manufacturer. Not a retailer.”- Wells
Ok, fair enough… So I assume if you’re a manufacturer then your annual report will cover things like lease vs purchase analysis on new machines, Research and Development analysis and Optimal manufacturing execution systems like on time delivery and plant improvements…Right?

So let’s get on to what they talk about now that Games workshop is a non-retail, manufacturer and all…

“Investment in store openings has continued, with 45 new hobby centers… Our primary focus remains restoring real sales growth.”
Wait, so your primary focus isn’t make things faster and cheaper with more reliable distribution channels? In fact your focus is opening new RETAIL STORES… This is an interesting position for a MANUFACTURER to want to be in. When was the last time you walked into a GE (general electric) retail store? Never, cause they are a manufacturer and they don’t have retail stores. Their Corporate vision is “Imagine, Solve, Build and Lead.” That sounds like a manufacturer.

Lets go on toGW’s global project. We should find some manufacturing in here…Right?

“The first of our agreed global projects is the rollout to all Hobby centres of Retail Standards, the sales training approach developed by our Australian business.” - Wells
“The second global project is the implementation of performance related pay for Hobby centre managers.” –Wells
“The third global project has been the relaunch of Warhammer this summer”- Wells
“Outside of global projects, we will continue to invest in opening more Games Workshop Hobby centres” -Wells

Ok, this makes a TON of sense… Your global goals are growing retail sales locations; implement an overtly retail sales pay structure for your managers and rollout retail standards for training SALES people. Oh wait, you did mention releasing a new product, which is kind of manufacturing… Sorta. This is the CEO talking by the way… You know, the guy who runs everything and KNOWS the business model (apparently).

Stop laughing/scratching your head for a second cause there is more. They actually mention manufacturing.
“We will continue to invest in tooling for more plastic miniatures and in upgrading and replacing computer systems, particularly in North America and Northern Europe.”- Wells
Wow, that’s all you give to manufacturing… One sentence in 6 pages? Capital job Mate!

Ok, now that we have talked about your internal growth and plan let’s cover how your going to handle competitors like Flames of War who is taking more and more market share.

“We are also clear that we will only make fantasy miniatures, not historical ones,” -Wells
Wha?! Did you just give a thumbs up to your competitor? Ummm okay. Don’t mind that guy over there, that is the CEO of Battlefront doing a cool little jig and singing. Cause you just told him you won’t ever be a direct competitor.

What inquiring minds want to know is if something is profitable why you wouldn’t want to go into it… Especially if it is already in the scope of your business (miniature war-game “manufacturing,”…) is it the fact that you can’t defend IP of a historical very well? We wouldn’t turn down a profitable business because we can’t sue people…or would we?
- “we can, and do, defend our intellectual property rigorously against imitators, thus
ensuring that our worlds are synonymous with quality.
- Using our defendable intellectual property, provides us with a considerable barrier to entry for potential competitors: it is our Fortress Wall.
- Where we think we can generate additional income for our shareholders from our intellectual property we will pursue these opportunities.”

That is a great plan… Were going to sit here in our fortress and not go out among the market to grow the company with new business lines. Did any of you read “The Prince,” by Niccolo Machiavelli? Cause he seems to think that “The prince who has more to fear from his people than foreigners ought to build a fortress. However, the best possible fortress is to not be hated by the people,” because fortress walls only serve as a target for foreigners. But what does he know?

Wells then goes on to cover how they plan on opening more stores and recruiting and training customers… Which is fine, but he is talking about the end customer, which again sounds more retail sales. A manufacturers “customer,” is a wholesaler who aren’t mentioned at all in this annual report. Oh well, on to more of this mess.

Here is something I love.
“We are not significantly affected by economic factors, as recent results show.”- Wells
Ok, lets look at the data then… in the graph next to his comment we see that sales fell from a peak of approx 150M to a low of 110M in the period of 2006-2008. Hmm, a 25% fall in sales is “not significantly affected by economic factors.” Well let’s look at a different measure then, return on capital. ROC also fell in the same period, but by about 50% what do you have to say about that Mr. Wells?
“Sales are down on last year on a constant currency basis despite strong growth from the new Games Workshop Webstore. We increased the number of
Hobby centres by 27 stores during the year, but the growth from these was not able to offset the decline in existing stores.” -Wells

Ummm, so you weren’t affected, but you were affected? Even after increasing by 27 stores you lost sales… Maybe I should stop looking for consistency and weird stuff like that… Come on, even Orks are consistent.

Well, I’ve beaten up on Wells enough, let’s talk about the front man… Kirby. This guy had a pay raise when all employee salaries were frozen. Now that is leadership. Let’s see what he has to say.
-“Shareholders who look for a predictable dividend on their shares might want to look elsewhere.”- Kirby
Shortly before that.
-“…Where does that leave us? Pretty much where we have always been: a small, steady-growth company that will pay a dividend…”- Kirby
Then shortly after his first statement
- Were delighted, once again, to recommend the payment of a dividend for the year…looking forward to the future WE WILL PAY DIVIDENDS”- Kirby

Then Wells threw in his two cents regarding the dividend and return for investors.
-“ We are here to deliver a good return for our owners. And we aim to do that for a very long time.”- Wells

So Kirby starts off by saying that investors might want to look to another company for predictable dividends then both he and Wells talk about how they will continue paying dividends into the future? I know dividends can be volatile, but you don’t initiate a dividend policy and then tell people they should look elsewhere for dividends. Unless you’re a manufacturing company who has their main focus in retail sales, ummm whatever.

I would like to finish with a quote from an unknown investor who knows even less than the CEO and Chairman. This person was quoted by Wells in his address “I like Games Workshop because nothing they have ever done has been down to luck.” Seriously? Umm, ok…wow. I don’t even know what to say about that… I give up.

I know this was a wall of text, but I thought it should be said. What are your thoughts? Arguments? Let me have it if I am wrong, or join me in scratching my head.


  1. I personally think the best comment ever in ones of these was when they said they had no idea why people bought their products.

    Warseer always has excellent discussions of these when they come out. Generally one the most interesting thing to consider is that they do not really pursue sales volume eventhough their plastic production mechanisms are perfectly designed for this since production cost after tooling is extremely low.

    They just released a profit warning saying sales were down like 4% last half year May-Novmember. Given that they raised prices like 5-10% across the board this implies sales volume has fallen like 10-15%.

  2. “Sales are down on last year on a constant currency basis despite strong growth from the new Games Workshop Webstore. We increased the number of
    Hobby centres by 27 stores during the year, but the growth from these was not able to offset the decline in existing stores.” -Wells
    Ummm, so you weren’t affected, but you were affected? Even after increasing by 27 stores you lost sales… Maybe I should stop looking for consistency and weird stuff like that… Come on, even Orks are consistent.

    Hey Duke, some good analysis. But - when Wells says 'economic factors' he means the wider economy. He acknowledges a decline in existing stores - but does NOT ATTRIBUTE that decline to anything, particularly the wider economic factors. Therefore, from that perspective there is no inconsistency.

    Your comeback will be that is from one perspective only - but no disrespect but it is all 'a certain point of view' (to quote the immortal Obi-Wan.) There is only one real perspective to consider - a British Company made a £16m profit in a year when many major British highstreet names were going bust.

    Also stay clear of the words of a long dead Italian - British Military academies have a thing about people who can use any old sun-tzu quote and make it fit their arguement - at the end of the day I could probably find one from Deepthroat or Predator that would do just as well. The fortress simile is to make investors feel they are in a strong position, not to indicate that corporately the company isn't approachable.

  3. @Erichrome: I love that quote! I haven't looked at the math, but your logic is sound, unless they already built that into their statement... Which they probably didn't

    @Denzark:After reading it again, he does later attribute slow numbers in those years to "Quality of management and decision making." No matter what he says the reasons are, it is inconsistent to say your aren't affected and then say you are affected. Many companies suffer because their management makes wrong decisions in though economic times. Idiot managers can make money in good times. Directly, or indirectly, they are affected by economic scenarios... The numbers don't lie about that. I will not for one second believe that toy soldiers are inelastic. But Ill get into the numbers a little more later.

    Your right, they did make money in the time period Im looking at, but their revised numbers are more like 8 million and not 16 If I do a numbers analysis Ill go into where that income actually came from.

    Lastly, your 100% right about using quotes... There is always something that will support whatever claim you want to make. However, my comment about the Fortress was showing that building a fortress wall instead of looking out for innovation is arguably not a good place to be in. If you make something idiot proof someone will make a better idiot and crack that wall of yours... Then what? I would also say that the company is also very unapproachable. They have no Public Relations department, no press relations department and no marketing...

    Of course, I love a healthy debate so I respectfully look forward to your reply.


  4. Hey Duke

    I hesitate to hold a healthy debate on finance with someone with your cv - my financial nous is sadly lacking.

    Have you ever worn scruffy clothes into a designer shop, and been looked down on by the staff? (thats when you want to grab them and say look nobber, you just work here, I can AFFORD to shop here)?

    Anyway, I wonder if any business does the same with its investors - they think 'we're the brains, you just put up the cash, we know how to make more from it...'

    In which case I would expect a financial report to be full of business speak - I stopped reading 75% of the way in - maybe they are trying to baffle everyone with science.

    Bottom line is, I fully acknowledge GW gouges us on prices - the only thing I don't internet discount buy is probably the odd paint, and codexes/black library.

    But I just can't see this profit warning as the doom and gloom, and sign of insanity by the board, that many allude to.

    Even if the profit figure is only £8m, this is huge in the current UK financial climate, for a niche luxury item, particularly after a winter where many customers couldn't physically get to high streets after snow.

    This year, Space Marine FPS= more royalties. 'Summer of Flyers' = more big kits. Grey knights = MEQ whores coughing up yet more.

    So I wouldn't write 'em off yet, and I doubt the call to boycott from some quarters is going to slash prices as I doubt Kirby et al thinks they are doing badly.

  5. @Denzark: Actually I have had that feeling a few times... And then they try and offer you some credit card...

    Most businesses tend to think they are the smartest guys in the room and that nobody else can hold a candle to them. I meet with a lot of those people on conferences and such and even though a lot of people are more educated than a lot of them they still have a tendency to talk down to everyone.

    Actually, the whole profit warning thing was the catalyst that sparked my interest, I don't think it is doom and gloom for them (I really hope it isn't too)

    My main point was that this company is confused... They makes comments like "we aren't affected," when they obviously are. "Were a manufacturer," When their global initiatives are all Retail sales and "We don't know why anyone buys our stuff,"

    I would love GW to make money and stay in business. My only point is that everything they do is against everything I have ever been taught or now about a company, which makes me scratch my head... Also I don't encourage a boycott. 1. it is really hard to organize and 2. usually doesn't work. 3. its kind old fashion.

    In the end, you right Kirby doesn't think he is doing that bad... And in some sense, just remaining in business can be enough to validate your decisions, no matter what anything else says.