The Games Workshop (LSE: GAW) share price fell when markets opened today after the wargaming and fantasy miniature specialist reported a slump in its half-year profits.
Key facts
Games Workshop said that sales were unchanged at £211.7m during the six months to 27 November, excluding exchange rate differences.
Management said the performance was led by “a great recovery in all channels in Australia, Canada and the UK”. The firm is also expanding in North America, where it added 119 trade outlets during the half year.
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However, an increase in manufacturing costs and other expenses meant that pre-tax profit for the period fell by 6% to £83.6m.
Fortunately, cash generation remained very strong, resulting in a cash balance of £68.1m at the end of November. That’s 64% higher than the £41.4m balance reported one year earlier.
A big chunk of this cash will now be returned to shareholders, who will receive a 130p per share dividend in late February. This payout will bring the total dividend declared so far this year to 295p. That’s equivalent to a dividend yield of 3.3% at today’s £87 share price.
What do the numbers mean?
The news seem to confirm market expectations that sale growth of the group’s flagship Warhammer products may be cooling now that the pandemic is over. Events outside the firm’s control have also hit sales. Games Workshop estimates £1m of lost sales in China and £2m in Russia.
The firm also faced some other headwinds during the period. Sales in North America were flat, due to “slow ordering rates” among the group’s US retailers. Management said performance is expected to improve this year.
Elsewhere, IT and warehousing upgrades have also caused a degree of disruption and extra cost. The company is investing in new IT systems, including a new online store. But CEO Kevin Rountree admitted these projects are running behind. This is making it harder to support growing sales volumes efficiently.
The outlook for 2023
I don’t see any serious concerns in today’s half-year results. It’s clear to me that Games Workshop’s niche business has a big global following that seems unlikely to disappear overnight.
One exciting development is that the company has agreed to explore possible opportunities with the Amazon Studios television business. Nothing is fixed yet. But Mr Rountree is confident the world of Warhammer will be brought to the screen “like you have never seen before”.
Licensing royalties from video game and television tie-ups are a growing area of income for the firm. They’re almost pure profit, and also a great way to attract new fans.
Are the shares a buy at current levels?
Games Workshop doesn’t generally provide financial guidance. However, broker forecasts for the 2023 financial year suggest earnings per share of around 400p. That prices the stock on about 22 times forecast earnings.
I think this is a great business, but in my view the shares look fully priced at the moment. I reckon we could see better buying opportunities later this year.
