GW financial report

[Jack Shrapnel]

From Faeit:

"Yesterday Games Workshop's financials came out, and overall they look rather healthy. It does look like there was some reduction in cash flow, but overall the profits were up from the previous report. (I will not pretend to be able to read the fine lines of the report). So here are the links where you can read them yourself, and people more qualified than myself can comment.


investor.games-workshop.com/2013/07/29/preliminary-results-2013/

investor.games-workshop.com/wp-content/uploads/2013/07/Preliminary-announcement-2013.pdf

via Tom Kirby, chairman and acting CEO of Games Workshop
“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."

[stonecutter]

While I won't get into too many technical details about this report, I will provide a little bit of explanation on something closer to home: GW pricing and profit margins. Many times I have heard the question about why it costs $100 for what is likely $10 worth of plastic. Essentially, it all comes down to how the "cost" of a product is actually determined. The costs for any business generally fall into four categories:

1) Cost of Goods Sold - This is the direct manufacturing costs that only covers the physical material and assembly line labour in the actual production of goods.

2) Operating Costs - This is where the bulk of the cost associated with many products comes from. It includes anything that is "indirectly" associated with production. Some examples include the factory building itself, property taxes on the factory, equipment costs (called depreciation), factory utilities, supervision, management and other labour costs that are not directly, hands-on in terms of production.

3) Sales, General & Administration (SG&A) - These are all other company cost including marketing, transporting, selling, non-production labour (i.e. the accounting & HR departments), etc.

4) Financing Costs - usually this is interest paid on loans since a lot of $$$ are required to build factories, invest in equipment, etc.

Now, we can examine the GW report and see how it applies:

Revenue: $134.5M (i.e. dollar value of sales but in English pounds vice $CDN)
Cost of Sales: ($36.2M) (these are the direct costs of materials & labour in making the models/books)

Gross Profit $98.3M

So, based on this, the raw cost of GW products are only about 27% of what they are charging their stores or independent retailers like Nexus. However, the company still has to cover the operating and other costs and the stores selling GW products also have to mark-up the price so that they can cover their own costs and make a small profit.

Operating Expenses ($78.1M) [GW appears to have thrown nearly all other SG&A costs into this category]
Operating Profit $21.2M
Financing Costs ($ 0.35M)

Profit before tax $21.4M
less taxes of ($5.0M)

Final Profit = $16.3M

The end result is that while the physical cost of GW products is only 27% of the wholesale price, a more realistic cost that includes everything needed to actually produce, distribute and sell their product to retailers is ~84%. They then pay interest and taxes, leaving them the overall profit of $16.3M or about 12%.

Now, we can take a look and see where the costs for a $100 model that we buy come from:

Price to Us: $100

Retailer: Pays GW $70 and adds $30 to cover store operating costs (i.e. rent, utilities, salaries, and enough left over to make a profit for themselves to live on)

GW: Sells to retailer for $70:

1) $19 in plastic & labour to produce
2) $40 in operating costs for the factory, selling, distribution, etc.
3) $3 in taxes on profit
4) $8 in profit for GW shareholders

So there you have it, you now know roughly where and how the pricing for models comes from and the next time you get sticker shock from a new model, I hope this will help you at least have well-informed sticker shock

[Jack Shrapnel]

Fantastic analysis Frank... thanks for breaking this down...