Financial analysis of GW

Ok folks, time to get a little corporate now.  Usually I stray away from talking GW corporate stuff, but with their recent Year End Financial Statements just coming out I can't help myself.  While reading it there was some really interesting stuff out there, lets jump right in and see what goodness Tom Kirby and his associates have given us this year.




First, before I start I wanted to give you a little background on myself.  I have an MBA, Suma Cum Laude,  in Finance and Accounting as well as an Undergrad in Business Admin and Finance.  I am also in the middle of my CFA level three exam prep and I hold a series 7 and 66.  I have also been working on Wall Street managing investments as an analyst for a large national bank for about 10 years.  The point of this isn't to stroke myself or to pat myself on the back.  I just wanted to give you the angle I am coming from, I might not be right (as my wife kindly points out)... But I do have a lot of background at looking into these things. I also want to note that while Ill try to take this from a professional standpoint, it is going to be hard not to insert my 'consumer,' side.

Anyhow, here are some of the more "interesting," things I found-

First things first... Despite popular opinion, this years financial results do not include the recent price increases.   On may 17 2011 Bell of Lost Souls reported the rise in prices by GW.  The Financial year end for GW is May 29.  So, there might be some tiny bit of change there, but it is a non factor when looking at these financial results. Likewise, the "Finecast," line wasn't reported until May 24, 2011 (also by BoLS).  As such it is also a non-factor in this financial report.

Moving on, lets see how GW did.

***ALL NUMBERS ARE IN POUNDS STERLING***

1. Revenue:
 In 2009 GW top line revenues sat at a nice 125.7M, in 2010 it rose slightly (flat) to 126.5M.  However, in 2011 Revenue (aka sales) fell to 123.1M.  This means that this year is the lowest year since 2008 (110.3M) which was in the middle of a very bad recession.   Well, if the recession is over (debatably) then why is Games Workshop losing money?

2.  Chairmans Preamble:
  For those of you who don't know, the Dark Lord of Games Workshop is Chairman Tom Kirby.  He is the largest single (as an individual) shareholder (6%) and he is the Chairman of the Board.  First off he says they know by trial and error and not "sophisticated analysis," how the business works.  Personally I don't like it when a chairman just pushes aside "sophisticated analysis," but that is just me.  He then goes on to say "We know...how to surprise and delight our customers over and over again." At least half of that is right, we are constantly surprised.  And even though Finecast is not reflected in the financial data (As stated above) he goes on to use it as a shinning example.  Doing this is like saying "I know I placed 130th at the last con, but my new list is awesome and will get me 1st!"  He should talk about finecast, but as an example of what is to come, not an example of what is. Mr. Kirby then continues to tout how well the return on capital is doing for the investors.  Hmmm Revenue is at a 3 year low, Earnings per share is down year over year and the stock price has gone from 439 to 440... Wow! Don't you feel the money your swimming in?  They did issue a dividend this year though (In a losing year?!).  Mentioning the dividend, he then goes on to say that it isn't stable and is in fact "happenstance," that doesn't make me feel comfotable as an investor.  Why? Because I buy stocks for 2 reasons 1. GROWTH! (NFLX) 2. Stable and predictable dividend payments (Utilities) if you can't do either then why do I want to own your company.  Tom obviously has no idea what he is talking about, and it saddens me.  The only hope that his preamble offers are these words (Hopefully in reference to himself) "retires," and "Succession."

WAKE UP!

3.  CEO Commentary
 Now lets move on to someone who at least has an idea of how to run the firm.  Mark Wells is CEO and is someone who would run the company very efficiently if Kirby got out of the way (IMHO).  Mr. Wells starts off with saying that the year provided "satisfactory performance."

 He specifically mentions that the specialist Forge World and Black Library businesses showed strong growth.  I personally have dealt with the head of American Operations over at Black Library and I must say that they really understand what it takes to sell their product. Black Library should be held up as a shinning example of how to run a company.

  An interesting point that is made is that the ROC (return on capital) has risen from 44% in 2010 to 45.7% in 2011.  For those of you who want to know,  return on capital is calculated as:

Net Operating Income 

Book Value of Invested Capital 

Net Operating income = Earnings - Cost of goods sold- admin expenses- depreciation - other expenses + non-operating income

Book Value of Invested Capital = Original value of investment - depreciation/ loss - liabilities 

This rise in ROC is likely from cost cutting (lower admin and cost of goods sold means higher Net Operating Income and as such the Numerator is higher, and because the numerator is higher the ROC is higher). Because we know, from past annual statements,  that it wasn't revenues which was increasing this number.

 Mark then dives straight into Fine Cast. Most of it is corporate babble to shareholders about how the new product is great and how it has been accepted by the consumers like wildfire.  There is one thing that was interesting in this corporate drivel.  He has pinned the cost of Finecast directly on QC (Quality control).  He claims that maintaining such a high level of QC is the reason that the costs are much higher than metal.  Tell that to everyone who sent the product back "the reactions of customers...has been overwhelmingly positive." I have no idea what he is basing this off of...But it is most likely sales, in which case his opinion is being skewed because those models were likely to be purchased in metal and were simply purchased in finecast because it was the only thing available.  He really should do a study to see how many purchases were made simply because of the new material and not just "I need a crowe."

  

  The only interesting thing (From a business perspective) that came out of his comments on WHFB is that they have finally admitted in writing that 40k is snuffing out WHFB and that GW is doing everything they can to "revitalize," it.  We all knew it, but GW had never flat out admitted it until now.

 Interestingly, GW has embraced the internetz!  They will be oopening 392 facebook accounts (one for each store).  I think this is a great initiative, though a little late to the party (since facebook is shutting down march 15th ;) lol)  They also congratulated Black Library for finding the Apple Bookstore and noted that it has not affected the paper sales in a negative way.

A very interesting note here, there is absolutely no mention of Tom Kirby's pet project: the one man store! In fact they go quite the opposite direction and only mention fully staffed hobby centers and their managers and how they are investing in training those managers to be more effective.  Sadly though, Tom Kirby will be teaching a class to these managers called "Understanding the Games Workshop Business." In my opinion Kirby should be sitting in on the class, not teaching it.  But that is my personal opinion.

ARE YOU BORED YET!!?? NO?....OK LETS JUMP IN AGAIN!

4. FINANCE REVIEW!!!

 - Sales: The big one here is that sales in Austraillia were down 11.8% during this period.  Remember, this is before the price hike in March.  It can't be getting better down under.  The main reason that this wasn't worse was becuase they had massive consolidations in North America which saved 3 million pounds. 

- Stock vs. index: A bright point in all of this, When looking at the long term the GW common stock has outperformed the FTSE small Cap index, but it should be disclosed that the index which is chosen to compare itself to is picked by the company.  

- Tom Kirby recieved a 20% pay increase while the CEO recieved a 5% increase, its good to be king!

- Free Cash flow: This is a measure of how much actual cash a company generates after doing business.  It is like asking how much gas you have in your car.  It is calculated as:

 EBIT (1-tax rate) +depreciation & Amortization - Change in Net working capital  - Capital Expenditure

Or essentially it mean "how much cash was left over after running the business and doing upgrades,"

The Free cash flow for Games Workshop was 14.253M pounds, which is 11.80% of revenue.  Last year  was 18.594 (14.69% of revenue).  As we can see the year over year cash flow for GW is down.  Though it is still positive.  This isn't a horribly negative thing, but GW should really be keeping an eye on their cash flow.  The easiest way to change this is by increasing earnings and lowering capital expenditures.  This is most likely why they have increased prices recently.  Time will tell if that was the correct action or not. 

- Current Ratio: This is a measurement of how quickly the company can pay its short term debt. It is calculated as:

Current Assets

Current Liabilities

A number under 1 means that the company can't pay off its obligations if an emergency happened and that the company is in bad financial health.  In essence you want this as high as possible. GW's Current ratio is 1.98, this isn't bad and means that the company has about twice as much current assets to pay off current liabilities than it needs.  It is mostly their large cash position which allows this number to be high. It is also the reason they initiated a dividend, if this number was closer to 1 then no dividend would have been issued (most likely). 

CONCLUSION:

- At this current time GW is in a decent enough financial position.  I wouldn't say that they are in any risk of failing and going out of business.  However, they have some immediate problems that they need to resolve.  Mostly their main problems lie in increasing sales.  This will raise Earnings per share and obviously it will increase revenues.  They need to particularly focus in UK, North America and Australia because they are losing revenues there year after year.  I personally think UK and North America will come out of it on their own, but Australia needs a lot of focus to bring it back into the black.  

 If I were GW CEO I do not believe that my choice would be to increase the cost of my products this year.  I believe that the elasticity (how much the change in price changes demand) of the GW product is not as much as GW would like to think, as such increasing costs will only serve to lower demand, which in turn lowers revenues.  Perhaps one way to rectify this would be to re-do the apocolypse boxed sets.  That way you don't actually have to lower prices permanently, but you get the cash-flow effects of lowering them.  If this increased revenues GW would be a very attractive small company to buy, especially if it could maintain its liquidity and cash/ dividend positions.

I could go on and on, but this is already getting long in the tooth.  What did you all think of this? did you even finish it? Thanks for reading anyhow, comments are welcome below.

Duke