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Stunning annual report | Games Workshop

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I was going through a company yesterday, it was up 300% this year. I fell off my chair, reading the powerful words of wisdom from the annual report. I ended up buying some shares yesterday in this company even though they have spiked a lot.

Company: Games Workshop


Stock symbol:  LON:GAW (London Stock Exchange)

ROE: 30%+ this decade, 60% this year

PE: 15

Growth: Lumpy, this year 50%

Debt: No, instead drowning in cash.

Business: Highly hobby-addictive games and miniatures for adults.



A delight to read excerpts from Annual report:


Most companies don’t live for long. Leaving aside banks and finance houses that can continue doing pretty much the same thing year upon year there are only a handful of companies that were in the Fortune 500 in 1900 still going today. Looking at the sector weightings in the US for 1900 62.8% of value was generated by Railroads; in 2000 it was 0.2%. Other big players in 1900 were mining and iron, coal and steel. It is not easy to survive when your industry is collapsing around you. In 2000 the big sectors were IT, telecommunications and pharmaceuticals, non-existent (nearly) in 1900. It is no surprise that today’s giants come from those industries.


If companies don’t live for long, they don’t grow for long either. The classic model is a start-up followed by rapid growth, then slower consolidating growth then a tail of gradual decline. Some flare and vanish like magnesium, others hang on in there grimly grinding out the years slowly rusting away like iron.


Investors have the job of buying shares just after the start-up, enjoying the rapid growth period and getting out before the decline. They like growth. Of course they do. How else can they guarantee to make their customers money? Their job is essentially about timing, although the time varies wildly from investor to investor. Some like to buy now and sell in a second when the share price has twitched. Some like to buy now and hold for years to give the shares chance to deliver their full value. I have often argued in the past that the first group are gamblers and not real investors, but both groups have the same need: growth.


This puts pressure on management. Grow dammit! Easier said than done. The demand for growth can lead to management making truly lamentable decisions for the long term health of their business in order to deliver now, this year, this quarter. It is no wonder that many businesses do not live long. Not only are they fighting in an uncertain world, they are having to force things at every turn to serve the god of growth. This same thirst for growth has also driven the LTIP craze whereby institutions think they have ticked the box labelled ‘long-term value delivery’ by allowing management to make up complex ‘long-term’ schemes that replace the short-term schemes that used to reward them so well and so much at the expense of future years. The LTIPs reward management even better, at an even more ruinous expense to the company. Of course they do; designed by managers for managers and cheered on by City institutions. So now maybe they aren’t such a good idea after all. It would help if we could all agree that ‘long-term’ means 25 years, not three. (See below).


Investors also like dividends. At the start of a company’s life there is an understood need for re-investment so dividends will be small or non-existent. As time goes on and the early growth rates slow, the expectation of dividends rises. An expectation of regular and ever growing payouts. A progressive dividend policy.


This puts pressure on management. Yield dammit! We don’t care if the business isn’t generating truly surplus cash, go out and borrow it so you can fulfil your commitments. Not only do businesses struggle to grow forever they are expected to do so under the burden of ever increasing debt.


Yes, I know, too gloomy and fatalistic. And yet these pressures are ever present in the lives of those of us who run public companies. Some resist and try to do what their companies need, and some give in and pursue unsustainable growth and borrow to pay uncovered dividends.


This has been our life here at Games Workshop these twenty-odd years. Sometimes growing, sometimes not. One time having a progressive dividend policy and, more recently, not.


Listening to the comments from investors both favourable (rarely) and critical (often) on how to keep growing and keep paying, it became clear that for a business to survive it needs to make its business just that: survival.


I realised many years ago that eternal growth, though sorely needed by some investors, was not sustainable. To begin with it was easy to see that compound growth was literally impossible in the long term, but then it became clear that promising growth at all was prejudicial to our ability to make good decisions that would keep the company alive and healthy. Yes we like growth. Yes we will try to get it. But, no, we will not make promises. Sometimes the head winds are too strong. Sometimes the need for re-structuring takes precedence. We will not do daft things to deliver artificial growth.



When survival becomes the mantra then the company needs to be built so it can live in the lean times as well as the fat. Many of the things we have done were done to ensure survival. We have investors and their needs are important, but we serve those needs by being honest with them and letting them know that we are aiming to survive and there will be good times when we grow and pay out dividends and there will be times when we don’t. We also have staff. They like having jobs. There are seventeen hundred (or so) people all over the world whose livelihood depends on the company they work for surviving so it can carry on paying the money they earn. We also have customers, and they want us to survive so their hobby can be maintained and the fun can continue.


In the good years of course our stores can have several staff, but in the bad ones too many staff spells disaster. Losses. Death. One man stores are not a moral crusade, not a gouging exercise in profiteering, but a survival technique.


Many of you reading this have understood all along what we were doing and why we needed to do it. This year you get the rewards for your patience. Kevin and all the staff have delivered growth. Not just currency-based growth but real growth generated by great models, good supporting products, joined-up promotions, intelligent social media work, co-ordinated production schedules and just-in-time shipping around the world. This year the rewards, and, we hope, next year and many more after that.


At heart Games Workshop is a simple business. We make and sell toy soldiers. We do nearly all of it ourselves (because we haven’t found people who can do any of it better than us; maybe one day we will, we keep on looking) and that makes it fiendishly complicated. Anyone can make a great miniature. No-one else can make 30 million of them a year and get them, on time, to our stores and trade partners all over the world and from there into the loving hands of our customers.


There are many wonderful opportunities ahead for the Company and the Hobby. We have barely begun our ‘Total Global Domination’ (a mantra from years ago) – despite being at it for over 25 years – and the business is full of ideas about how to do better, everywhere.


Strategy and objectives


Games Workshop’s ambitions remain clear: to make the best fantasy miniatures in the world and sell them globally at a profit, and it intends doing so forever. This statement includes all the key elements of what we do and why we do it that way. All of our decision making is focussed on the long term success of Games Workshop, not short term gains.


Let me go through it part by part:


The first element – we make high quality miniatures. We understand that what we make is not for everyone, so to recruit and re-recruit customers we are absolutely focussed on making our models the best in the world. In order to continue to do that forever and to deliver a decent return to our owners, we sell them for the price that we believe the investment in quality is worth.


The second element is that we make fantasy miniatures based in our imaginary worlds. This gives us control over the imagery and styles we use and ownership of the intellectual property. Aside from our core business, we are constantly looking to grow our royalty income from opportunities to use our IP in other markets.



The third element is the global nature of our business. We seek out our customers all over the world. We believe that our customers carry our Hobby gene and to find them we apply our tried and tested approach of recruiting customers in our own stores, by offering a fantastic customer experience. Our retail business is supported by our own mail order store (it has the full range of our product) and our independent stockist accounts and trade outlets across the world. These independent accounts do a great job supporting our customers in parts of the world where we either have not yet opened one of our stores or where it is not commercially viable for us to have one of our stores. The long term goal is to have both channels (retail and trade) growing in harmony. We will always have more independent accounts than our own stores. Our strategy is to grow our business through geographic spread growing all of the three complementary channels.


The fourth element is being focussed on cash. By delivering a good cash return every year we can continue to innovate, surprise and delight our loyal existing customers and new customers with great product. To be around forever we also need to invest in both long term capital and short term maintenance projects every year, pay our staff what they have earned for the value they contribute and deliver surplus cash to our shareholders. Our dedication and focus should ensure we deliver on time and within our agreed cash limits.


We measure our long term success by seeking a high return on investment. In the short term, we will measure our success on our ability to grow sales whilst maintaining our core business operating profit margin. The way we go about implementing this strategy is to recruit the best staff we can by looking for the appropriate attitudes and behaviour each job we do requires and identifying the value that job brings. It is also important that everyone we employ has a real desire to learn and has a great attitude to change. Our Academy offers all of our staff both personal development and management skills training. It is also worth noting it’s not what you know at Games Workshop it’s how much you contribute to our success that we value.


Business model and structure


We design, manufacture, distribute and sell our fantasy miniatures and related products. These are fantasy miniatures from our own Warhammer 40,000 and Warhammer: Age of Sigmar universes. Our factory, main distribution centre and back office support functions are all based in Nottingham.


We are an international business centrally run from our HQ in Nottingham, with 75% of our sales coming from outside the UK.




Employing 187 people, the design studio in Nottingham creates all the IP and the miniatures, artwork, games and publications that we sell. In 2016/17 we invested £8.0 million in the studio (including software costs) with a further £2.3 million spent on tooling for new plastic miniatures. We are committed to a similar level of investment every year.




We are proud to manufacture our product in Nottingham. It’s where we started and where we intend to stay. We are currently working on a significant project, with a leading UK software supplier, to upgrade our core IT systems that interface with our manufacturing equipment and systems.




All of our product is initially distributed from our warehouse facility in Nottingham. This facility supplies our two hubs in Memphis, Tennessee and Sydney, Australia and either directly to our trade accounts and retail stores or via a third party carrier. Our project to upgrade the IT infrastructure and software for the warehouse that supports our mail order store based in Nottingham will be delivered in the Autumn of 2017.


Business model and structure continued





We sell via three channels, our own stores ‘Retail’, third party independent retailers ‘Trade’ and our ‘Mail order’ web store.


Retail – provides the focus for the Hobby in their areas. They only stock Games Workshop product. They are where we recruit the majority of our new customers. To do so the stores don’t offer the full range of our product, just new release product and the appropriate extended range. At the year end we had 462 Games Workshop stores in 23 countries. Our stores contributed 41% of the year’s sales. We have 360 one man stores, small sites, each one staffed by only one store manager. We also have 102 multi-man stores, which are constantly reviewed to ensure they remain profitable. If not, they will be closed and probably replaced with one man stores.


Trade – we sell to third party retailers under closely controlled terms and conditions. They help us sell our products around the world and importantly in areas where we don’t have our own stores. Independent retailers are an integral part of our business model; Games Workshop strives to support those outlets which help to build the Hobby community in their local area. The bulk of these sales are made via our telesales teams based in Memphis and Nottingham. We also have small teams in Sydney, Tokyo, Shanghai, Singapore, Hong Kong and Malaysia. In 2016/17 we had 3,900 independent retailers (2016: 3,800) in 62 countries. We strive to deliver excellent service, operating in 20 languages covering all time zones. 38% of our sales came from sales to independent retailers in the year reported.


Mail order – the mail order store allows enthusiasts full access to all Games Workshop products. It is run centrally from Nottingham. It accounted for 21% of total sales in 2016/17. All of our stores also have a web store terminal that allows our retail customers access to the full range.




We control the business centrally from Nottingham; it is where the people with experience and knowledge of running our niche business work. I have put in place a flat structure: the people with senior responsibility who make all of the big decisions report directly to me. My team is split into five parts: sales, operations, merchandising and marketing, systems and IP exploitation.


My channel sales structure comprises retail, trade and mail order. This structure is made up of four key territory retail sales managers in the UK, North America, Continental Europe and Australia and New Zealand. We also have a global trade manager and a global mail order manager along with a sales manager for Asia. A global merchandising and marketing manager supports our sales channels with appropriate internal and external communication.


My operations and support structure includes a finance director for Games Workshop who is responsible for accounts, compliance, licensing and legal duties. We have a product and supply manager who is responsible for our factory, logistics and design studios (Citadel, Forge World and Black Library). He also manages our three main distribution hubs in Nottingham, Memphis and Sydney. A personnel manager and our Academy personal development and skills training ensure we take our people recruitment and development seriously.


During the year I recruited a Global IT manager. She will help us invest in our core systems as well as consider how we can leverage technology to help us deliver our long term goals. IP exploitation. I have a small team of advisors that are helping me ensure we have an exciting five year plan to maximise the income we earn from external global partners who can deliver incremental value to Games Workshop without causing any harm to the core business.






Disclosure: Have vested interest in the companies mentioned. Views are personal notions and do not represent any organisation or company. Investment in stock market can (and many a times do) result in loss of principal capital.



Written by amitdipsite

July 27, 2017 at 6:01 am

Posted in Uncategorized

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