Wednesday, August 1, 2012

GW Financials: Profit Sources

by SandWyrm


As I look through GW's financial statement, I am finding a few things that don't look quite as rosy as the summaries would have you believe. Let's have a look at one of them.

First up, profits before taxation. Here's the raw numbers (In thousands of Pounds):


And the chart for growth, based on the above:


Now let's compare that to the growth chart from yesterday...


So sales in Australia are up as a percentage, but the profits are WAY down for the second year in a row. Asia and 'Export' sales are way up as a percentage, but they're losing money too.

Sales growth has all but stalled in the UK and Europe. 

Looking at the growth chart again...


We can see that Europe has seen a decent increase in profits. Probably from cost cutting. North America is still the big winner for GW though.

Now, let's take what we've seen so far and look at it another way. We'll take all of the regional gains and combine them into one number that represents game and model sales worldwide. 'All Other Sales' is mostly licensing. So we'll just call it that.

'Product And Supply' could damn well be anything, or nothing. The description says that it includes costs of £116K related to the 'Digital Development Team'. Which to my mind should be under general development, as they're probably the ones who made the iPad Marine Codex. The fine print also indicates that some licensing costs got moved around between that category and 'All Other Sales'.

Presumably there could also be profits/costs in that category related to the sale of unused equipment, such as lead/pewter spin-casters that were replaced with the 'Finecast' resin-casting equipment that GW bought a year ago. Or sales/rental of warehouse space. In short, who knows? It's a vague category that's perfect for various shenanigans used to prop up other numbers.


So that said, where is GW getting it's increased profits from? Mostly from licensing and whatever shell games and activities fall under 'Product And Supply'. Boiled down, 93% of their profit growth in Game And Model Sales is coming from North America. Whereas the UK and Europe are mostly subsidizing Australia, Asia, and Exports.

Licensing is the big win, as I'm sure any Marvel Comics executive could tell you. They should double down on that. And Product And Supply? Who knows? Maybe it'll be the same next year, and maybe it won't. I wouldn't say that number is one that you should count on, as it's so variable by nature.

 

But in this report it's 49% of their stated growth, which has me a bit concerned. Because if that growth came from increased sales of product to customers, they would be sure to tell us. Since they aren't saying that, I have to assume that it's coming from one-off sales of inventory/facilities and other things that aren't core to the business. Or the shuffling of costs between units.

Which maybe explains why the dividend was cut this year, even though the numbers appear to be up when you look at the summaries.

Which is not to say that they're doing anything illegal, or that they're breaking accounting rules. I'm sure they aren't. But I do think that they're trying to... well not hide. Maybe obfuscate is a better word. But they don't want it to be obvious exactly where their newfound growth both is, and isn't, coming from.

Edit: Eriochrome had a very good comment that I wanted to append to the post. Since it has another (probably more correct) view on what the 'Product And Supply' category represents.

He said:
To understand the report you need to understand GW corporate structure as a partially vertically integrated manufacturer/retailer. Product and Supply is the side of the company the designs and produces the models. Their revenue is all internal as they sell the models to the sales department at something like 35-40% MSRP. Game/Models Sales then represents both the trade sales (at 55-60% MSRP) or Retail sales at (100% MSRP).

Now Revenue from Sale businesses (excluding Forge World/Black Library) was up about 5% but Production revenue was up more like 8%. This indicates that more shift from retail to trade sales. If you compare the Product+Supply/Sales Revenue for the past few years is goes from 41 %, 44%, 50, 51.5% in 2009,2010,2011, and 2012. This is the real trend that they do not want to talk about hence no discussion of profit differences between retail and trade.

9 comments:

  1. You've seen too many gangster movies. This post comes off as a wacked out conspiracy theory rather than a critical review. Assuming that GW was doing something nefarious, why would they tip their hand in their financial statement so much so that someone with, I am assuming, no accounting training unraveled their plot?

    No sir, I think you are anomaly hunting and stricken with confirmation bias. You start with the premise that something is our of joint and then looks for data to support your hypothesis under the guise of just asking questions. It's poisoning the well and a trip through a dozen other logical fallacies before you vaguely tie up things at the end. No, GW is not in the business of "import and export" nor are they shaking down the Auzzies for protection money. It's just a financial report and if you have questions, take it to your accountant and get real answers rather than hunting for ghosts.

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    1. This comment has been removed by the author.

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    2. (((I deleted and reposted the same reply since I felt certain parts of my reply were unnecessarily combative, which I apologize in advance for and have removed.)))

      You don't need to be an accountant to understand a financial report, since these reports are intended for the common shareholder and not for government scrutiny (I don't know how they do it in England, but I took Accounting in College and they provide separate reports to separate agencies in the U.S.; the Financial Statement provided to the public isn't meant for the IRS)

      The purpose of providing financial statements to shareholders and the general public is to provide consumer information for current and prospective investors, so that they may adjust their investments accordingly should they choose to do so.

      So it's in a publicly owned company's best interests to present their financial situation in as bright a light as possible, so as to keep current investors and attract new ones. That's not conspiracy, that's economics.
      -----------------------------------------------------------------

      As an aside, either Sears or K-mart had a similar display of profits mainly coming from the selling of stores and other assets. A Crunching Company does tend to let off a lot of good vibes, but eventually they'll run out of assets to liquidate and the truth becomes clear. (one or the other company eventually had to merge/be bought by the other...I can't recall which was which though).

      The low profits-increased sales in Australia could mean they're withdrawing from the Australian Market. But I only thought about this because of something I recall hearing about regarding Australia, here or other-wheres; the word "Embargo" was thrown about.

      Aside from the Licensing that obviously comes from the Warhammer 40k videogame (they're supposed to be releasing DLC Multiplayer modes for it if they haven't already), the other thing I know that's going to be coming out soon is the "Only War" imperial guard rpg book from Fantasy Flight Games, who seems to specialize in making Licensed Games. Same guys who did Dark Heresy, Black Crusade, and Rogue Trader too.

      http://www.fantasyflightgames.com/edge_minisite_sec.asp?eidm=201&esem=2

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    3. @Vurumai

      Conspiracy theory? That's a laugh. When did I say GW was doing anything illegal, or for that matter, unusual?

      Once upon a time when I was right out of college, I used to produce slide presentations for banks and other large corporations. Including many household names. Every single one of them played games with their numbers. I watched it happen plenty of times as numbers changed by half a million here or a quarter of a million there between revisions to their presentations for their shareholder meetings. I've listened as the execs overseeing my work talked shop in front of me and worked out the pros and cons of moving number x to section y instead of section g. It's how business is done dude.

      I'm just pointing out that GW is doing it too, and what some of the ramifications might be. Because while I'm no accountant, I do have some experience looking at numbers like these and seeing through the BS that all companies put out to make their finances look like the best ever.

      What nefarious things am I suggesting that they're doing?

      Well, they've switched their production over to resin and so they'll have had some metal casting equipment and material stocks that they're not using anymore. So maybe they sold it. If the new equipment requires half of the space, or allows them to reduce stock on hand, then maybe they've been able to sell off or lease out buildings that they're not using.

      They also moved their US headquarters to Memphis. So what did they do with the old HQ buildings? Probably sold them or leased them out.

      They might also have some extra plastic casting capacity that they've been selling. Can't let all that equipment sit idle. If there's paying customers available for that down-time, then why not?

      Point being, there's lots of non-core ways that a large corporation can make some extra cash. Obviously they've done quite well with that this year (whatever it was) and have been able to shove things like the development of digital codices into that account instead of letting those increased development costs impact their other development numbers before they've begun to pay for themselves. Which is totally fine, legal, and common. Just realize it and read their report with your eyes wide open. That's what good investors do all the time.

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    4. @sciencemile

      My assumption is that the licensing portion also includes whatever they get from Fantasy Flight for their games.

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  2. To understand the report you need to understand GW corporate structure as a partially vertically integrated manufacturer/retailer. Product and Supply is the side of the company the designs and produces the models. Their revenue is all internal as they sell the models to the sales department at something like 35-40% MSRP. Game/Models Sales then represents both the trade sales (at 55-60% MSRP) or Retail sales at (100% MSRP).

    Now Revenue from Sale businesses (excluding Forge World/Black Library) was up about 5% but Production revenue was up more like 8%. This indicates that more shift from retail to trade sales. If you compare the Product+Supply/Sales Revenue for the past few years is goes from 41 %, 44%, 50, 51.5% in 2009,2010,2011, and 2012. This is the real trend that they do not want to talk about hence no discussion of profit differences between retail and trade.

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    Replies
    1. That is an excellent, thoughtful, and very informative comment eriochrome.

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    2. I ran a post last July where I looked into this all in depth:

      http://twilight40k.blogspot.com/2011/07/games-workshop-financials-whats-in.html

      This report I am most surprised by the 10% rise in US sales. They finally increased their sales more than they raised their average price is at least one zone.

      I also see that the embargo has not helped the down under sales business. They are losing more money on more sales. I think this is really just an accounting issue as GW production still gets the 35% of MSRP for the products at the AU dollar prices which brings them an extra 50% income compared to same items to UK or US. This is probably 1 M pounds of money that should really be credited to the AU sales as opposed to the UK production.

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    3. They might be relying on those sales to make the UK numbers look better than they otherwise would.

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