Games Workshop: Impressive business fundamentals increasing stock's attractiveness

Games Workshop (LON:GAW) continues to boast impressive business fundamentals while simultaneously experiencing strong growth. With the stock down over 20% from its 52 week high and management continuing to make strategic investments in its long-term global growth runway, shares look attractive right now.

As makers of top quality miniature action figures for fantasy gaming (such as the popular Warhammer franchise), the company takes great pains to differentiate itself from the competition through what it calls its “Fortress Wall” (continued investment in product quality and intellectual property) and its “Fortress Moat” (its 400+ Games Workshop stores which teach customers how to collect, paint, and play with their miniatures and games).

It is highly selective in picking these store operators, recognising that they serve as brand ambassadors and are as involved in making gaming disciples as they are in simply selling products at a profit. Finally, in areas where it has not yet been able to build out a network of individual stores, the company utilises experienced local distributors alongside the Games Workshop Webstore, which serves as a virtual equivalent to the individual physical stores.

While it does invest heavily in its products and people, the company offsets these expenditures by running a very lean, low-risk operation elsewhere: they forgo expensive corporate offices, prime rent shopping locations, and mass-market advertising campaigns. Furthermore, they have never acquired an outside business and never plan to, instead choosing to focus solely on running an efficient organically-growing, debt-free niche business. Whatever excess cash they generate from running and reinvesting in their business they return to share holders.

Though the UK market is fairly mature, management sees a vast growth runway internationally and is upgrading the business’ capabilities to reach this large potential market. It has been investing in improving and expanding its talent recruitment, merchandising, logistics, marketing, IT, and manufacturing systems as it expands into new markets in South America and Asia.

The most significant risk it faces moving forward (beyond potential changes to its vital European market from Brexit) is potential scaling difficulties and inefficiencies (in both its IT and employee networks). Successfully growth will depend on effective communication and execution between management and the company’s various moving parts across the globe. 

If the company can successfully execute and mitigate Brexit-related risks, significant upside can come from continued growth. Last year retail sales grew by an impressive 27%, backed by 27 net new store openings. With this year’s store growth focus on the United States, impressive results will likely continue given the strong US dollar and sound economic fundamentals in the country.  

Online sales also grew at 37% last year. With additional investments in website improvements, the e-commerce boom in the United States, and a growing brand presence around the world, this channel should continue to fuel strong growth. With earnings per share nearly doubling last year, ambitious growth projects in place for the foreseeable future, a conservative self-financed business model, and a nearly debt-free balance sheet, Games Workshop appears to be a buy.