Games Workshop Financials: Whats in the numbers? Price Rise and Embargo

We already had a quick note about the Games Workshop annual report but I am interested in digging a little deeper to see if we can get a better understanding of some of the issues with GW recently. This post will be slightly more technical and math related since I like Math (hence the Math Hulk series).

The first thing we need to understand about GW is that they divide their company into essentially 3 parts: Sales group which covers both retail, online, and trade sales; Production and Supply which designs and makes the products; and a Support Group which Logistics, Admin, Corporate which is really all overhead. The first thing we note is that production and supply sold 57 M pounds of stuff to the sales division which converted it to like 115 M in revenue when the 8 M of other stuff is removed Black Library and Forge World. So a quick look would make you think that GW retail doubles the price of what they get to sell but this is not going to be the case. GW has both retail and trade sales so those have to be accounted for seperately.

GW used to publish the break down of those two channels but stopped I would guess since the numbers did not look the way they wanted to. Globally last time they showed them (2008 report) it was 60% retail and 40% trade so it would appear that more than half of people get their kits from GW directly but you have to remember that these numbers are based on revenue not volume. A sale at a full GW store nets them MSRP while a sale at a RT store nets them probably 60% MSRP on average (trade discount varies and might be as high as 50%). So with those numbers you actually get GW sells 47 percent of the kits and the independent 53%. In someplace like the US where the split is probably closer to 50:50 in revenue now then the volume split is 38%:62%. So given that the US only has like 100 GW stores and over 500 RT we can see GW stores do move a lot of volume for their limited number but are not the primary channel for the customers in the US or worldwide.

So lets see if we can figure out what production is charging retail for the kits. Assuming the Sales pays the same price to production regardless of the final sale channel we can get that sales pays about 40% of MSRP to production with 30M associated with sales to independents and 27M for sales through their stores to generate the 115M in sales with the 60:40 retail:trade division. So GW stores pay 40% MSRP for kits and charge 100% and are often not profitable while independents are often paying 60% and selling at 80% while trying to be profitable which can be hard. Interesting to not that even at selling the products at 40% of MSRP to sales the product group brings in 57M and lists its operating expenses as only 9M. So if that is an indication of the incremental cost of production (cost for next unit as long as below full capacity) the production cost for the kit is like 6% of MSRP on average. So that means that at a GW store 94% of what you are playing is going to pay for them selling it to you, corporate overhead, and profit. even if we include the 4 million for design and development the cost is still about 10% of MSRP. Now some of the corporate overhead is because of the production but remember that design and production has like 250 employees and sales has 1250 so organizing them and their work environments represents most of the overhead costs. Remeber this 10% cost the next time GW talks about how things are getting more expensive to make so they raised the price another 10%. It really translates into things are getting more expensive to sell not to make since that is where all their costs are.

The next point to look at is the embargo. Now we can clearly see why they decided to do the southern hemisphere embargo. Profit down under went from 600K on 10.6M sales to -400K on 10.4M in sales. So profit went down 1M but sales only dropped by 200K. How does that happen? First thing to remember is these numbers are in pounds. The cost of the business in Australia is in their dollars which moved up about 10% on average over the year. So if you look at their costs in pounds they went up by 10% but their sales actually went down 10% since they generated the same number of pounds even thought their dollars were worth more.

Now this loss of sales could have been offset partially if they paid for their kits in pounds from corporate since the kits would have also gone down in cost by like 10% but I think that corporate has them pay in dollars and then does the conversion on their side which means they made that extra money from that 10% of currency. But remember that is a long going issue and GW uses about a .4 AU dollar to UK pound on its product which is now at 66% of the true exchange rate. Assuming UK and Au both pay 40% of their MSRP to production, production is get 67% more for each kit sold to Australia . Using a 66% GW retail vs 34% RT for Au taken back when it was part of the pacific group, we get about a 5M product cost level which if it was reduce by the 40% that they are overpaying to corporate to be a fair price with their new currency value they would have made a 1.5M profit last year. GW still made that profit but it is getting credited to Production and Supply not AU Sales division even though they lost 10% of their sales. Now we will see if the embargo will work with a significant boost to GW AU sales or if it will just take a bite out of UK trade and AU will be flat still eventhough they saw another price increase.