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.
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