Games Workshop PLC: A Journey into the Thriving World of Fantasy Miniatures

Published by Evan Louise Madriñan on 19/06/202319/06/2023

by elmads

Table of Contents

Introduction

Have you ever encountered these miniatures? or groups of individuals around a certain table with a miniature landscape? or probably a person whose hobby is painting miniatures such as the ones in the photograph below.

At first, I thought these miniatures came from console games or probably from fantasy stories such as The Lord of the Rings and Narnia (because of the various forms and types of creatures).

But then I see adults come together with their vast amounts of miniatures placed strategically on a tabletop miniature landscape. One person first casts the dice, and whatever number comes out of it determines whether there is excitement or not.

A book is also held and read throughout the game. It seems like a guide of sorts where it shows the miniatures certain abilities, points, stats, and others that can be used to battle the opponent across the table.

I get to realise something: these miniature plastics are not just for displays but as aesthetics used to make a miniature fiction world where battles can be imagined and seen from above. Strategic war gaming, where instead of cards (like magic cards), they use miniatures to make things more realistic and engaging.

I first encountered this more than a decade ago, and I thought that it was just a hobby within a small community. I was proved wrong.

As the COVID-19 pandemic started in 2020, global lockdowns happened. Almost everyone was indoors, and due to this, everyone also focused on using their phones and the internet.

This resulted in the internet and tech stock booms, including the so-called pandemic stay-at-home stocks too. Then I noticed that there was this company whose stock price boomed as well, despite not being an essential business. A company that manufactures miniature tabletop war games.

I was surprised because it’s been a while since I’ve encountered it again. I thought that those plastic miniature games were gone, but apparently they aren’t. It actually has an even larger fan base and community base now than ever. This is where I found out that Games Workshop Group sits on the throne of tabletop games worldwide, and I was thrilled to find out that it is also a publicly listed company on the London Stock Exchange.

Games Workshop Group PLC

NOTE: All information is taken from their annual and half-year reports.

Sector: Consumer Discretionary

Industry: Leisure Product

CEO: Kevin D. Rountree

Tenure: 7 years (started on January 1, 2015).
He joined Games Workshop in March 1998 as an assistant group accountant.
Became CFO in October 2008.
Then COO in May 2011.

Short Company History

Games Workshop was founded in 1975. It started as a manufacturer of wooden board games like backgammon. Then it became an importer of the role-playing game Dungeons & Dragons and a publisher of role-playing and war games in its own right.

The company’s success is due to their Warhammer role-playing games, which they introduced back in 1983 and were followed by Warhammer 40,000. Since then, various intellectual properties have been developed by the company.

Their main source of income is from selling miniature plastic models and rulebooks for the game.

They have expanded their revenue and will continue to do so by making video games, books, and animations.

Business Model

Designs, manufactures, distributes, and sells fantasy miniatures and related products.

Design: Products are designed in house. Their design studio creates all the intellectual property (IP) and all the associated miniatures, artwork, games, and publications that they sell.

Annually, their specialist staff produces hundreds of new sculptures, illustrations, rules, stories, etc., enabling them to deliver new products every week and continue to keep our customers engaged and excited. Citadel Colour’s paint range, brushes, and accompanying painting system are designed to help everyone, from the complete beginner to the most experienced miniature painters in the world, achieve great results.

Under our Black Library imprint, we publish new titles every year, from short stories and audio dramas to full-length novels and audio books. These we make available in physical bookstores, third party digital platforms, and through our own retail and other specialist stores.

Manufacture: The company manufactures its products in Nottingham, United Kingdom.

Logistics: Their products are distributed from their main warehouse in their HQ (Nottingham, United Kingdom) or their new rented warehouse facility approximately 25 minutes away. These facilities supply their two hubs: one in Memphis, Tennessee, and one in Sydney, Australia. Between these four facilities, they are able to directly supply their independent retailers, their own retail stores, and fulfil their online orders.

As you’ve noticed, the company has a vertically integrated business model. Overall, the company’s business model emphasizes their ability to create and produce their own unique products while maintaining control over the supply chain to ensure quality and efficient distribution.

Source of Revenue

They have four reportable revenue segments: retail, trade, online, and licencing.

Retail (their own stores): Their stores only stock Games Workshop products. They are where they probably recruit the majority of their new customers. To do so, the stores don’t offer the full range of their products, only starter sets, new release products, and the appropriate extended range. This segment represents 23% of their total 2022 revenue, as per their most recent annual report.

Trade (third-party independent retailers): This is where they sell to third-party retailers under closely controlled terms and conditions. Independent retailers are an integral part of their business model, helping them to sell their products around the world and, importantly, in areas where they don’t have their own stores. Games Workshop strives to support those outlets that help build the Warhammer hobby community in their local areas. This segment accounts for 55% of their total 2022 revenue, as per their most recent annual report.

Online (online store): All of their retail stores also have a web store terminal that allows their customers to access the full range from within the store. Their web stores are run centrally from our HQ (Nottingham, UK). Sales via their web store account for 22% of their 2022 revenue.

Licencing: They grant licences to a number of carefully chosen partners. This allows them to leverage their IP to broaden the presence and brand exposure of Warhammer around the world, often entering new markets such as board games, apparel or accessories, and media and entertainment. It also allows them to generate additional income. Currently, the majority of this income is generated by video game sales in North America, the UK, and continental Europe.

Games Workshop Financials

Earnings Power Performance:

Revenue and Operating Income Growth (10 Years): ✅

Net Income and Free Cash Flow Growth (10 Years): ✅

Financial Health:

Current and Quick Ratio: (10 Years): ✅

Debt-to-Equity Ratio: (10 Years): ✅

Measuring the profitability and efficiency of games workshop in utilizing its capital

Return on Invested Capital and Return on Equity (10 Years): ✅

Using Terry Smith’s Six Ratios

Relative Valuation: Price-to-Earnings Ratio

To learn more about some of the investing metrics commonly used for fundamental analysis, please see the links provided below.

Their Focus as of 2022 financial report

Their focus as of the 2022 financial report:

Keeping our loyal hobbyists engaged in their Warhammer hobby.
Recruiting more hobbyists.
Mitigating a c.2% (c.£8 million) decline in core gross margin, which is a fair challenge. In the year, we reviewed our input price increases, and they looked more permanent, so we increased our prices on a broader existing range by c.5%. In the short term, we will always continue to absorb some of the cost pressures ourselves; we prefer to only increase prices for the additional quality of new miniatures. We are focusing our efforts on efficiency improvements everywhere and further volume growth.
Getting our major projects over the line: our investments in a new finished goods warehouse near Nottingham (estimated go-live date: summer 2022) and our new ERP system (estimated delivery date: plan pending) restarted.

Growth Engines

The Warhammer Plus subscription was released in 2021.
The Warhammer community is growing.
Video games, animations, and series deals are in the works.
Has exclusive products with good quality
It is unrivalled in its small niche of tabletop games worldwide.
Vertical Integrated Business Model

Risks

Increasing supply chain costs such as freight and carriage due to the current global economic conditions.
Delays in their IT Enterprise Resource Planning (ERP) system “As a team, we took the easy decision to pause our ERP project in January 2022 (we were not spending money wisely). We will restart the ERP project again soon. I’m told it will be a project ongoing in the background for some time,” stated their 2022 report. To know more about ERP, see this link: https://dynamics.microsoft.com/en-gb/erp/what-is-erp/.
The rise of 3D printing. This could be a substantial headwind for the company, as individuals will be able to make their own miniatures for tabletop games without having to purchase Games Workshop products.
The increasing number of yearly game releases Some of the games they have released have received poor reviews, which could contribute to burnout among their loyal customers and community.
A cyclical business In times of economic hardship, people will prioritise staple goods over purchasing luxury products.

My Conclusion

Games Workshop has a substantial market share in tabletop games, possessing a vast array of intellectual properties and a promising possible expansion into video games, books, and series. It also has a very strong and independent business model of vertical integration.

Its CEO, Kevin D. Rountree, has helped the company reach new heights since he entered in 2016. He gathered and strengthened the Warhammer community by starting a community page and consistently making video content via their WarhammerTV YouTube channel.

He has been continuously finding ways to improve the quality of their products (paint, books, resin materials, book narratives, and game content).

He also put Warhammer starter kits on discount to attract new customers into the world of tabletop role-playing gaming (a long-term strategy where new customers can be a potential future long-term Warhammer loyalist; this in turn can further increase their sales and margins down the line).

The more IP they produce and the more successful it becomes, the more they can make money out of it via licencing revenue.

That being said, this company definitely possesses risks, which I’ve cited previously in this article.

Games Workshop has been on my business list for several months now. The stock price of the company nearly reached my target purchase price, unfortunately it rallied around 50% since then.

I missed my chance, but hey that’s the reason why we have our own investment Philosophy, what’s the point of having it and not following it in the first place isn’t it.

Knowledge is my Sword and Patience is my Shield,

elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.