CHAIRMAN'S PREAMBLE

When reading results like these the owners of a business have to ask themselves: to what extent is this a trading cycle slowing for a while and to what extent is it due to bad management? If this is a trading cycle, what are the underlying trends in sales of core product? If this is bad management, what has been the effect on gross margin, net margin and cash? I hope that the rest of this document will give you the same confidence I have. Management is good and, yes, sales are simply reflecting the downside of a trading cycle.

Over the last two years Mark Wells, who took over the Games Workshop Tabletop Wargaming division in March 2004, and Paul Thomas, who is MD of our Manufacturing and Supply division, have begun to make their presence felt. Without the operational control over detail these men bring, a trading downturn like the one we have seen over the last few months would have had far more serious consequences for our profits.

I read these results with a certain amount of frustration: they are not good. Meanwhile, they could have been much worse. Most importantly, our underlying business is sound and seriously well invested.

When I returned to the business five years ago, one of the first decisions I had to make was: should we take a licence from the producers of the film the Lord of the Rings? It was touch and go. The arguments for doing so were: acquiring more hobbyists, acquiring more independent trade accounts, stopping someone else doing it, and going with the general feeling throughout the Company that we had to do this. It was the last that was most important in my decision to say yes, closely followed by the third. The first two I was more nervous about. Yes, we would get more but for how long? Would it be permanent and, if so, at what level?

I should have been more optimistic. Not only was the product much more successful than I ever dreamed it would be (thank you Rick Priestley for a great game design), it has given us a valuable third product line to support Warhammer and Warhammer 40,000. The Lord of the Rings product sales have declined faster than we anticipated after the unsustainable levels of the last two years, but we still see them contributing to our sales and expect them to do so far into the future.

I expect to be criticised when the Company does not do as well as it should. Earlier this year, we were obliged to announce that we did not think that the stock market’s profit expectations for Games Workshop
would be met. As a consequence our share price fell significantly. Amongst the comments made, one in particular struck me as interesting. I was asked what events I was going to engineer to make the share price go back up again. My position on this is quite clear. I, together with the management team, run the business – and the stock market decides what the share price should be. Both do their best to get it right but neither should try to do the other’s job. Whether you are thinking of buying shares or thinking of selling them, rest assured I will do nothing other than run this business the best I can for the very long term.

I read recently a report on Games Workshop which represents a new and independent approach to analysis. I applaud this development. The existence of truly independent analysis is necessary for both companies and shareholders. The process whereby research is based upon what the Company says (inasmuch as it is allowed to) about its own future prospects – both in meetings and in ‘analysis’ – is, in my view, fundamentally unfair. Firstly, because it is us talking about our own future: whether wittingly or not we are going to produce information with the Company flavour. Secondly, it is information that is not available to all our shareholders equally. We make our presentations to the financial community available on our web site, but we do not visit in person every shareholder. We only visit a select few institutions, and most of those institutions do not in turn brief the shareholders they represent. The emergence of this kind of analysis I therefore welcome. Even so it has, as with most things, to be taken with a pinch of salt.

What then of next year and the many years after that?

Later in this document you will see a graph showing our sales performance ever since I led a buy-out of the business in 1991. Not only does it illustrate well the recent over-performance of the business, it also shows that we have performed consistently well for a long time. This is what we should be measured on – long-term consistency. Back in 1991 I knew the venture capitalists that backed me were taking more than their fair share in both dividends and equity; but I was also confident that the business had a longer and richer future than they could imagine, and a little temporary pain was worth it. This is where we are today – a little temporary pain. All owners must form their own views but this owner is in it for the long term.

The signature of Tom Kirby.
Tom Kirby
Chairman and Chief Executive

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