Games Workshop : Annual Report

PRESS ANNOUNCEMENT

GAMES WORKSHOP GROUP PLC

25 July 2023

ANNUAL REPORT

Games Workshop Group PLC ("Games Workshop" or the "Group") announces its annual report for the 52 week period to 28 May 2023.

Kevin Rountree, CEO of Games Workshop said:

"We finished the year having delivered eight consecutive years of Group sales and profit growth - in the period we reported the highest level of sales and the most profit we have generated since flotation 29 years ago. Our international team has been sensational again, thanks to you all."

The full 2023 annual report can be downloaded from the investor relations website at investor.games-workshop.com

See the glossary for details on the alternative performance measures (APMs) used by the Group. Where appropriate, a reconciliation between an APM and its closest statutory equivalent is provided.

STRATEGIC REPORT

Strategy and objectives

Games Workshop is committed to the continuous development of our intellectual property ('IP') and making the Warhammer hobby and our business ever better.

Our ambitions remain clear: 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.

Let me go through our strategy part-by-part:

The first element is that we make high quality miniatures. We understand that what we make may not appeal to everyone, so to recruit and retain customers we are absolutely focused on making our models the best in the world. In order to continue to do that forever and to deliver a decent return to our owners, we sell our miniatures for a price that we believe represents the investment in their quality.

The second element is that we make fantasy miniatures based in our endless, imaginary worlds. This gives us control over the imagery and styles we use, and ownership of the IP. Aside from our core business, we are constantly looking to grow our licensing income from opportunities to use our IP in other markets.

The third element is that we are customer focused. We aim to communicate in an open, fun way. Whoever and wherever our customers are, and in whichever way they want to engage with Warhammer, we will do our utmost to support them.

The fourth element is the global nature of our business. Our customers can be found anywhere, and we seek them out all over the world. They're a passionate bunch with an interest in science fiction and fantasy. They're collectors, painters, model builders, gamers, book lovers and much more. And while no two customers engage with Warhammer in exactly the same way, they're all deeply invested in the rich characters and settings of our IP.

To reach them, we have two key tools: our retail chain and our digital content. In retail, we showcase the Warhammer hobby and offer a fantastic customer experience. Our digital offering has never been richer. Through warhammer-community.com and social media we reach thousands of people every day, showing them the very best aspects of the Warhammer hobby and inviting them to join our global community of enthusiastic fans.

Our retail channel is supported by our own online store (it has the full range of our products) and our independent stockist and trade accounts across the world. These independent accounts do a great job supporting our customers in parts of the world where we either have not yet opened one of our stores or where it is not commercially viable for us to have one. Our long-term goal is to have all three channels (retail, trade and online) growing in harmony. We will always have more independent accounts than our own stores. Our strategy is to grow our business through geographic spread, growing all of the three complementary channels.

The fifth element is being focused on cash. By delivering a good cash return every year we can continue to innovate, surprise and delight our loyal existing customers and new customers with great products. To be around forever we also need to invest in both long-term capital and short-term maintenance projects every year, pay our staff what they have earned for the value they contribute and deliver surplus cash to our shareholders. Our dedication and focus should ensure we deliver on time and within our agreed cash limits.

We measure our long-term success by seeking a high return on investment. In the short term, we measure our success on our ability to grow sales whilst maintaining our core operating profit margin at current levels. The way we go about implementing this strategy is to recruit the best staff we can. We look for those with the appropriate attitude and behaviour a given job requires and for those who are aligned with our principles and who are quality obsessed. It is also important that everyone we employ has a real desire to learn the skills needed to do their job and has a great attitude towards change. To support them, we offer all of our staff both personal development and skills training.

Our brands

We have originated and are in control of a number of strong, globally recognised brands with their own identities, associations and logos.

Our key consumer facing brand is 'Warhammer' - this unites all aspects of the Warhammer hobby - collecting, building, painting, playing, reading, watching, gaming, etc. in the worlds of Warhammer.

We have two main universes/settings - our dark, gritty fantasy sci-fi universe, which encompasses 'Warhammer 40,000', 'Warhammer The Horus Heresy' and 'Necromunda' and our unique fantasy setting that includes 'Warhammer Age of Sigmar', 'Blood Bowl' (albeit a tongue in cheek parody) and, the soon to be released, 'Warhammer The Old World'. We believe our IP to be among the best in the world.

We continue to add to the depth of these worlds with an ever evolving range of miniatures that we hope will keep hobbyists engaged and excited for a lifetime.

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The Warhammer settings are incredibly rich and evocative backdrops. They're populated by more than three decades of fantastical characters and comprise thousands of exciting narratives. We are committed to making it easier than ever for people to discover, engage with and immerse themselves in our IP. Aided by a small, senior team we have already begun to find new partners, and new ways to help us bring the worlds of Warhammer to life like never before. Together, we'll continue to explore animation, live action, video games and more. We'll present the very best aspects of our rich IP, delighting audiences while always ensuring we do no harm to our core miniatures business.

Business model and structure

We are a vertically integrated business. We design, manufacture, distribute and sell our fantasy miniatures and related products. These are fantasy miniatures from our own Warhammer 40,000 and Warhammer Age of Sigmar universes. We are an international business centrally run from our HQ in Nottingham, with 78% of our sales coming from outside the UK. We have our two main factories, a paint factory, two warehouse facilities, design studios and back office support functions - all are based in or near Nottingham.

Design

We design all of our products at our HQ in Nottingham. Employing c.300 people, the design studio creates all the IP and all the associated miniatures, artwork, games and publications that we sell. Annually, these specialist staff produce hundreds of new sculpts, illustrations, rules, stories etc. enabling us to deliver new products every week and continue to keep our customers engaged and excited. In 2022/23 we invested £17.3 million in the studio (including software costs) with a further £6.7 million spent on tooling, the majority of which was for new plastic miniatures. We are committed to investing in these areas at an appropriate level every year.

All of our plastic miniatures are branded as Citadel Miniatures, a mark with an unparalleled reputation for quality. It denotes both a style and level of detail that we apply to both our own worlds (Warhammer 40,000, Warhammer Age of Sigmar etc.) and those of others, e.g. Lord of the Rings. Our resin miniatures, designed for more experienced customers, are branded as Forge World and are less widely available than their plastic counterparts.

Many customers love personalising their miniatures and our Citadel Colour paint range, brushes and accompanying painting system are designed to help everyone from the complete beginner to the most experienced painters in the world achieve great results. In the pursuit of ever better, we continually develop new types of paint and ways of using them. The result - our paints are used the world over. And for painting more than just our miniatures.

When not interacting with our miniatures, many customers enjoy reading stories set in our rich and immersive worlds. Under our Black Library imprint we publish new titles every year, from short stories and audio dramas through to full length novels and audio books. These we make available in physical bookstores, third party digital platforms and through our own retail and other specialist stores.

Manufacture

We are proud to manufacture our product in Nottingham which is the centre of expertise for our global business. It's where we started and where we intend to stay.

Logistics

Our product is distributed from our main warehouse at our HQ (Eurohub) or our warehouse (EMG) approximately 25 minutes away. These warehouses supply our two hubs; one in Memphis, Tennessee and one in Sydney, Australia. Between these four warehouses, we are able to directly supply our independent retailers, our own retail stores and fulfil our online orders.

Sell

Our core revenue is generated via three channels, our own stores 'Retail', third party independent retailers 'Trade' and our online store 'Online'. We also sell via our licensing partners. We support these channels and activities via our digital and marketing team.

Retail - our stores provide the focus for the Warhammer hobby in their geographical areas. Our stores only stock Games Workshop product. They are where we recruit the majority of our new customers. To do so, the stores don't offer the full range of our product, only starter sets, new release products and the appropriate extended range. At the period end, we had 526 of our own retail stores in 23 countries. We have 399 single staff stores: small sites, each one operated by only one store manager. We also have 127 multi-staff stores, which, like our single staff stores, are constantly reviewed to ensure they remain profitable. If not, they will probably be converted to single staff stores.

Trade - we sell to third party retailers under closely controlled terms and conditions. Independent retailers are an integral part of our business model helping us to sell our products around the world and importantly in areas where we don't have our own stores. Games Workshop strives to support those outlets which help to build the Warhammer hobby community in their local areas. The bulk of our sales to independent retailers are made via our telesales teams based in Memphis, Nottingham and Barcelona. We also have small telesales teams in Sydney, Tokyo, Shanghai, Singapore, Hong Kong and Kuala Lumpur. In 2022/23 we had 6,500 independent retailers (2022: 6,200) in 71 countries. We strive to deliver excellent service, operating in 20 languages covering all time zones. Independent retailers sell from their physical stores as well as their own online web stores.

Online - sales via our own web stores. All of our retail stores also have a web store terminal that allows our customers to access the full range from within the store. Our web stores are run centrally from our HQ.

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Licensing - we grant licences to a number of carefully chosen partners. This allows us to exploit our IP to broaden the presence and brand exposure of Warhammer around the world, often entering new markets such as media and entertainment. It also allows us to generate additional income. Currently, the majority of this income is generated by video games sales in North America, the UK and Continental Europe.

Marketing - keep us customer focused. This team acts as the bridge between our other business areas, ensuring we have a joined up approach between product (design to manufacture) and sales. Marketing spend a lot of time listening and developing a two way dialogue with our customers to make sure we keep their needs at the forefront, championing the Warhammer hobby around the globe and injecting our content and communications with a real sense of passion and fun.

Structure

We control the business centrally from our HQ in Nottingham; it is where the majority of people with experience and knowledge of running our business work. I have put in place a flat structure: the people with senior responsibility, that make all of the big decisions, report directly to me. There were a few changes during the year to help us deliver our operational plans.

I implemented a new structure during the year which is split into two main teams: an operational board team and a senior management

team. The operational board members are: the chief financial officer, a global IP and product design director, a global business to business (B2B) sales and marketing director, a global manufacturing and supply chain director, and a creative media director. I represent our own sales channels at the regular reviews.

Our global IP and product design director is responsible for our Warhammer design studios (miniatures, books and box games, specialist systems, hobby product, our publishing business - Black Library, and creative approvals for third party licences). They ensure any content that is produced, whether physical or virtual, truly represents our IP. They also support me in exploiting our IP, alongside our creative media director.

The responsibility for our trade sales is with our global B2B sales and marketing director who also manages the marketing team for all sales channels.

Reporting directly to me, our retail chain is split between two retail territory managers, one for North America and Asia and one for the rest of the world. Our online store (our biggest store) is the responsibility of our rest of the world retail manager, who also manages our biggest physical store, Warhammer World.

The global manufacturing and supply chain director manages the three factories in Nottingham and our four main warehouse facilities in Nottingham, Memphis and Sydney as well as a merchandising team to support the sales channels.

Our operations and support structure includes the chief financial officer for Games Workshop who is responsible for accounts, HR, legal and compliance, and IT. They also support me in exploiting our IP by managing the licensing team.

The senior management team comprises the members of the operational board together with our global head of IT, two retail territory heads, our Group company secretary/general counsel, two HR managers (covering support and advisory, and recruitment and development). In addition, my executive assistant helps me by running a team who support the day to day running of the teams above.

Key performance indicators

The boards and management team use a number of key performance indicators to provide a consistent method of analysing performance, in addition to allowing the boards to benchmark performance against our forecast. The key performance indicators utilised by the boards can be split into key financial performance indicators and key non-financial performance indicators.

Our key financial performance indicators are:

Monthly and year to date core business sales growth by channel

This measures the core business sales growth achieved in each of our core channels on a monthly and year to date basis.

Monthly and year to date core gross margin

This measures the core gross margin achieved on core sales after taking account of the direct costs, depreciation of manufacturing equipment and the costs of shipping our product to customers/stores on a monthly and year to date basis.

Year to date core operating profit percentage

The ratio of core operating profit against core revenue, as a percentage. This is considered to be a measure which reflects sales and costs under our direct control.

Monthly and year to date core operating profit

This measures gross profit less operating expenses for the core business on a monthly and year to date basis. This is considered to be a measure which reflects sales and costs under our direct control.

Year to date licensing revenue

This measures licensing revenue and cash earned from licensing. These measures reflect revenue which is not under our control.

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Our key non-financial performance indicators are:

Number of own stores by territory

This measures the number of our own stores which is an indicator of our global reach.

Number of ordering stockist accounts by territory

This measures the number of trade outlets that have ordered from us in the last six months. It is an indicator of our global reach and the health of our trade account base.

Customer engagement

We measure this through our owned content channel Warhammer-community.com and reach delivered through our social platforms.

Shareholder value

We believe shareholder value is created, primarily, by not destroying it. We have no intention to acquire other companies, nor to dispose of any of those we own.

We return our surplus cash to our owners and try to do so in ever increasing amounts. A 'working cash buffer' of three months' worth of working capital requirement has been set aside alongside six months' worth of future tax payments before deciding how much cash is truly surplus for the purpose of declaring dividends.

Review of the period

Another record year for Games Workshop - the business and the Warhammer hobby are in great shape.

It has been another exciting year. After a relatively slow start for us, we finally got into our rhythm and have delivered profitable sales growth in all of our three channels, and in all major countries (excluding Russia, where we stopped selling in March 2022). It was great to see the team effort in the second half focused on executing our operational plan rather than allowing ourselves, at times, to get distracted by external events out of our control. There were lots of details to get right everywhere and, as always, the global team has delivered again. We have controlled our costs well and improved our gross profit and as a result our cash flow has been great; allowing us to return £136.5 million to our owners during the period. Our staff have once again been amazing; thank you and well done to you all.

Our operational plan is designed to give us the best chance to succeed every month so it was rewarding to see us finish the period with seven months of consecutive Group core revenue growth against the prior period. Core revenue growth for the period at constant currency finished Retail +16.9%, Trade +9.3% and Online +3.0%.

We have been focused on recruiting new customers, improving our customer service and at the same time aligning our stock forecasting and delivery to our ambitious operational plans: getting the right products to the right locations at the right time. Easy to say but by its very nature forecasting (trying to predict the future) is an impossible task to actually get right. We have been investing in factory and warehouse capacity and our new facilities are starting to go live. We are now improving our end to end processes and our communications about our product ranges with our customers, retail store managers, trade teams and customer service teams. Our new forecasting team still have some hard work to do; we don't want to underestimate demand but too much cash tied up in stock is not great either.

We also take an ambitious approach to aligning ourselves with broader stakeholders' opinions on how we run Games Workshop. We have, in the period reported, continued our focus on environmental, social and governance (ESG) areas. The board, operational board and our senior managers carried out a thorough review of our carbon footprint which was supported by third party specialists. In summary, we have committed to significantly reducing our scope 1 and 2 emissions over the next 10 years. We have a detailed plan and so we believe it is achievable.

Morale at Games Workshop is upbeat: we are doing OK but inflation and the related higher interest rates are clearly an ongoing concern for most of our staff. During the period, we continued to look at relevant ways to support our staff. We have increased pay across the Group by on average 4.9% (supporting fully the increase in UK national living wage to £11 per hour) and following a review of our family leave entitlement, our maternity and adoption leave entitlement has increased from 6 weeks to 18 weeks at full pay. Paternity leave will increase from 1 to 2 weeks at full pay. We will continue to keep staff benefits under review.

In line with our Group Profit Share Scheme, and for their outstanding contribution to these results, we have paid each member of staff £4,000 this period (2022: £3,500), in total £11.6 million (2022: £9.9 million).

Design

Following the successful relaunch of Warhammer The Horus Heresy in June 2022, we have released a steady flow of new plastic miniatures, for what was originally a resin only range, allowing ever more trade accounts and hobbyists to access this part of the Warhammer hobby. February saw the release of the novel 'The End and the Death', the first part of the climactic finish to the legendary storyline behind this miniatures range which began in 2006 and over 60 novels ago!

The second half of the year also saw some fantastic new miniatures and a dramatic storyline leading into the new (10th) edition of Warhammer 40,000, released in June 2023. Fair to say that excitement for the new edition is high.

Often in the shadow of Warhammer 40,000, Warhammer Age of Sigmar continues to grow steadily with launches in the period for Seraphon, Slaves to Darkness and the wonderfully named Gloomspite Gitz, all being well received.

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