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Sunday, January 19, 2014

Games Workshop The Decline and Fall



Thurday January 16, 2014
“LONDON (Alliance News) - Games Workshop Group PLC sat firmly on the stock-market losers list Thursday, having seen almost a quarter wiped off its market value, after the games retailer reported a huge drop in profits and revenues for the first half of its financial year.
Shares in Games Workshop were the biggest faller on the London All-Share Thursday, down 24% at 548.00 pence per share.”
Many people have been blogging about this “shocking” event in this post I will show you that this is the beginning of Games Workshop’s inevitable fall into the dust heap of history.

Six months to 1 December 2013    Six months to 2 December 2012
          60.5m                                         67.5m

So Games Workshop lost 7 million in sales in the 1st half fiscal year of 2014. Considering the price of a GW miniature that is shocking. So what does GW’s report to shareholders say about this?

(From the GW financial report )
“INTERIM MANAGEMENT REPORT
First half performance Sales in the first half of the year were down against the comparable period in the prior year, continuing the trend that developed in the second half of 2012/13. During the first half, the rapid transition from multi-man stores to one-man stores and the reduction of trading hours across the Group caused disruption in our retail chain. We also experienced some decline in sales through independent stockists.

We view these as short term issues and expect to see growth return in both channels. We continue with our store opening programme (27 stores opened, 20 closed in the period) secure in the knowledge that our one man model allows us to insure new openings are profitable. In the future we expect to benefit from the more focussed selling operation across all channels against the background of a materially lower cost base.”

Ok so GW managements excuse for such a massive loss of sales the change from mulit-person to one-man retail stores. This is a major reorganization of their retail operations, and interestingly it removes the cudgel GW has been using to bludgeon the online retailer out of the GW racket. From now on GW will not be providing the “hobby content” (painting days, gaming days) that they have been known for. Now the move to push online retailers out of the GW market is revealed to be an important part of their sales strategy since a customer will no longer receive any more value through purchasing a product in a one man store than they would have on line.

Let’s take a closer look at the sales figures:

REVENUE BY SEGMENT IN CONSTANT CURRENCY

                                                  Six months to                    Six Months to
                                                  1 December 2013              2 December 2012
UK                                                        13.7m                               15.6m
Continental Europe                         16.9m                               19.6m
North America                                     15.6m                               18.1m
Australia                                                 4.6m                                 5.6m  

So here you can see that the independent sales contracts GW has forced upon its independent retailers and its constant price increases has resulted in loss of sales around the globe. What does the CEO have to say about this?

Here is the CEO’s assessment of 2012-13 from the financial report:
“Games Workshop has had a mixed year. Sales were stronger in the first half than the second, but cost control and cash management have strengthened throughout the period. We finish the year with the most profit this company has generated since flotation and have returned £18.4 million to our owners.”

So why is GW the things they are doing to their customers? This statement sums up the direction of Games Workshop quite nicely.
(From the Chairman’s Preamble of the same report.)

“During the year Mark Wells left Games Workshop, after more than ten years, five as chief executive, he has gone to graze in pastures new. His tenure as CEO saw our return on capital increase from around 10% to over 50%. He is a man who truly understands about shareholder value and put that understanding into good practice.
Thank you Mark, and good luck.”

As you can see “a return on capital” has been and reminds the goal of GW management. The owners of GW want a huge return on their investment and management is prepared to give it to them. Take a look at GW’s major investors.

The Nomad Investment Partnership LP 3,450,545     10.9 % of the company

Investec Asset Management Limited      3,087,765     9.7 % of the company

Ruffer LLP                                  2,492,260     7.9 % of the company

Phoenix Asset Management Partners Limited 1,865,218       5.9 % of the company

FIL Limited                                  1,753,900     5.5 % of the company

Legal & General                                    1,683,901     5.3 % of the company

Artemis Investment Management LLP    1,620,001     5.1 % of the company

Look these companies up on the web they are all small Hedge Funds, some rather shady looking like The Nomad Investment Partnership LP out of the Cayman Islands, looking to make money for their clients.

If you take a close look at GW’s revenues you’ll see that they’ve been inflated with massive price hicks over the last few years.

GW’s revenue by year.

          2013                       2012
          134.6m                   131.0m

2012                       2011
131.0m                   123.1m

2011                       2010
          123.1m                   126.5m

2010                                            2009
126.5m                  125.7m

2009                                           2008
125.7m                  110.3m

2008                                          2007
110.3m                  109.5m

2007                                         2006
111.5m                 115.2m

2006                                       2005
115.2m                136.6m

What’s all this Decline and Fall bull?! This massive revenue loss it the tipping point, the beginning of the end. I suspect out going CEO Mark Wells new full well that he brought the company to this point, but them he made millions as did the investors. They have been looting the company, any return even close to 50% is out right looting.

So now that Mark Wells is gone things will change for the better right? Wrong! The main driver of GW is now The Nomad Investment Partnership LP, the shadowy investment group out of the Cayman Islands. They have increased their position in GW and are now the dominate board controller. They want money, but Games Workshop did not declare a dividend this time the dividend for 2012 was 18p per share and 20p before that. So Expect big price increases in a few months once the sacking of the majority of retail sales staff fails to raise the stock price.

Here are the 3 reasons why GW is on the downward spiral;

1)    Price, GW’s marketing department has likened wargamers to heroin addicts we’ll see our mothers to get a fix. That’s true to a point and now the point has arrived. Across the globe wargamers have stopped buying GW not because they don’t want the goodies, but because they literally can’t afford it anymore.
2)    Loss of Standing, GW’s has abandoned the “hobby center” in favor of a tiny little one man shop. They are closing down the highly visible high street shops in favor of cheaper rents. These high street shops where the face of GW and a portal for main street to enter wargames street. This loss of visibility is immeasurable.
3)    Customer Feed Back, GW’s refusal to solicit or even listen to customer feed back of even the most basic sort has created a profound disconnect between then and their customers. Even the simplest complaint, no hobby content in the White Dwarf, is utterly ignored by a company that survives on discretionary funding. This disconnect not to mention the anger it has generated among its customers has, and will continue to accelerate its loss of sales.

Its fall will not be swift there will be 5-6 more years of falling revenues before GW is forced into receivership. But receivership is where this company is bound.