OPERATING REVIEW
Summary of results
I am delighted to report on another year of very strong
sales growth (+£22.7m) and operating profit growth
(+£2.4m). The Games Workshop Hobby, and the business
which supports and maintains it, continue to enjoy good
health. This has also been a very busy year operationally,
and we have taken some bold steps forward in the Americas,
in our global manufacturing and supply chain and with
our management team.
Sales
Sales growth remains a consistent feature of the Games
Workshop Group, as demonstrated in the following
chart:
Total sales - £m
Sales have grown in all key territories, with particularly impressive growth continuing in both Continental Europe and the UK.
Sales by territory
cc - constant currency*
* Constant currency growth is calculated by comparing sales in the underlying currencies for 2003 and 2004, both converted at the 2003 average exchange rates as set out in the financial review.
In 2004 sales made through our own Games Workshop Hobby stores made up 46% of turnover, as we continued to open more stores throughout the world. We opened 37 stores during the year taking our total to 310 at the end of May 2004. The balance of our sales was made through independent retailers (47%) and direct, through the internet and mail order (7%).
Sales by channel
Continental Europe
There are five autonomous sales businesses in Continental
Europe, whose mission it is to develop the Games Workshop
Hobby in France, Germany, Spain, Northern Europe and Italy.
We now have 90 Games Workshop Hobby stores, up from 81
last year. Each of these businesses enjoyed strong sales
growth during the year except for the Spanish business,
which saw sales slip slightly backwards after strong growth
over the last three years. The Italian business, whose
sales function had previously been based in Nottingham,
relocated to the outskirts of Rome during the year. In
spite of this disruption the sales for this relatively
small business continued to grow impressively, and we
believe that the sales operation is now well placed to
develop the Games Workshop Hobby properly in Italy.
UK
Over the last two years we have enjoyed a period of very
strong growth in this business, where we now have 117
Games Workshop Hobby stores (2003 : 116). We reported
last year that DeAgostini, a third party business which
had been granted a licence by the Games Workshop Group
to produce a serialised gaming supplement based upon
our Lord of the Rings tabletop battle game, launched
its ‘Battle
Games in Middle-earth’ product in the UK. This product,
which was sold through traditional magazine newsstand
distribution channels, was heavily TV advertised, and
this resulted in an unexpected increase in the sales of
our Lord of the Rings products. At the time we indicated
that this ‘bubble’ effect increase in sales
might not be sustainable in the future. In 2004 this effect
continued during the first half of the year, however during
the second half we have seen a return to a more normal
level of sales. The healthy growth which we have continued
to enjoy through both the independent and direct channels,
further confirms the underlying strength of our UK business.
The Americas
2004 has been a year of significant investment and
structural change in the Americas, which for us comprises
the USA and Canada. We believe that we now have a
sales infrastructure which can deliver long-term
growth in this exciting territory. At the beginning
of the year we established three new regional sales
offices for the US in Chicago (Mid-West), Los Angeles
(West) and Memphis (South) in addition to the Baltimore
(North-East) operation, which was previously our
sales centre for the entire country. These offices,
and the dedicated sales teams which each has established,
are now responsible for growing the Games Workshop
Hobby in each region, and for providing customer
service both through independent retailers and through
our own Games Workshop Hobby stores. To support these
efforts on the ground we have opened 21 new Games
Workshop Hobby stores, taking the total to 75. Sales
in the year through our own stores and through the
direct internet and mail order channels have shown
healthy growth, while sales to independent retailers
have remained sluggish. We remain confident that
the investment we have put into growing the Hobby
in each region will result in continued sales growth
in our own Games Workshop Hobby stores and the direct
channel, and that this will also help to restore the
health of our sales to independent retailers.
Asia Pacific
This business comprises Australia and New Zealand.
We made the decision during the year to close our three
stores in Hong Kong and Singapore as these activities
were a serious and unprofitable distraction from the
core business in Australia and New Zealand. During
the year we opened three new Games Workshop Hobby stores
in Australia and New Zealand, and we are confident
that this business will benefit from the improved focus
which it now receives.
Manufacturing and supply chain
We have made significant investment in our vertically
integrated design, manufacturing and distribution supply
chain this year. This has enabled it to respond positively
to the growing demands of the sales businesses and will
underpin its ability to do so in the future.
In June 2003 we opened our new Memphis warehousing and distribution facility, which has supplied the needs of our American business this year. Towards the end of the year we introduced a box packing activity in the new facility, and over the next twelve months we plan to introduce both metal casting and plastic injection moulding. In the medium-term we expect that the Memphis facility will supply the majority of the needs of both our American and Asia Pacific regions.
We have also continued to invest in the Nottingham operations where we are currently reorganising our administrative offices ahead of building a new warehouse. This programme will ensure that the needs of our Continental European and UK businesses are catered for into the medium-term.
Other activities
Warhammer Online
In 2001 we established a venture, owned 71.25% by Games
Workshop Group, with our partner Climax Development Limited
to operate a massively multiplayer online computer game
set in the Warhammer world. This operation continued until
21 June 2004 when, following a fundamental review, Games
Workshop Group and Climax decided to terminate the venture.
This decision was taken following a full review of the
progress, costs, market and risks associated with the
operations.
This decision is treated for accounting purposes as a post balance sheet event, and the costs of termination will be dealt with in the results of the Group for the year to May 2005.
BL Publishing
Our publishing business, which made sales of some £1m
this year, has begun to extend its activities outside
the Warhammer and Warhammer 40,000 intellectual properties
into other fantasy, science fiction and horror properties.
This business is developing a small but profitable niche
publishing portfolio, while continuing to enhance and
develop the existing Games Workshop intellectual property.
Sabertooth Games
We have taken action this year to refocus this US based
collectible card game business, which has been struggling
to break even since we acquired it in 2002. We have acquired
the outstanding minority shareholding (15%), reduced the
cost base and moved the business to our Memphis location
to ensure that it can obtain the maximum benefit from
Games Workshop’s operational logistical structures.
We believe that these actions will place this small business
(sales this year of $3.4m) on a firmer footing for the
future.
Management team
While we believe in evolutionary rather than revolutionary
change in our management structures, this year we have
made an important move to establish a more clearly defined
divisional management structure for the Games Workshop
Group. We now have four management groups, each with clearly
defined responsibilities as follows:
Games Workshop Tabletop Wargaming division – responsible for the development of the Hobby throughout the world. This encompasses the sales businesses in each territory as well as the design studio based in Nottingham.
Manufacturing and Supply division – responsible for the realisation of the designs into manufactured products, and the supply and distribution of those products to our sales businesses and their customers around the world.
Other Activities division – responsible for the sales of all non-tabletop wargaming products, including publishing, collectible card games and computer games.
Group – responsible for the financing and corporate governance of the activities carried out in the divisions. This also includes intellectual property management, legal, treasury, reporting and investor relations.
Having established this divisional structure we believe that we are now better placed to address the key areas of management recruitment, development and succession planning in a more systematic way.
Workforce
Games Workshop is a special business with an even more
special workforce. Many share a passion for the Games
Workshop Hobby, and those who do not, have an equally
strong passion for providing excellent quality service
to support the Games Workshop Hobby. So we are fortunate
in that the Hobby is at the centre of all that we do.
But while managers can talk about divisional structures
until the cows come home, it is not structures which
have delivered Games Workshop’s remarkable growth, it
is the often heroic efforts of this special workforce
who all understand that what they are doing matters. That
is why we have managed to make such significant changes
to our business while still delivering growth in both
sales and profits. We now employ 3,200 people around the
world, and one of my (few) regrets is that I can no longer
talk to them all personally. So once again, I would like
to use this annual report to say thank you to all our
staff and I trust that our shareholders will join me.
Risks facing our business
Managing the risks which face our business is what
we do every day. The establishment of the divisional
management structure referred to above is a natural
step towards making this process more transparent
and accountable. The Games Workshop Tabletop Wargaming
division is responsible for keeping the Hobby fresh
and exciting and for managing market facing risks,
the Manufacturing and Supply division is responsible
for managing product delivery risks, the Other Activities
division is responsible for using our intellectual
property appropriately while not distracting our
tabletop wargaming activities and the Group is responsible
for managing treasury and legal risks. We have a formal
risk reporting process as part of our annual budgeting
and planning cycle, but the management of these risks
is an integral part of the daily management process.
Amongst the product delivery risks are those relating to input prices. The cost of raw materials, such as metal and plastic, represents no more than 2% of our sales. While the prices of these commodities have shown significant volatility during the second half of this year, we do not believe that this volatility represents a significant threat to our long-term profitability.
In the short-term our buying team is working hard to minimise these risks and the Manufacturing and Supply division is seeking out process efficiencies to offset any cost impact.
Many of our risks are mitigated by the significant portfolio effect which we enjoy with different geographies, different routes to market and different currencies. This leads me to conclude that the main source of risk for us remains management error. This is why management recruitment, development and succession planning are so important.
Prospects
We believe that Games Workshop Group can continue to
deliver consistent linear growth in sales and profits.
We believe that by doing what we are doing, in the
territories in which we are already doing it, our sales
can grow to a multiple of what they are today. Therefore
the directors believe the prospects for the business
remain very good.
Tom Kirby
Chairman and Chief Executive
| << Chairman's preamble | Financial review >> |
Home |
News |
Latest results |
Information for investors |
Downloads |
Games WorkshopCopyright Games Workshop Ltd 2000-2008