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Tuesday, June 17, 2014

The Future of Games Workshop - Part 14: Judgement Day

The Future of Games Workshop: Judgement Day
Part 14 - Yearly Financial Report incoming like a wrecking ball?

The most anticipated release from GW coming soon™

7th Edition 40k, Orks... Not what I am waiting for. For me the most anticipated release from Games Workshop this year is their 2013-2014 annual report. 

After 7.5 posts full of warning signs and concerns about the direction GW is going, in January of this year, GW lost 25% of their stock value in a day, following a 12% drop in sales which resulted in 30% less profits.

With close to 40,000 views (how appropriate) part 8 of our epic series of walls of text turned out to be the most read article on our blog ever. It is clear that the community cares a lot about what happens at GW. 

In the articles leading up to part 8 I warned about what I felt was going wrong at GW and this January I had this certain 'I told you so' moment. 

Dividends & Crystal Balls

The financial year 2013-2014 is over and the annual report should be out in 2-3 weeks, but today I will look deep into my Crystal Ball to see if we can already tell something about this report.

But before that, we'll look at the past for a moment. 

5 year chart 

As you can see on the five year chart, after reaching their high at 830 pence per share on October 1st 2013, they hit a one-year low on March 4th hitting 471 pence. Since then the share price has recovered quite nicely and reached 670 pence again as of today. 

6 month chart

This graph shows 'the fall' in a little more detail. What's interesting to me is that in spite of lack of any news the share price picked up again at the beginning of April and - had you invested on March 1st, you'd be happy (but not surprised) to hear that you just made 42% profit on your investment. Not bad! 

The question is why? There really weren't any relevant news or announcements on the GW Investor Relations site. On April 11th, the following 'Interim Management Statement' was released: 
"Games Workshop Group PLC today issues the following interim management statement for the period 2 December 2013 to 6 April 2014.In the four months to 6 April 2014 trading has been broadly in line with the board’s expectations."
Very exciting news! NOT. "Trading has been broadly in line with the board's expectations". Pretty much says nothing, but then again, that's how these statements always are.

But then on June 6th we got the following information regarding this year's Dividend. 
"Games Workshop Group PLC announces that the Board has declared a dividend of 20 pence per share. This will be paid on 4 July 2014 for shareholders on the register at 13 June 2014."
Woopies! A dividend! That's great, isn't it! About 3% on the current share price. But is this dividend really this great? And can we maybe extrapolate some information regarding the financial report from this? 

Well, let's look at GAW's IFRS fundamentals: 

May I point your attention to the already flashy red box on the bottom. First column is 2013, second 2012 - all the way down to 2009. 

We can see that after Mark Wells took over and GW made some good money again, payment of dividends was resumed in 2010. Back then it was 25p dividends per share on a 48p earning, the first cautious signal that things are looking brighter for shareholders. 

Between 2011 and 2013 we can see a very strong correlation between earnings per share (EPS) and Dividends per Share (DPS, no guys, it's not damage per second): 36p earnings = 38p dividends, 46.8p earnings = 45p dividends, 51.5p earnings = 58p dividends. 

What does it all mean?

Having said that, let's revisit the 20p dividends per share. 20p is 38p or 66% less than the 58p dividend from last year.

So, what does it all mean? Well, we don't know this for sure until we see the final report, BUT, we can create a few scenarios: 

Scenario 1: It's really bad

1:1 correlation between profit and dividends (like 2011-2013)

GW was not able to stop the downward trend in sales. They lost more than 12% in sales (as it was half a year ago). In spite of pretty much firing everyone who didn't work in the US or the UK, cost cuts did not catch the fall.

Profits are down significantly to about 20p per share or - at 31,859,196 shares - to 6.4m for the period (compared to 16.32m for 2012-2013). Down 60%

Scenario 2:  It's bad with a handbrake. 

2:1 correlation between profits and dividends (like in 2010)

GW was not able to significantly stop the downward trend in sales. However, by cutting cost (see above) and a few quick money-grabs (7th Edition), they were able to stabilize on a lower overall sales level.

Profits are down to about 40p per share or 12.8m for the period. Down 30% from last year. 

By cutting the dividend, GW puts some cash into the war stash for next year. If this scenario turns out to be right, I fear the GW management expects the trend to continue and/or they have no idea how to stop it. 

Scenario 3: Something in between or something completely different. 

The answer is 42. Let's try that. 

Personally, I would be shocked and at least a little bit surprised if this year's dividend of 20p would mean they only did 20p earning per share. IF that were the case it would be pretty much disastrous and the worst-case scenario. Well, it could always be worse, but you know what I mean. 

However, I would be equally surprised if GW was able to stop their downward trend in sales. Some indications from GW stores all over Europe who told me that sales are at about 50% of last year point in this direction. From the few independent retailers I know I hear similar stories, including GW's attempt to move sales into this year by offering discounts in the next fiscal year, but then again, none of these statements are facts nor are they representative. 

But killing all Games Days, killing all (?) Golden Demons (Rumor: There will be Golden Demon UK this year, NOT a Games Day), firing most of continental Europe and quick money grabbing schemes (7th Edition in May? Seriously?) to me look like attempts to cut cost wherever they can and make as much cash as possible. I almost wrote desperate attempts. Good thing I didn't. 

Let's make this a little game. I think that their profits are down by 42% to 9,5m for this year or about 30p per share. I base this purely on the fact that I don't think GW did better than the first half of the year and that 42 is always the answer. No science behind this. Gut feeling. And I got plenty of gut, just saying... 

What do you think? 

What do you expect from the financial report? Do you even care? Go ahead and leave some comments below and try to GUESS the profit loss that GW will post in their annual report. I am standing at 42% ;)

Check out yesterday's BEEBLE・BABBLE #9 with Dizzy Angel Demon and Creature Caster's Jeremy Glen, where we talk about Life, the Hobby Universe and Everything. The GW related section starts at around 40:05. 

Previous Parts on "The Future of Games Days and Games Workshop"

Part 1 - Part 2 - Part 3 - Part 4 - Part 5 - Part 6 - Part 7 - Part 7.5 



  1. (...)
    and like the spider be
    patient -
    time is everybody’s cross

    So said the poet, and so am I waiting; for the day shall come when the wargaming hobby will be free from tirany; and on that precise day we who love the hobby will all rejoice. So, waiting I am. Waiting for the downfall.

  2. First off, I'd like to say I have read the entire series and appreciate what you have to say. Now I personally have a few points I'd like to share.

    ....What is worrying to me is that it's not about the quality of their product, services offered, competitors doing better for cheaper, it's all about the bottom line. Cost. People want a fun cheap hobby. When they can go elsewhere and get their thrills for cheaper, why wouldn't they? As an Australian, I started playing in 1993, and have seen the price raised by 350% in the same time frame as national inflation went up around the 54% mark. This is why people don't want to buy models, we aren't earning 3 times the money we were, we can't keep up. On top of that, they are trying to sell more big kits that cost more money. It's a joke.

    On top of this, you have their design debacles with rules. If you make a broken unit, fix it. Don't wait till next codex/rulebook. If you fix it quickly, then yes, you will upset a couple of players, but the rest of the community WON'T be upset. Isn't that more important? Not to mention, if you consistently fix mistakes, then people won't feel picked on, as they know that it is a fair system. Instead we have a series of up-down codex's, with broken units all over, but it's nothing that a few FAQ's couldn't fix! Instead, they released a new Edition, which only alienated players as most of us didn't see it as a fix, we saw it as an admission that they failed, and had no clue how to fix it, so said "stuff it, lets try this". The "try this" approach is fine in say, the old chapter approved, but when people are shelling out $180 for a "try this" it doesn't fly.

    And that is why gamers HERE in particular are upset and not buying.

    1. I completely agree. Where you surprised that there was a 7th edition in May? To me it looked like: We need to make a lot of money before the end of the financial year.

    2. If I was a betting man, I would say that the timing is perfect. You give a month to hype it up, and then another month to pick up the snap-sales of gamers followed by the gamers who have to save money a little. Great way to boost your bottom line come end of financial year.

      Further down, a comment was made referring to building a 3000 point army, and then not having to buy new stuff. This is where GW differs to most other games (most, not all). GW brings out MUST-HAVE new toys, aka Riptide, Wraithknight, Dreadknight, Grav Centurions, Wyverns, Gorkanought etc etc. You are FORCED to buy new kits to stay competitive. My 2nd and 3rd ed armies are NOTHING like the 7th ed ones, so good luck talking about having a limitless pool of models to draw on (especially when you cop the nerf, and your previously dependable units are useless for the next few editions).

      Since this is more about finances then my specific gripes, I wouldn't be surprised if they dropped 38%. Just to be different to 42%. Now the reason they got so high in the first place was an overinflated sense of worth on the stock market I think, similar to companies prior to the Great Depression. Their stock was never worth what it sold for, and the market is wising up to it.

    3. And then you need to refresh your browser.... lol

      I'm like you guys, I LOVE this hobby. To talk a poker term, I have put so much money in, I am committed to the pot. I honestly hurt because I want to keep collecting but they are making it so hard. I have watched this entire video, and you guys made so much sense. How is it that their own shareholders don't want change in their company? Why can't they hire a savvy businessman to fix their issues?
      -Playtest your games with a WIDE audience.
      -Bring back skulls.
      -Drop your prices, not a great deal, but at three times the cost of 15 years ago, you're not inspiring confidence.
      -Actually let customers have feedback. My suggestion, put a free postage letter in the kits, let people write on these letters and send them back, that way it's not haters, it's those who buy the kits who will get their say.

      Is that so crazy?

    4. That in-box postcard idea would only tell them what the guys still buying want (more of same). Not the problems that caused so many others to stop buying (who want price/quality changes).

      Really though, the problem is blindingly obvious to everyone. Prices continue to go up at the same time that the model/rules quality is going down. If GW corporate would listen to its own store managers or regional HQs, I'm sure that they'd get the message just fine.

    5. You have to be willing to listen, and I think that's the problem. The mentality seems to be "people will like what we tell them to like" unfortunately the hobbyists don't like it and are voting with their feet. It was ok to lose players if you also gained them, but at the cost of getting into the hobby, I don't know that they are gaining hardly any new players now.

  3. I suppose scenario 2 (30% down) is right, but with a twist - they're not trying to stash money away for next year.

    Somebody invested in a 15-year supply of beer and toilet paper (Munchkin:Apokalypse reference), because he knows Judgement Day is at hand!

  4. Winter is coming (over gw...)!!!
    we will prepare! ;->

  5. So no-one willing to guess a % loss in profits for this year? ;)

    1. just because you asked :)

      I'd say it won't be as bad as you think (the 42%) mostly because of some releases like the knights or even 7th edition (altough I know very few, who bought it)
      So my guess is: 17, 64% loss. Why? For the very scientific reason of it being 42% of your 42% guess. :) (also I don't think they made it much worse than january)

    2. Haha! OK 17,64% it is...

      I honestly expect a little more than 30% profit loss, but 42 is just too juicy a number to not pick ;)

  6. I agree with you sir. I think 7th got rushed out to cover losses, and any project that gets rushed suffers (to at least a small degree) in quality for it.

    You live by the margin, you die by the margin. The whole problem with margin retail is by it's nature it is exclusive, while the premise of a community based hobby is to br inclusive. Crossed purposes is never a good retail plan.

    1. I never thought about that! I think you have an excellent point here!
      Thank you!

    2. I've been saying this for some time.

      GW (like Microsoft) wants to be Apple. But the dominant mass-market low-margin brand cannot also be the exclusive, premium, high-margin brand. They're incompatible concepts. Especially when your market dominance depends on having enough of an installed base to perpetuate a network effect.

      You can see this strategic insanity in the recent inversion between Forge World and GW. FW was once GW's premium brand. But now they're actually cheaper on a lot of items.

      Result? 40K has gone, in just a few years, from the game that everyone plays (because everyone else plays), to one where you can no longer just show up on game night and expect to find an opponent. You now have to schedule games on Facebook in advance.

      What game has assumed 40K’s place as the just-show-up choice? In my area, that would be X-Wing. Models are ready-to-play, reasonably priced both individually and in terms of how many you need. Plus you can easily carry enough around to interest a non-player in a few starter games.

  7. Wisconsin is hardly the center of the hobby universe, but I'll tell you what I'm seeing here.

    In our area people are sick to death of 40K and it's many MANY problems. Some of them are switching to other game systems (Warmachine/Hordes mostly) but Privateer Press has it's own miniature quality issues. People who love the GW games for the modeling and kitbashing have good reason to dislike any of the alternatives. For really nice looking, high quality, plastic kits that are easy to model and convert, GW and maybe Malifaux are the only companies out there that I know of. I don't think much of the quality I've seen from any of the other companies I've seen.

    What people seem to be doing is offloading their 40K stuff on eBay and getting into WFB in a big way. While the 40K scene seems to be dying off, WFB is seeing a resurgence. It'll be interesting if this turns out to be a worldwide trend, and not simply local to our little corner of the world.

    If there are different teams taking different strategies with each of those product lines, would the people overseeing the 40K efforts be demoted or urged to follow the WFB team's lead? Or would managerial attention focus on trying to do the same things in WFB as they did in 40K?

    1. That's a good question, Glen, and really I don't know the answer either. Here in Europe WFB is almost dead in many areas. It is said (although I have no proof for this) that WFB is about 10% of GW's sales whereas 40k makes about 90% with regards to gaming systems (LotR < 1%). Again, not sure if that's accurate, but it surely feels about right.

      Do others see the trend that people revert from 40k and go into WFB? Or do they leave for other systems as well? Or do they even just stick with 40k (as I probably will for the time being, not that I play much anyways) ;)

    2. among those I know (in hungary) most are either go to new systems (Infinity / Malifaux/historicals being the most liked) or stay with 40k.

      Because of needed model count (and price because of that) there is almost none, who starts up a WHFB army now.

    3. There's been a slight resurgence in WHFB here in Indy, but only amongst those who used to play it and had armies already.

      Long-term though, Fantasy has the same fundamental problems that 40K has. So I think that the reason behind the resurgence is social. The worst of the WAACs still gravitate to 40K. So it's easier to get away from them by switching to WHFB. Where the model cost of being a WAAC is much higher, and less competitive social norms can be enforced more easily. Because WHFB’s competitive culture died with 8th, there's not as much of a competitive expectation to deal with these days.

      The honest competitive guys have pretty much all abandoned both games by now.

  8. What I actually see in the initial graph you presented is that despite the financial crisis that started in 2008 and is still going on in parts of the world GW flourished.

    So an expensive -hobby- did not suffer despite the huge loss of income, employment and growth that the rest of the world faced.

    As such I think that even a heavy hit wont stop them. Is it a set back? Yep it is. But I work in the FMCG market and even market leader and necessity products in Cental and South East Europe took a huge hit. GW selling a premium, hobby totally elastic product went from 250 pence in 2009 to 830 in October 2013.

    Did the company really manage to more than triple its value, assets and shareholder expectations in 4 years during a deep crisis in US and Europe? I would say that obviously not... instead we had a bloated, inflated share price. Hence now, the bubble went away and a more 'normal' point has been reached.

    As for the price hikes... that is indeed true but not to the doom and gloom I read here (and elsewhere). I started in 2004 and a LR costs maybe 10% more today than it did then. Back then I was a student and nowdays I am a well paid professional. I make much more than 10% extra so I can still afford to buy new models for my armies even though theoretically the whole idea of having a 2-3k army is that you dont NEED to keep buying stuff... you can play for decades with what you have and only pay for new codices and rulebooks...

    1. GW wasn't flourishing. It was slowly drowning. Note the inflation-corrected sales numbers for the past 5 years in this post:

      They did pull off a minor miracle in terms of cutting internal costs to boost profits. But they're down to the bone on that strategy now, and the quality of their products is reflecting their lack of product development investment over that time period.

      You’re flat-out wrong on the Land Raider only being 10% more than it was in 2004. It’s nearly double what it was back then.

      As for the stock price, GW managed to attract institutional investors by being what those kinds of firms want. Reliable in terms of profits and dividends. Which worked wonders as long as they were able to churn out a steady stream of products with predictable sales.

      Now? They're trapped in a vice of their own making. Whereas they used to hold new products back to keep sales/profits steady and predictable (what institutional investors like), they're now flailing to release as much as they can to stem the bleeding.

  9. I think we have to take the development at GW in context. Parts 1-3 of our series describe how GW managed to turn a loss writing business into a profit machine. That was mostly due to the work of Mark Wells, heavy cost cutting and upping their margin by getting more sales directly rather through independent distributors (this is the VERY short version of pages of walls of text).

    That - in combination with VERY high yield on dividends (close to 9%!!!) for shareholders lead to a constant rise of the share value.

    Now let me state that the share price really has nothing to do with the current performance of GW - it's just the expectation of the market for their future development. Right now the dividend is at about 3% (which is still not bad, but far from 8-9%).

    In short. The management has done a pretty good job making money. The question is: at what cost? And with the departure of Mark Wells it is easy to see that things have been going to well. Whether Mark Wells saw the end of the line and left or he didn't get along with Tom Kirby (both are rumored) or a combination of both doesn't really matter.

    The concern is that GW is losing sales. And even after getting rid of their European operation (which will have a significant impact on cost for the next fiscal year, not this) cost cutting gets more and more difficult. You can just cut that much cost...

    So now their sales go down. Their profit loss scales much more than the sales loss which explains the 30% profit loss following a 12% sales drop.

    Our worry is that with everything GW has done in the last year (killing GDs, WD, Visions, lackluster rules & broken codices) that there seems to be no clear strategy to counter the sales drop.

    Less exposure, 0 community interaction and a high entry cost into the hobby are a very dangerous combination in my opinion.

    But GW won't go down. At least not quickly. So let's wait for the financial report and more importantly for the change at the management level.

  10. I reckon they're down to 42% of the profit, Zaph. Whoever is closest buys the first beer at Euro ^_^

  11. For me, I'll throw my hat across the room, 60+% I've played this game since the birth of second, and I haven't picked up seventh, Something doesn't feel right about it.. and here in arizona, there is a divide forming between the diehards and the people who can't afford it anymore, I'm seeing kids (20 somethings) skipping bills to pick stuff up. it's turning into a drug here

    1. The bet is on! 60+% - I hope it doesn't come to that for GW's sake. ;)

  12. Love the site and this series of articles.

    As a fanboy and somebody who actually invested in GW in March 2014 (woo hoo!), I'm not sure the picture is necessarily THAT grim (although, of course, it may well be!).

    Reports I've heard (yes, nothing like the anecdotal evidence...) are that the new ed. 40k has oustripped sales of the last one (even though it seem like a bit of a mess rule-wise).

    The new releases are all, more or less, very good and of good quality. The renewed design team that you have mentioned in previous articles is really seeming to pay returns now in terms of quality and this may be bringing sales back up.

    The apparent renewed commitment to WFB, with the seemingly doomed Brettonia on their way, might also help with giving customers renewed confience to purchase WFB products.

    Add to that renewed digital licenses (one of there big money makers in previous years) - namely a new Bloodbowl game and a Hobbit film on the way, and things may not be so bad... at least in the short term!

    Anyway, what I think has happened is a market overeaction in terms of the dropping share price (hence why I invested). I also don't think a dropped dividend rate, after a market crash like we saw is necessarily a problem. They could easily have propped things up by releaseing some of their huge capital reserves that they seem to have lying around in the bank, but have seemed to have played things correctly to my mind.

    Another interesting thing to note is that therre was a director purchase of shares in February, which might indicate something else is going on - who knows, the picture might be a lot rosier than you're are predicting.

    I do agree about the broader, long term problems of pricing, fostering the community and the general poor marketing of the company you raise, however. Games Day/Golden Demons have become a joke in what used to be a highlight of the year. Compare that with Salute (not sure if you've been) and what they manage to achieve as a wargaming club rather than a huge business and it shows you the gulf.

    1. You raise some really good points here. I agree that especially the investment in more designers and artists could be their strongest point at the moment.

      Add some cool community involvement and they could be golden again.

    2. Keeping my fingers crossed! In the meantime, i might just sell those shares!

  13. Im going to fo with 32% as its my age as of ruesday and its a nice round figure. However I hope they sort it as my mates and I hsve started playing infinity anf x-wing and as a massive star wars nerd and a pokemon like need to catch em all, the 'cheap' alternative has been anythibg but! However after an eldar, marine and strike force ultra buying spree last few months im kibda full on toy soldiers...okay..maybe one more b-wing. I await july with interest but GW has a way to go before the end times but they must know its on its way currently.

  14. I'm going with 27% loss due to lost confidence in GW since the last drop. Especially after the year end finances come out.

    1. Cool, we got a good range of 'bets' now. Let's see who's the closest ^^

  15. Just going to be an odd man out and say they show an increase in sales.

  16. First, love the series as it shows perspective from somebody with credibility, as too often any complaints get dismissed as someone being an "armchair executive" so it's great to have a REAL former executive say things.

    I used to play 40k from 1996-2002, and nowadays can't bother because of GW's business practices and the pricing. Sadly I live in an area that's still dominated - the main store has only 40k going on and everything else that's tried to get started fizzles and dies.

    I'm definitely curious to see the end result - I can't imagine GW turning the ship around with their desire to just push more product at the exclusion of everything else.

  17. We made a post over on The Back 40K about the upcoming financials.

    We checked the GW FTP site, and found a Chairman's preamble, for what it's worth.

    should be announcements in the next few days.

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