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Urbem's 'Wonderful Business' Series: Games Workshop

U.K.-based Games Workshop Group PLC (LSE:GAW) is the world's largest hobby miniatures company. The business employs a vertically-integrated operational model, retaining control over every aspect of design, manufacture and distribution in the niche market that it created for itself. Over 30 years ago, three game fanatics started the company by selling handmade, classic wooden games from their homes in London.


Games Workshop generates the majority of its revenue through the sale of fantasy miniatures and related products, and a small percentage (less than 5% as of fiscal 2019 revenue) through license royalties. To retail its products, the company leverages third-party trade accounts (47% of fiscal 2019 product sales), its owned retail outlets (34%) and online (18%). In terms of geographic breakdown, we see the most significant revenue shares in North America (38% of fiscal 2019 product sales), Continental Europe (25%) and the U.K. (25%). Games Workshop also has a presence in Asia, Australia and New Zealand, making itself a genuinely global business.

Games Workshop is best known for its iconic Warhammer games, which have built a strong brand identity and a loyal fan base. The games have rich settings, populated by more than three decades of fantastical characters and thousands of exciting narratives. The company has earned a longstanding, unparalleled reputation for producing high-quality miniatures for the games. Consumers collect, build, paint and even personalize miniatures that can be ultimately used in games played against fellow hobbyists. In addition to interacting with miniatures, many of them enjoy reading relevant stories from hundreds of titles that the company has published so far.

According to the chart below, Games Workshop generated a higher return on assets most of the time than its peers, including Hasbro (NASDAQ:HAS), Mattel (NASDAQ:MAT) and Sanrio (TSE:8136), throughout its history as a public company. The consistent outperformance indicates the management's effective capital allocation as well as the existence of economic moat.

One might think this consumer discretionary business is quite cyclical. Surprisingly, the data tells a different story. During each of the past two recessions, the company managed to grow its sales and operating incomes (see below).

When it comes to strategic planning, management sticks to its focus on the long term and the niche market within the company's core competence. The company has been consistently investing in its design studio to enrich its IP and, hence, widen the moat. We noticed the management change at the company in 2015 with Tom Kirby (currently owning nearly 4% of the company) stepping down and Kevin Rountree taking the reins. We appreciate the new management team's initiatives since then, including more product releases, invigorated licensing business and a more active online presence, accompanied by a considerable improvement in the company's return on assets.

The global board games market is expected to grow at a high-single-digit compounded annual rate and reach a total value of more than $12 billion by 2023, presenting an industry tailwind for Games Workshop. Meanwhile, the company can continue to expand globally and launch new products to recruit more hobbyists as well as upsell to existing customers. Thanks to the rich intellectual property owned and fully controlled by the company, the licensing business has been increasing its contribution to the top line and may not see any sign of slowdown for the foreseeable future.

Disclosure: The mention of any stock in this article does not constitute an investment recommendation; investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market; we do not own any stock mentioned in the article.

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This article first appeared on GuruFocus.