Spending hours carefully painting a model of a fantasy mythical creature isn’t everyone’s idea of a good time. But Nottingham-based Games Workshop continued a track record of profitability when it released its annual results today.
“We have a simple strategy at Games Workshop. We make the best fantasy miniatures in the world and sell them globally at a profit and we intend to do this forever,” the company outlines on its website. With annual sales of £118m and operational cash flow of £27m, it seems to be doing this.
With many retailers struggling to weather the storm that is currently battering retailers, how is Games Workshop managing to buck the trend?
“It is a hobby company rather than a retailer,” says analyst Charles Hall of Peel Hunt. While many competitors have a popular fan base, they do not have the same vertically integrated business structure.
Therefore, says Hall, the retail front is only a small part of the company. With a comparatively small cost base, gross margin generation is 69 per cent. And most of the operating margin is generated in the manufacturing rather than the sales side, and a large proportion of sales are mail order rather than from shops.
Chief executive Kevin Rountree admitted in his statement that December sales had been “disappointing” but added: “Thanks to a great team effort, we bounced back with four out of five months of profitable sales growth.”
Pivotal to the company success this year is the positive cash flow conversion of the company are the royalties generated from computer games according to Hall. He says that Games Workshop simply sells on the rights to use the characters it creates, and doesn’t get involved with the more lucrative (but more capital intensive) development and marketing of the games.
In 2016, royalties soared from £1.5m to £5.9m, boosted by the Freeblade tablet game that was launched in tandem with the Apple launch of their iPhone 6 last year. Also there are the Warhammer characters which have been developed into a hugely successful series of computer games.
Hall also adds that the company is one company that is well placed to benefit from Britain’s exit from the EU - 72 per cent of sales coming from outside the UK, meaning exports will be much cheaper, particularly to the large US market.
With a comparatively small workforce, the company seems to focus on investing in people and running the business for long term gain rather than short term success.
“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.
“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,” says Rountree.