Games Workshop: A Peek Behind the Fortress Wall

Updated: Mar 4

Games Workshop is the company behind the largest and most successful hobby miniatures brand Warhammer. Warhammer has various fantasy settings, including Age of Sigmar, a fantasy setting for mortals and Warhammer 40,000, a space fantasy set in the year 40,000. These settings allow hobbyists to collect and paint miniature characters, build armies, play war games against other players, engage in competitions, read an ever-growing library of fantasy literature and play various branded computer games to engage in Warhammer online. Please don't underestimate Games Workshop based on its fantasy nature — an investment of £5000 in 2016 would be worth over £100,000 today. Description from the Games Workshop business model reads more like a note from Warren Buffett than a medium-scale business manufacturing miniatures; here is a small excerpt:


‘Our ambition is unchanged: to make the best fantasy miniatures in the world, to engage and inspire our customers, and to sell our products globally at a profit. We intend to do this forever. Our decisions are focused on long-term success, not short-term gains.’


Games Workshop has a large team of incredibly passionate and creative employees, who share the vision of creating quality content alongside an adept management team, with the appointment of Kevin Rountree as CEO in 2015. Combined with a new shift in strategy, Games Workshop has turned itself into an exceptional business.

A robot with a gun on a pile of machinery with red and black clouds in the background

To give you an overview of Games Workshop’s operations, the company originated in Nottingham, which is now the location of its headquarters. Within this headquarters, over 200 staff design all of the miniatures and create the ‘lore’, which is Warhammer speak for fantasy content. Games Workshop manufactures all of its miniatures in Nottingham too, which besides the pride of employing more staff in its home town, creates many benefits in terms of product quality, oversight, efficiency and quick turnaround times on key product lines. Products are then distributed globally from the warehouse in Nottingham to two distribution hubs — one in Memphis, Tennessee and one in Sydney, Australia. These hubs then serve retailers with stock in nearby geographies.


Products are sold through three channels: 530 owned retail stores in 23 countries, 4900 independent retailers in 72 countries and a network of online web stores for which orders are fulfilled from Nottingham. This large international presence is reflective of the fact that 74% of sales are currently derived from outside the UK. Whilst figurines are the dominant source of revenue, Games Workshop has built a vast universe of intellectual property over more than 30 years of business. The full exploitation of this IP has been a key focus in recent years, with Games Workshop licensing the Warhammer brand and content to computer games and TV shows; licensing was accountable for 6.3% of total revenues in 2020, but due to its ‘pure profit’ nature, it was accountable for 17% of operating profit.


The last communication from Games Workshop to its investors came in its half year report in January. The business reporting year is May-May, thus, the half year report measures performance in the six months from June to November. For the most recent period, revenue was up 26% — bear in mind that this was at a time when pretty much all 530 owned retail premises were closed. Online sales have fulfilled the majority of orders in the period. Due to the profitable nature of the underlying business, this revenue growth has meant operating profit for the latest half year was a couple million ahead of operating profit for the full year to May 2020. Just to reiterate again — profits in the latest half year are ahead of the full year period the year before. Incredible! Considering they are pretty equal halves in terms of operating performance, it sets the scene for a big profit delivery in the full year to May 2021.


The coronavirus had a large impact on the business at the initial onset, with the loss of six weeks of operations as the business grappled with the logistical requirements of the pandemic. However, disruption in the latest report has been kept to a minimum, with the largest issue being a higher than desirable ‘out-of-stock’ notification on popular product lines — a nice problem to have. The pandemic plays into Games Workshop's strengths as a time-consuming, indoor hobby and will have likely contributed to an increase in engagement with the hobby from users old and new.


Key to Games Workshop’s recent success has been a strategy change. In the few years running up to 2015, the business underwent a transformational overhaul. The retail channel was re-organised, by exiting unprofitable retail locations and switching to a largely ‘one-manned’ retail premises. Lots of work has been done to recruit staff for these stores that are capable of delivering the company requirement of ‘outrageous’ customer service. Trade accounts were lost in the early period, as the company focused on migrating to a new ERP system and optimising accounts, but many efficiencies were also achieved in this period. Although the annual report in 2015 pictured a business going through a challenging process, these efficiencies are still reaping rewards today. The strategy also shifted in terms of the customer-facing perspective. To refresh the brand and increase presence in the digital space, three prominent online platforms were created: an online website — Warhammer Community — created in 2016, which had 4.7 million users engaged in the recent half-year report; a centrally managed YouTube channel, which teases new product releases; and lastly, the addition of an impressive Instagram feed, which currently boasts 2.5 million posts under the hashtag #Warhammer, where fans post pictures of their newly painted figurines. The combination of a more efficient business focused on global growth through owned channels and an improvement in customer engagement has created the success you see today for Games Workshop.


So looking forward, what are some of the opportunities at Games Workshop’s disposal to deliver growth for shareholders? Firstly, a core priority is growing the popularity (and therefore, purchasing) of its miniature figurines. This is the core revenue and profit driver of the business and so must be central to the company strategy. Whilst Games Workshop has been in business for more than 30 years, and has already achieved 74% of sales from international sources, sales are mostly derived from Europe and North America. A key growth market for the company is Asia, and, relatively speaking, Games Workshop has only scratched the surface. The company already sells products in over 20 languages, and the content seems to be relatively relatable across cultures, thus, a push into further global markets seems achievable.


The second growth driver for Games Workshop will be the focus on licensing their IP to provide a royalty stream. Licensing has been typically weighted towards the computer games industry, where successful launches such as Total War: Warhammer, utilise the Warhammer brand and fantasy story content for the game. Other computer game license streams can occur from more bolt-on style licenses within games that currently exist, where players can purchase Warhammer add-ons and character extras. Games Workshop is becoming increasingly focused on other large royalty projects such as the Eisenhorn TV series, which is based on a popular character from the Warhammer novels. Games Workshop is very risk averse with licensing, and is very selective with deals. This does reduce short-term profit prospects, however, this decision is made to protect the IP from reputational damage, and is sensible in the long term.


The big question for investors is, can Warhammer remain popular and grow its offering to succeed at global level, or is the recent boom in miniature collecting set to fade when the pandemic abates, allowing us to return to cinemas, pubs and football matches? This worry can be partially quelled by the fact that Games Workshop does not consider a loss of demand at all in its risk section of the annual report. If the company doesn’t deem this a risk, then I think we are on good footing. Of course, this risk may still be present for investors, but I think a consideration of the following factors might help to abate worries over this risk:

  • Warhammer hobbyists use Warhammer for different reasons — whether this be creative types who enjoy painting, collectors who want to amass large hordes of figurines with special edition characters or Wargamers who actually want to go to battle and play the game with their peers. Many hobbyists will, of course, be a blend of all three, but because Warhammer covers these different customer types, there is unlikely to be a mass reduction in popularity.

  • The Warhammer demographic has a typically high-disposable income and reliable job. We have to make generalisations here, but typically, Warhammer is an expensive hobby, and you don’t get into it without a certain level of disposable income.

  • Games Workshop has many sales channels and an increasing online presence to continue to attract new customers even if the fall-off rate picks up.

  • Warhammer offers an alternative to computer gaming — I assume many parents will be happy to encourage their children to be creative with paint and figurines as an alternative to playing video games for hours on end.

  • The re-opening of entertainment and leisure businesses post Covid-19 could actually provide a boost for Games Workshop, as players will be welcomed back to local stores for tabletop gaming matches in addition to going to exhibitions to meet many like-minded fans.


A table of Games Workshop's financials

Source: Games Workshop Annual Reports and Edison Research Estimates


When considering Games Workshop’s financials, you will see a business that is executing well in terms of its financial strategy:

  • Revenues are growing solidly, with an outsized jump predicted in 2021.

  • Fantastic operating margins of 33%, which are expected to increase to around 38% in 2021, showcasing the profitable prowess of the business.

  • An incredible ROCE (Return On Capital Employed). Games Workshop's capital light structure and net cash balance have helped deliver an average of 70% over the last three years. This ROCE figure is reducing towards a more sustainable level, but is currently well above the average business in the UK or the US.

  • In terms of dividends, management restricts shareholder payments to only truly surplus dividends. This means you should not hold the shares if you wish to be paid an income stream, however, with a 20-fold return over the last 5 years, Games Workshop’s success accentuates why you should not be too focused on dividends!

In terms of estimates, I think there is a good chance the company can beat the current operating profit expectation of £116m in 2021, considering £90m of this has already been banked in the first half.


In terms of valuation at the current price of 9,905 pence, Games Workshop trades at 34x 2021 earnings estimates and 32x 2022 earnings estimates. In all reality, I think there is a high likelihood of the company topping these estimates, so you will probably be paying less than the above figures. This P/E ratio may seem high, at more than double your average FTSE100 company, but I would ask you, how many FTSE100 companies are delivering their whole prior year profit in the current half year? With a niche but intensely loyal fan base, incredibly strong IP and years of operational knowledge, the barrier to entry — or as Games Workshop calls it, the fortress wall — is very high. A long term focus for the business and a clearly successful revamped strategy could generate above market returns for many years to come. Games Workshop is my number 1 stock in my personal holdings, and I intend to keep it there for a long time.