Description

Brief Summary 

I would be a buyer of Games Workshop, a niche player in the board games and hobby market listed in the UK. The company, while being niche, has built a devoted following, both in the UK, where the game/hobby originated, and now globally (the company get almost 80% of their sales from outside of the UK). The management team have done an excellent job building the brand and the fan base outside of the UK, evidenced by their 8% compound organic revenue growth rate since 2000 (almost double that over the last decade), and their large online following. The company boasts fantastic financials – aside from the organic growth, they have gross margins of nearly 70%, operating margins in the high 30’s, ROIC of nearly 50%, and ROE of nearly 60%, They generate impressive free cash flow, and are shareholder friendly, with an excellent management team. They have a :ahem: Fort Knox balance sheet. While they have grown enormously over the past couple of decades, the game/hobby still has a lot of white space to grow into. The company have also recently entered into an agreement with Amazon Studios to potentially produce a TV series which will give the brand much broader exposure and could bring many new consumers to the brand (none of which I’ve factored into my numbers yet). Assuming that organic growth moderates from the breakneck pace of the last few years to the slightly more modest long-term average, I see 30% upside over the next 2-3 years without leaning into the numbers too aggressively, and I can see it compounding double digits over the longer-term. 

Business Basics 

Games Workshop are a producer of fantasy figures used in a board game called Warhammer. About 40 years ago, the founders created (and continue to own) the IP around it. There are a couple of key properties – Warhammer 40k, and Age of Sigmar – the ideas are similar, but the settings just vary. Both concepts revolve around a battle between good guys and bad guys, with the difference being that Warhammer 40k has a futuristic setting (similar type of idea to Star Wars), whereas Age of Sigmar has a fantasy-type setting similar to Lord of the Rings. Over the years they have released countless books and chapters of the stories to build the mythology/canon of the genre and to engage their devotees around the game. They also have a production studio in-house where they release content onto their YouTube page (it has about 700k subs) a few times per week. 

The way that the game is played is that you bring your little army of figures and play against another person across a giant board. A certain objective will be set, which might be capturing a certain amount of territory, killing a certain number of characters, and so on. Each of your figures will have a range of properties (health, strength) etc. and you take turns moving your army, rushing, attacking, defending and so on. When you attack (or you’re being attacked, you roll dice to determine if the attack is successful, how much damage it does, or if you evade it). There are many tactical nuances to it, similar to the way that it’s simple to learn the moves of the pieces on a chess board, but most of us will never be Magnus Carlsen (or in my case get above 1200 ELO). 

The way they make money out of it is that, to play the game, you need figures (and lots of them), and if you want figures, you need to buy them from Games Workshop. You don’t just buy them, however – you also need to paint and personalize them, which you do via buying the various accoutrements that accompany the figures from Games Workshop – paint, paintbrushes, and so on. While the game itself is clearly important, equally important is the “hobby” part of it – some people like spending their free time running or playing football or shopping – Warhammer hobbyists like spending their time painting their figures. There is a very wide range of price points for the figures – a starter pack would set you back £10-£20, and then for the serious collectors/hobbyists/gamers there are figures that cost hundreds – and if your gains from being long NVDA are burning a hole in your pocket and you have a spare £25k,  you could even look into this bad boy. 

The company are vertically integrated and do everything in-house. Following some consolidation under Tom Kirby, who led an MBO in the 90’s, all of the production was moved to Nottingham, UK, where they have a design studio employing several hundred people, together with three factories and two distribution facilities. Outside of the UK, they have a distribution hub in Memphis, USA, and another in Sydney, Australia, which they use to service North America (45% of sales) and Australia/Asia (10% of sales); the UK and Europe are of course serviced out of the UK warehouses. 

Industry Background & Market Size 

It’s challenging to size the overall market as it is such a niche area – Business Insights have some research suggesting that the total board games market is around $12bn, however I believe this includes games like chess, monopoly and so on, which aren’t really direct competition to Warhammer. The nearest competitor would probably be something like Dungeons & Dragons, but again it’s not a direct competitor as it doesn’t have the hobby element of buying the figures and painting them. The owner of D&D, Wizards of the Coast (a division of Hasbro) had sales of $1.3bn in 2022, however WOTC includes various things other than D&D such as Magic: The Gathering, so not all of this is D&D.  Looking more broadly outside of tabletop gaming, according to Statista, the total video game industry was about $350bn in 2022, and ~$250bn of that was mobile gaming, albeit quite a bit of this was in China where Warhammer doesn’t have much of a presence at the moment. 

I don’t think any of these numbers give a really solid answer that one can hang one’s hat on in terms of what the addressable market actually is – to me the point is more that an enormous amount of money is spent on pursuing hobbies globally, and Warhammer is only a tiny part of that at the moment (I’ll get into numbers below) with a lot of potential space to grow into, and Games Workshop have done very well over the years in terms of carving out a niche for themselves, which has driven impressive (if streaky) organic growth of 8% over the long-term. 

Looking at why they’ve been able to grow so strongly, the company have done well (especially since the “new” CEO came in) at bringing newness to the models they produce, pricing them at better entry levels, and refreshing the store level management to really focus on people who are passionate about the hobby and are able to evangelise the game and the brand. 

My second theory is that trends in society are just massively favourable for products like Warhammer. While I have only done scuttlebutt and it’s pretty far from comprehensive research, my anecdotes suggest that the customer demographic skews towards single men, often quite lonely with a lot of disposable income. We’re venturing away from serious investment analysis to pseudo-psychology/sociology now, but my sense is that many of these guys are either uninterested in dating or have given up on it. To keep this at least somewhat grounded in objectivity, here are a couple of surveys that lay out some of the salient points: 

https://www.pewresearch.org/short-reads/2023/02/08/for-valentines-day-5-facts-about-single-americans/ 

https://www.washingtonpost.com/business/2019/03/29/share-americans-not-having-sex-has-reached-record-high/  

We’ve all seen the statistics on platforms like tinder where a guy’s chance of a woman swiping right on him is something like 1%, while women can get hundreds of matches a week. Like many things in life, sex/relationships seem to be Pareto distributed – the “best” 20% of guys get 80% of the women and the rest get little or nothing (define “best” however you want but the cynical interpretation seems to be that unless you’re over 6 feet, over 6 inches, earning 6 figures, it’s an automatic “no thank you” from many potential partners). 

There are alternative theories around this phenomenon of increasing singledom and loneliness (closing gaps in salaries between sexes meaning that woman can afford to be more selective and not put up with bad behaviour), but the reasons for it don’t really matter – the point seems to be that among people defining themselves as single, a meaningful percentage of them simply uninterested in a relationship or sex, or have given up trying to pursue one, and the percentage seems to be rising. It’s particularly striking looking at the age characteristics that an enormous 63% of males under 30 report being single, while it’s much lower for older men and all women. It’s almost as if there’s some kind of correlation between a man’s age, how much money he has, and a woman’s willingness to date him. I point this out not to make some cynical point about gender politics, more just to point out that these men need to do something with their money to stave off the loneliness, be it spending on OnlyFans (a $5bn revenue business, FWIW), going on killing sprees, or hopefully just developing an interest in Warhammer. 

Company In More Detail 

As mentioned above, the company is based in Nottingham in the UK. Since consolidating a lot of their base around there, they now have a design studio there where the models and stories are made, along with TV production studios that they use to produce the content that gets put onto their channel. They then have three factories there, as well as a couple of distribution centres, while they then have a couple of other distribution hubs outside of the UK (the UK is only just over 20% of revenues now, which indicates how they’ve been able to promote the hobby outside of the UK). They have three main revenue lines/distribution channels – Retail, Trade, and Online. 

Retail (23% of revenue)

In this channel they distribute Warhammer products via a network of 530 stores that they control themselves (so they’ll only sell Warhammer products in those stores and nothing else, i.e. Pokémon, Magic: The Gathering, Manga comics, etc). They lease all of these stores and the setup is generally a one or two man operation (about 80% of stores are set up like this) as a typical store will only do about £200k of sales per year. The retail network is the lowest margin channel they have. They company changed disclosure in 2020 to include the three channels above in divisional operating income, but they then added the Design/Manufacture piece as a separately disclosed operating income generator (but didn’t include it in the top line for obvious reasons) and most of the operating income now sits in the Design/Manufacture “piece”. Before the change, however, the retail part did about 12% operating margins. It’s less profitable due to the overhead costs assumed (rent, rates, staff, etc) but it performs an important function in that the store owners are usually passionate about the hobby and evangelise it to people who are new to the hobby. 

Trade (53% of revenue)

In trade they are selling Warhammer product in to “general” hobby stores that sell multiple different games and products – examples would be things like Forbidden Planet, Geek Retreat, and so on. They do this via multilingual sales teams, one in Nottingham and I believe at least one other in Barcelona. They have about 7,000 accounts globally, with the average one spending about £35k/year. This channel is much more profitable, enjoying margins in the mid-30’s (before the change of disclosure). 

Online (20% of sales)

In this channel they’re just selling directly to customers via their webstore. It’s much more profitable, with operating margins in the 60’s – I actually think it could be higher, but they try to be fair to their trade partners by giving them a lot of the hot new releases so that they don’t just have old products in store. 

The rest of the revenues come from royalties, which are obviously almost pure profit. At the moment, it is mainly computer games, but there is potentially some optionality here from a recent deal they did with Amazon Studios. The details on this are currently very limited (the company are deliberately quite terse and only take meetings with their top shareholders) but we do know that they signed an agreement lasting a year in which Amason will work on ideas for a TV series based around the IP, with Games Workshop retaining the right to say yes or no to any ideas pitched. The speculation is that the series is going to be directed by and star Henry Cavill (of Superman and The Witcher fame), who happens to be massively into Warhammer. 

Financials 

The UK is, sadly, a bit of a graveyard for stocks for historical reasons that are a bit dull to go into. It’s a market full of turds, and the LSE is where stocks go to die. There are, however, a few really good companies outside of the compounders everyone knows like LSEG, Sage, RELX and so on, and actually quite a few of these are in retail – companies that look dull and doomed but have surprisingly good financials or good management teams or some other factor. Next is one that I wrote up a few years ago that fits this description (good management) and there are a few others – Greggs (the sausage roll compounder) is one; Dunelm is another one; Howden Joinery is another.. Games Workshop is another one that I would put into this category as well. The economics of this business are fantastic – gross margins last year were 68% (and they peaked above 70%), operating margins were over 35%, ROIC was about 50%, and the company generates very strong free cash flow (net income conversion into free cash flow has averaged 100% over the last 10 years), much of which they return to shareholders (80% payout ratio over the same period). They haven’t leveraged the business up to reward shareholders (it has a net cash position), and they aren’t starving the business of capital either – organic growth has averaged 8% since the start of the 2000’s, and 14% over the last 10 years:

In terms of broad brush strokes on the numbers, here’s a summary of some of the key statistics:

So it does just under half a billion of revenue, 410p of EPS (23x EPS backward looking), £165m of free cash flow(5.3% yield backward looking), and they return most of that to you as a shareholder. From the chart above, it’s clear that the organic growth hasn’t been as consistent as one would like to see in an ideal world. I’d attribute that to a few things: 

1) Retail business was an underperformer in the past – I think this was down to the managers they had in place in some of the stores, and then the regional middle management (particularly in Europe and, to a lesser extent the US). As mentioned above, to be an effective manager of one of the retail stores, you need to be passionate about the hobby and really evangelise it. I think that, in the past, that was not the case in quite a few of the stores, and this then percolated through the other channels, as the retail part is really important in generating interest and demand in the hobby

2) Some issues with previous senior management regarding some customers dissatisfaction. I think that there was a perception that they were pushing too hard on price and there was not enough newness in the offering. This happened under the former CEO, Tom Kirby, who has since stepped down (but still owns quite a bit of stock) and there’s some quite good discussion about it on the online forums related to Warhammer. Unfortunately they don’t break out organic growth by price and volume, so it’s not possible to see how much of the very strong organic growth in the early 00’s was price driven (or the volume response when it reached a tipping point), but that’s my sense

3) The company introduced some new warehousing, CRM and back end for their website (after a strong period of growth) where I believe there were initially some teething problems meaning they could service the level of trade accounts that they wanted to, which created some headaches

4) Brexit also didn’t help 

I think that those issues have, been largely addressed now. Kevin Rountree, the current CEO, cleaned house of the underperforming managers when he took over as CEO in 2015, and he also took action to address the price points and barriers to entering into the hobby. Examples of that would be in-store initiatives where the new managers will show you how to paint your first figure, and offerings where you can now get starter sets for under £15, making it a bit more accessible. 

In terms of where the business goes from here, modelling it accurately is challenging, the reason being that, as mentioned above, they’re not big fans of talking to the buy side (or even the sell side really – only a handful of local brokers cover them, despite this now being a £3bn company). If you have a chance to read any of the annual reports, it’s clear that they’ve been quite influenced by Buffett/Munger (they make the obligatory references a couple of times) about creating value for the long-term and growing the business rather than making half-yearly numbers, and they’re not big fans of engaging in this kind of game with investors or brokers. It’s irritating in one sense (how are you supposed to model it?), but when looking at how they’ve performed, I think they truly do believe in the long-term value creation idea and they’re not just avoiding any engagement out of any need for secrecy. 

I think it’s reasonable to conclude that the 14% top line CAGR that they’ve enjoyed over the last decade is probably not sustainable, and the longer-term growth rate of 7%-8% seems like a sensible estimate to me. I’m using that for the next few years, with incremental margins of about 45%, which is about what they have historically done. That gets me to roughly the following P&L:

So I think they can grow EPS from 410p last year to ~430p this year, ~470p in 2025, ~740p by the end of the decade. In terms of what I would pay for these earnings, I think 20x is reasonable. From a theoretical perspective, 20x is about a fair multiple for a >50% ROE business growing mid-single digit (actually it’s growing more than this, but that’s about the limit of what I feel comfortable putting in), From a practical perspective, the P/E range over the last 5-6 years has been about 16x-29x (probably covid-affected), so the market has no issue paying 20x for this business. Looking at 2026 numbers (it’s a May year end), that would get me to £113 as fair value, and on top of that you should get about £11 of dividends, so total return of about 30%, which I think is good enough. If they continue to deliver (which I think they can due to the trends I referred to above), I think a patient investor would be looking at compounding low teens out to the end of the decade. 

Amazon Deal 

I’d be remiss not to mention the Amazon deal, even given the details are pretty sparse at the moment. All we really know is that they have entered into a deal with one another to work on ideas for a TV show over the next 12 months around Warhammer 40k, and thar Games Workshop have the final say. My observations would be that: 

1) We all know that in streaming, content is king and IP is valuable and getting more valuable

2) When Amazon Studios did the Lord of the Rings series, they paid the Tolkien estate $250m up front and spent another $500m on developing the show 

I obviously don’t think that Warhammer is anywhere near the level of Lord of the Rings in terms of popularity, but even if it has 10% of the value, that is almost pure profit to Games Workshop and is enough to be meaningful. DHX paid something like $350m for Charlie Brown and Strawberry Shortcake (I may have this wrong but I think I read this) – Warhammer is niche for sure, but it has a devoted following. I would not be shocked to see some kind of quite lucrative deal, and more exposure on Amazon should, at the very least, drive traffic to the other channels. At present I’m not modelling any of this as the details are pretty much non-existent, so one does not need this for the thesis to work I don’t think – it would be the cherry on top. 

What Can Go Wrong? 

The key risk that I see from here is a slowdown in the organic growth rate. In the chart below, I’ve put the forward P/E ratio on the left hand scale and the average five year organic growth rate on the right hand scale – it’s clear from here that there is some correlation between the two, and a moderation of the organic growth in the mid-00’s saw the P/E multiple compress from mid-20x to below 10x:

Of course, over this time period we had the GFC, which hopefully we won’t see a repeat of, so the macro headwinds are likely to be less severe, however the peak in organic growth in this cycle has been higher. I’d also point out that Games Workshop is just a much better business now, with ROE and ROIC roughly double what it was going into the last “lost period” of organic growth, thus any P/E trough is likely going to be considerably higher. That being said, if we had a year of, say, 0% organic growth, it’s not unreasonable to fear that the P/E might trough in the mid-teens, which would suggest a painful drawdown, maybe in the 20%-30% range (though the cash generation and returns would hopefully insulate you a bit). To that end, I’d note that in the last update a couple of months back, they posted an organic growth rate of 9%, still incredibly impressive, but enough to send the shares down over 10% on the day. It’s not an exact science of course, but just eyeballing the chart above, it does seem like the market is already attempting to price in some moderation.

Any drawdown might then be exacerbated by the fact that the company don’t really talk to investors, so you are kind of in a bit of an information vacuum unless you’re a NBIM or a Baillie Gifford and you own a lot of stock and the company are willing to talk to you. I think I’ve laid out the reasons why I don’t see any reason other than mean reversion for a really dramatic slowdown in organic growth, but that’s the key risk I see.

Catalyst

Time and potentially the Amazon Studios deal