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.
Posted by Duke at 12:08 PM