GW stock drops 10% after cryptic warning to investors

[Red_Shift]

I'm amazed we've gone so long without a significant new space marine release. I wouldn't be surprised if there is a bit of buyers fatigue with all these sets like wake the dead.

[Master Commander Ajax]

To be fair if you believe everything you hear about Brexit in the UK at the moment then you’d be forgiven for thinking it actually was an impending Black Crusade.

[Robbienw]

I'm amazed we've gone so long without a significant new space marine release. I wouldn't be surprised if there is a bit of buyers fatigue with all these sets like wake the dead.

 

 

Yeah, I find this amazing too. There has not been a major marine release this year, just a few bits.

 

I suspect Primaris sales haven’t been as good as GW expected, and they are having a bit of a rethink. Could explain why it is taking so long for Primaris wave 2 to come out; maybe they are having a bit of a redesign? There was a lot of talk last year when they came out about GW having lots more designs in the pipe for them to come, yet nothing except for a few lieutenants has appeared 16 whole months later.

 

Lack of major space marine release for another year could cause trading uncertainties in 2018 was to 2019, given how much revenue they bring in!

[Xenith]

Brexit, naturally. This warning comes on the tail of another breakdown in negotiations.

[redmapa]

Im with the majority, this seems like GW predicting more drops in the stock due to external strife like brexit, tariffs or whatever caused the market drop in the Uk the other day, they are just getting ready to get hit.

[Scammel]

Im with the majority, this seems like GW predicting more drops in the stock due to external strife like brexit, tariffs or whatever caused the market drop in the Uk the other day, they are just getting ready to get hit.

It's worth bearing the market drop came at a time when negotiations were speculated to be going well, thus strengthening the pound a little over a week ago. Much of the market overreaction to speculation is just that - a natural overreaction - and GW simply isn't presently in a position to be hurt by much more than FX volatility.

 

In fact, going forward it's not very clear to me how GW stands to be directly affected by much else going forwards. It's contingent on some form of deal (and I would stake my professional reputation on some sort of deal manifesting), but tariffs have tacitly been a non-issue for about a year and the raw materials GW needs aren't time-sensitive in a way that, say, produce is, so extended customs processes needn't be an issue (especially if GW applies for Authorised Economic Operator status, which I assume it has done). FX fluctuations could seriously hurt, but I'm not sure how it stands to be affected by the immediate mechanics of Brexit, so to speak.

[Subtleknife]

It's still only touching the 180 EMA line on the one day chart and apart from the recent dip it is still showing a nice up trend, it will be interesting to see whether it rebounds off the 180 EMA like it has done as far as I can see going back to May last year, could make a tidy profit for very little work.

[Lemondish]

I'm amazed we've gone so long without a significant new space marine release. I wouldn't be surprised if there is a bit of buyers fatigue with all these sets like wake the dead.

 

They probably just looked at the upcoming release schedule, realized there were no significant new space marine releases, and thus decided to warn folks ahead of time ;)

[N1SB]

Hi Fraters! I'm just waiting a bit to visit the 500th Warhammer Store to join their display, but I saw this, thanks for starting a thread.

Summary: IMHO it probably isn't a big deal, and there might honestly be a positive nugget here. I also agree with many of your points, even/especially the funny ones.

I'll share my thinking.

+++ The Actual Statement(s) +++

Following on from the Group’s update in September, trading to 7 October 2018 has continued well. Compared to the same period in the prior year, sales are ahead and profits are at a similar level to the prior year.

However, the Board remains aware that there are some uncertainties in the trading periods ahead for the rest of the 2018/19 financial year. A further update will be given as appropriate.

Link: https://investor.games-workshop.com/2018/10/18/trading-statement-4/

+++ I don't think "Uncertainties" are the focus, but are definitely a factor, but we've seen it before +++

The news article focuses on the "uncertainties" paragraph, which is a fair point. It IS kinda cryptic, therefore scary, not in a good way. For GW investors, it has always formally listed a set of risks & uncertainties, the same ones, year after year: a ERP change (which seems never to be complete), recruitment, supply chain management, range management, distractions. Now they added innovation and IP exploitation, such as looking for movie and/or toy deals that GW itself talked about.

The Brexit and tariffs, etc., practically affect all those old risks & uncertainties, like you guys already said. That's not new. Like, yes, there was another breakdown in Brexit negotiations...but has there been any Brexit negotiation that wasn't a breakdown? It's business as usual.

To illustrate this point, GW used the EXACT same line awhile back, copy & pasted from March 2017:

Games Workshop is pleased to announce that the sales and profit growth, that was discussed in the January 2017 trading update, continues. Income from royalties receivable is also ahead of expectations. In light of the above, profits for 2016/17 are likely to be materially above market expectations.

Sales and profits have further benefitted from the continuing favourable impact of the weaker pound. However, the Board remains aware that there is some uncertainty in the trading periods ahead for the rest of the 2016/17 financial year. A further update will be given as appropriate.

Link: https://investor.games-workshop.com/2017/03/06/trading-statement-2/

In short, I think this is GW's go-to official statement regarding their listed risks & uncertainties, or the Brexit, or it's just a throwaway line. Like how companies say "we continue to strive for excellence" and "putting people 1st". It doesn't seem like a bad problem, it's just business as usual.

+++ "Sales Ahead", but "Profits At Similar Level" only? +++

This isn't apocalyptic, but I think this is the biggest reason for the 10% drop in share price (ouch). It's not even a huge deal.

One trend/pattern is their revenue/sales and profits track pretty well with each other, as you can see here. You can see they're pretty parallel for awhile now:

Basically, for the past dozen years, revenue and operating profits usually go up or down together at about the same rate. Sometimes GW makes some cost-cutting measures, that improves profitability, but the overall trend is where one goes, so does the other, like those fish that swim together in the same direction.

GW tightly manages its overall costs. Any given year...good or bad...their Cost of Sales + Operating Expenditures is always about 100-something million pounds. For example, n both their worst year 2007 where they were losing money, and in their turnaround year 2016, those costs were around 113 million GBP.

So when GW says sales are ahead and profit is at a similar level, that suggests sales are up and profits are level, when they usually go up and down together. This makes me think those fish suddenly broke off from swimming together to different directions. It makes me look around to see what cause them to scatter.

I attribute this factor to that share price drop of 10% (ouch) in relation to something you guys already said. Profitability obviously leads to dividends paid to shareholders which obviously affect the share price. There's some automated trading bot(s) out there that literally changed their forecast for profitability to "a similar level to the prior year" because that's what GW said and are trading at a different price, thus causing that 10% drop.

(I also agree with your points about how GW has got the spotlight as of its turnaround. People noticed the stock, but also notices any slight twitch it makes. The spotlight giveth, and taketh away, it's the life of a rock star.)

+++ Conclusions +++

I liked the article, learned Kirby's really out now, I agreed with the other points, I just didn't weigh the points equally. I also agreed with and reached similar conclusions to yours, as you can see, I might've come from a different direction but we're on the same page. I was building on a lot of your points, in fact.

But the biggest thing is sales are up, but profits are level. Which leads me to ask: where did that money go?

I think maaaybe GW's making substantial but not massive investments this quarter. Might be up to single-digit millions. Still beaucoup bucks! I just don't know what. More property, plant, equipment? Was there progress on the movie/toy deal front, that's why it's considered an uncertainty?

Edit - I made a mistake, thanks to Brother Tom's reply below for correcting me, in that if there was an issue with profitability, it would be something related to Cost of Sales + Operating Expenditures. Like they're hiring more people. More property, plant, equipment wouldn't fall into those.

[Arkhanist]

They have had to do a substantial investment in plant to keep up production with increased range of kits that's driving sales (they're adding new plastic faster than they kill the old) and I know they were constrained by space and power, so that may be costing more than originally projected, and thus the split between sales and profits?

 

Imminent substantial Brexit export problems should be priced in by now, as that's been on the cards for a while for anyone paying attention.

[Brother Casman]

Thanks for the insights, folks! I did stumble across this elsewhere on the web: GW Nottingham Expansion. Perhaps the profits went towards the second phase of construction mentioned?

[Frater Antodeniel]

The "no-deal" brexit may have forced GW headquarters to be cautious, taking precautions as to the where such things may lead.

 

Also speaking of investments, while i have completely no idea of how much such a thing can cost, GW constructed an extensive solar panel setup atop their main factory as it reported in this community article from august, https://www.warhammer-community.com/2018/08/09/9th-aug-a-real-life-solar-enginegw-homepage-post-2fw-homepage-post-4/ .

 

Maybe it is one part of the explanation^^.

[N1SB]

Brothers!  Outstanding "know the heavens, know the earth" (i.e. the larger environment).  Just back from 500th store, will think on this.  Slept 2 hours last night.

[carlisimo]

The "no-deal" brexit may have forced GW headquarters to be cautious, taking precautions as to the where such things may lead.

 

Also speaking of investments, while i have completely no idea of how much such a thing can cost, GW constructed an extensive solar panel setup atop their main factory as it reported in this community article from august, https://www.warhammer-community.com/2018/08/09/9th-aug-a-real-life-solar-enginegw-homepage-post-2fw-homepage-post-4/ .

 

Maybe it is one part of the explanation^^.

I have a hard time accepting that it’s due to Brexit because there’s nothing new on that front. Were British investors more confident about the UK’s bargaining position than the rest of us think they should’ve been? I guess that would do it.

 

I suspect it’s more about trouble expanding their manufacturing capacity. GW’s had trouble restocking things like Kill Team terrain and starter boxes, and one rumor going around is that their HQ expansion outstripped the electrical grid’s capacity in that part of town. That would explain the solar panels.

 

Wishful thinking, but I wouldn’t mind if those of us upset at FW’s regional price hikes were having an effect on revenues.

[Zodd1888]

It's probably relative to Brexit and the investment into their manufacturing. Hedge your bets and take the hit right now, lowering the threshold of how the actual drop in the market may harm the company, and if things turn out alright or better the stock rebounds well. A little scary, but then it isnt if they're actually correct because they prepared.

[TheOneTrueZon]

GW taking a page out of the Elon Musk playbook?

 

Spook investors to see which way the wind is blowing. Wild times.

 

 

 

edit - Also in terms of environmental issues coming to bear upon industry & society, there's a lot of talk of banning plastic in various forms and other companies talking about alternatives. There's probably a lot of sprue material that has ended up in the great pacific plastic garbage zone.....

[Calyptra]

Also in terms of environmental issues coming to bear upon industry & society, there's a lot of talk of banning plastic in various forms and other companies talking about alternatives. There's probably a lot of sprue material that has ended up in the great pacific plastic garbage zone.....

That's a serious issue that sometimes nags at the corners of my mind. (Why does my mind have corners? Are minds supposed to have corners?) Also, I will cackle hysterically for an uncomfortably long time if they end up going back to metal. (And I'll be just fine with it; most of the models I assemble/convert and paint these days are metal anyway.)

[Chaos Lord Tom]

Please note that profit is not affected by investments in the year they are engaged, cash flow is but not profit.

 

They may have committed to higher structure costs (mainly payroll) tu support continuous growth explaining profit stability.

[Panzer]

 

Also in terms of environmental issues coming to bear upon industry & society, there's a lot of talk of banning plastic in various forms and other companies talking about alternatives. There's probably a lot of sprue material that has ended up in the great pacific plastic garbage zone.....

That's a serious issue that sometimes nags at the corners of my mind. (Why does my mind have corners? Are minds supposed to have corners?) Also, I will cackle hysterically for an uncomfortably long time if they end up going back to metal. (And I'll be just fine with it; most of the models I assemble/convert and paint these days are metal anyway.)

I don't think I'd continue the hobby if they'd go back to metal. So glad that's a thing of the past even tho the weight was nice.

I don't believe they'd ever do that anyway. If they want to reduce the amount of plastic sprue getting into nature I can see them doing something more like hirering people to clip all the bitz off the sprue and sort them into better degradable plastic bags instead.

Of course that would raise the price and we'd lose the handy numbering for the assemble manual on most bitz but I guess that's probably the best solution. At least they would have control over the sprue waste and could even re-use them for new models.

[Mostwanted]

 

 

Also in terms of environmental issues coming to bear upon industry & society, there's a lot of talk of banning plastic in various forms and other companies talking about alternatives. There's probably a lot of sprue material that has ended up in the great pacific plastic garbage zone.....

That's a serious issue that sometimes nags at the corners of my mind. (Why does my mind have corners? Are minds supposed to have corners?) Also, I will cackle hysterically for an uncomfortably long time if they end up going back to metal. (And I'll be just fine with it; most of the models I assemble/convert and paint these days are metal anyway.)

I don't think I'd continue the hobby if they'd go back to metal. So glad that's a thing of the past even tho the weight was nice.

I don't believe they'd ever do that anyway. If they want to reduce the amount of plastic sprue getting into nature I can see them doing something more like hirering people to clip all the bitz off the sprue and sort them into better degradable plastic bags instead.

Of course that would raise the price and we'd lose the handy numbering for the assemble manual on most bitz but I guess that's probably the best solution. At least they would have control over the sprue waste and could even re-use them for new models.

I can't see them getting staff to clip the sprues for us before packaging. That would be a monumental amount of work that would cost GW a fortune. This would push the cost of the product up a lot to compensate their extra costs. Also, I wouldn't want someone else clipping my parts off, in case they damage any details on the parts.

 

GW also won't go to metal, surely that would be to impractical to make all the multi part models like that? Also would again push costs up for both parties.

 

Plastic is here to stay for the model making community. The thing GW could do is push the in house recycling of sprues. Have a collection point in stores that ends up going back to their production facilities where they can be recycled there.

[Panzer]

 

 

 

Also in terms of environmental issues coming to bear upon industry & society, there's a lot of talk of banning plastic in various forms and other companies talking about alternatives. There's probably a lot of sprue material that has ended up in the great pacific plastic garbage zone.....

That's a serious issue that sometimes nags at the corners of my mind. (Why does my mind have corners? Are minds supposed to have corners?) Also, I will cackle hysterically for an uncomfortably long time if they end up going back to metal. (And I'll be just fine with it; most of the models I assemble/convert and paint these days are metal anyway.)

I don't think I'd continue the hobby if they'd go back to metal. So glad that's a thing of the past even tho the weight was nice.

I don't believe they'd ever do that anyway. If they want to reduce the amount of plastic sprue getting into nature I can see them doing something more like hirering people to clip all the bitz off the sprue and sort them into better degradable plastic bags instead.

Of course that would raise the price and we'd lose the handy numbering for the assemble manual on most bitz but I guess that's probably the best solution. At least they would have control over the sprue waste and could even re-use them for new models.

I can't see them getting staff to clip the sprues for us before packaging. That would be a monumental amount of work that would cost GW a fortune. This would push the cost of the product up a lot to compensate their extra costs. Also, I wouldn't want someone else clipping my parts off, in case they damage any details on the parts.

 

GW also won't go to metal, surely that would be to impractical to make all the multi part models like that? Also would again push costs up for both parties.

 

Plastic is here to stay for the model making community. The thing GW could do is push the in house recycling of sprues. Have a collection point in stores that ends up going back to their production facilities where they can be recycled there.

 

 

Well of course they could put more machines to work for that task as well but that would be an even bigger investment since they don't have any of those yet. ^^

[N1SB]

I done goofed. Sorry about that guys, you gave good answers but I outright asked the wrong question. Many thanks to Brother Tom for catching it and correcting me:

Please note that profit is not affected by investments in the year they are engaged, cash flow is but not profit.

They may have committed to higher structure costs (mainly payroll) tu support continuous growth explaining profit stability.

You're absolutely right. I thought something like a new office building or some new tech like giant solar panels sounded right at the time, but it's the way profitability is counted, it would be something like payroll, like what we think of as ongoing cost. I asked the wrong question. Seriously, I had a brain fart, I literally talked about Cost of Sales and Operating Expenses in the same post, what's wrong with me.

So for example, something like, y'know, everyone at GW getting a small raise (IMHO I think they deserve it) would be something that could explain it.

And you guys rightly mentioned GW bought a bunch of new property, plant, equipment last year to keep up with their growth, but if that's not enough...maaaybe paying double overtime and stuff? That would account for the difference.

But I'm seriously kicking myself here because there's something I SHOULD have thought of at the time of writing, as I was heading to the 500th Store. Here's GW's Operating Expenses:

The big red slice of pie is Retail, a.k.a. Warhammer Stores, so it's what I'd instinctively turn to. Now, GW outright called themselves out on the profit issue, so I don't think it's a tiny amount, it'd be beaucoup bucks. Something like that massive piece would maaaybe make sense, I dunno.

I was going to/coming back from the 500th Warhammer Store, which happened to be in my hometown. But although they don't get as much attention, there was a new 499th store, 501st, 502nd, 503rd...etc., to say nothing of new things like things like the Warhammer Cafe/Citadel, that sort of thing. It's rent, which is always beaucoup bucks, plus the hiring/training of new store managers.

So again, maaaybe there's a slew of new Warhammer Stores that they just signed leases for, setting up, etc.? We just got a 3rd store in my city, that's a good many stores now in this very packed Hive City. Do you guys notice new stores in your area? That's definitely a good thing.

[Panzer]

 

Do you guys notice new stores in your area?  That's definitely a good thing.

 

I wish. Especially now that the local FLGS closed last month and I just noticed my Mephiston Red dried up after moving. :D

[Kastor Krieg]

There's still just one in Poland - and I don't expect more, because every other FLGS in the country is pricing them out, selling at -20% o -30% MSRP.

[Panzer]

There's still just one in Poland - and I don't expect more, because every other FLGS in the country is pricing them out, selling at -20% o -30% MSRP.

 

That's pretty common tbh. GW shops don't make much money. They are mostly there to get player into the hobby. GW earns more from FLGS selling their products than from their own shops anyway. ^^