ACCOUNTING AND FINANCIAL ANALYSIS

Accounting and Financial Analysis

Accounting and Financial Analysis

Games Workshop Group PLC

Games Workshop Group designs, manufactures, distributes and sells everything an enthusiast needs to play tabletop wargames in the fantasy world of Warhammer. It is a niche business that appeals to people dedicated to the Games Workshop Hobby. They create materials of the highest quality that appeal to a niche sector of the population. It is a global business with more than 250 stores in The Americas, Continental Europe and Asia Pacific but also trades with thousands of other independent retailers worldwide. Games Workshop has its own hobby centres that introduce people to the Hobby. They also work with independent retailers and sell direct both on the Internet and by mail order. Games Workshop is not a retailer, its stores promote the Hobby and provide a venue for experienced gamers to meet and play. Game Workshop's biggest challenge is to ensure they constantly provide a level of detail and service that is appropriate and respectful to the devotion of their customers.

Key Performance Indicators (KPIs)

Revenue up at £125.7m (2008: £110.3m)

Revenue at constant currency* up at £113.9m (2008: £110.3m)

Operating profit - pre-royalties receivable** up at £5.5m (2008: £0.8m)

Operating profit** at £9.0m (2008: £2.5m)

Pre-tax profit at £7.5m (2008: £1.1m)Earnings per share of 17.8p (2008: loss (2.4)p)

Year end net borrowings of £1.6m (2008: £10.1m)

The 2009 annual report, analyst presentation and notice of annual general meeting may be viewed at the investor relations website at the address above. Constant currency growth is calculated by comparing results in the underlying currencies for 2008 and 2009, both converted at the 2008 average exchange rates.( Baker, 1999)

Games Workshop, purchased in May 1998 has very attractive business fundamentals. For example its Gross Margins have climbed to 68% in the most recent interim results, which many businesses would envy. Its Return on Equity at the end of last years result was 44%, again a sign of an asset light business. During the last interim year cash to debt has improved to 1 to 1 from 0.5 to 1, which is also a move in the right direction. Also, it appears that the hobby offers growth potential evidenced by the 10% growth in sales despite the growth in computer games. However, management are struggling to manage growth: In the last few results the incremental returns on equity have declined considerably resulting of a decline in ROE of 55%+ to the most recent 44% and now expected to decline to say 30%. These are common characteristics of mismanagement.

It is not too hard to figure where this mismanagement comes from; first the last few interims have seen successive failures of controlling inventory, managing debtors and creditors to a lesser extent. The other was the slow decline of net profit margins, which indicated a loss of control of operating costs. This has exploded in the last interim period by 17% against a growth in sales of 10%.As far as sales are concerned, we had a disappointing third ...