jozhik
11-05-2016, 03:50
I have got to start posting here more frequently than once a year or so. The wall-of-text drive-by act is starting to become tiresome. On the other hand, I have been busy hatching various plots...
People who fear walls of text like the plague, do skip to the "TLDR" section at the very bottom.
...
Disclaimers.
Recall that GW's fiscal year ends on May 31, and they're a U.K. company and so are on a 2-a-year financial release calendar (November and May, filed 30-45 days after period end date) as opposed to the 4-a-year schedule for U.S. companies. As such, we only have numbers through November of 2015 to play around with; nevertheless, this already captures the initial AoS wave and so is at least partially instructive. Additionally, whenever I say "fiscal year 20XX", I mean year ended May 31, 20XX; similarly, H1 20XX means the first half (six months ended November 30) of fiscal 20XX. Thus, the latest numbers we have are for H1 2016 (period ended November 30, 2016). Plus or minus a couple of days, actually, depending on the specific year.
Also note that GW, as a rule, does not break out its results by product line. Which annoys me immensely, but then so does my neighbours' Newfoundland who is apparently a) afraid of the lifts and b) believes that the only way to deal with this fear is to rhino-charge into the lift at full tilt irrespective of who else might already be in it. For those of you blissfully unaware of what a Newfoundland is, the normal adult weight for one is at around 70 kilos or 150 pounds. This particular Newfoundland is, I would say, not the smallest example of his breed, damn his oversized and incredibly malodorous hide...
...I digress. The point is that we do not have any official numbers as to how an individual product - be it AoS, a specific 40k faction, or GW paints - is doing. The one highly notable exception is Forge World, which comprises the bulk of the "Mail Order" reporting segment and some of the detailed numbers for which are available, but more on that below.
Finally, all these numbers come from GW's financial filings, all figures are in millions GBP, and any calculations like EBITDA are done the way I do them (and so may differ from how someone else would have done them).
Consider yourselves warned.
...
So.
First, let us examine total revenues for H1 going back a few years.
H1 2012 = 62.7
H1 2013 = 67.5 (+7.6%)
H1 2014 = 60.5 (-10.4%)
H1 2015 = 56.5 (-6.6%)
H1 2016 = 55.3 (-2.2%)
It is not easy to infer anything AoS-specific from these unless you are already biased, precisely because we have no product line data. For example - were the 2014 and 2015 declines due to 40k, WFB, or both? Did AoS help slow the bleeding in 2016, or was 40k having a banner year and AoS pretty much derailed it? I have no idea. I know that some people on these very boards have made claims to some effect, but unfortunately I cannot accept these as anything other than "Internet rumours" - sometimes accurate, often not very - without an actual piece of paper with numbers on it to back them up. And, yes, that bit about GW bringing back points values, which probably means something, but I have no definitive evidence to that effect. Feel the difference.
What is evident, however, is that since fiscal 2013 - does anyone remember what GW was releasing that year? - the numbers have not been particularly good. You can see a similar trend in the full-year revenues:
2012 = 131.0
2013 = 134.6 (+2.7%)
2014 = 123.5 (-8.2%)
2015 = 119.1 (-3.5%)
LTM 11/2015 = 117.9 (-1.0%) [LTM == Last Twelve Months == 12 months ended November 30]
Incidentally, more sales have been shifting into the Christmas season, though I wouldn't read too much into that just yet.
The bottom line is - if GW had thought that AoS was going to be its silver bullet for restoring sales growth, well, that has not happened. On the other hand, unless one is prepared to claim truly outstanding growth rates for 40k sales in the past year, it is unlikely that AoS is selling so badly that "the end is nigh". I hope we will know more with the full-year 2016 release (July-ish, most likely), which would incorporate the 2015-2016 Christmas season...
...oh and incidentally, no, video games do not appear to be factoring into this. GW's royalty income has been consistently small (and I don't include it in revenues in any case).
...
But wait, there is more.
In 2015, GW had decided to ditch its traditional way of reporting sales and operating profit by region - Europe, North America, etc. - and instead switch to the following three segments: Trade, i.e. independent retailers; Retail, i.e. GW stores; and Mail Order, about 90% of which is labeled "Citadel and Forge World" without breaking out which is which. Separately, Trade and Retail are also broken down along regional lines, though Trade consolidates UK and Europe while Retail counts them as separate regions. Go figure.
The point is, we only have these new segment numbers going back to fiscal 2014, but I found them interesting nevertheless. Behold.
Incidentally, in terms of size - Trade and Retail are about equal and account for roughly 80% of sales. In other words in H1 2016, Trade was 22.4 million, Retail was 21.5 million, and Mail Order was 11.4 million.
Trade:
2015 growth = -6.3% [UK/Europe -11.8%, others positive]
H1 2016 growth = +2.1% [UK/Europe +5.8%]
Maybe it's people stocking up for the AoS release. If so, and if (!) AoS has not been flying off the shelf, then Trade should take a hit for the full year 2016 because people won't be restocking quite as quickly.
Retail:
2015 growth = -4.6% [UK positive - +5.2%, but Europe is -15.2%]
H1 2016 growth = -8.3% [Europe at a ridiculous -25.2%]
I have no idea. I don't think it's store count, since they closed 13 but opened 22+3 (22 one-man and 3 multi-man). I don't think a majority of it is currency because the Euro isn't down 25% versus the Pound, last I checked. My natural inclination is to blame the French, but then I blame the French for pretty much everything anyway. Is Europe sucking wind that much economically? Are people really that worried about the mere possibility of a Brexit? Is it all just a particularly insidious plot hatched by Putin personally to reinstall Tim Kirby as GW's CEO and thus bring down Western civilization? As I said, I have no idea.
All told, Europe is still bigger than NA for GW, but is now significantly smaller than UK. When your second biggest region by revenues is crashing like that, I would like to know why...
Mail Order:
2015 growth = +3.9%
H1 2016 growth = +2.3%
I would like to console myself with the happy thought that most of this is due to the good people of Forge World. While their prices may be of the rip-your-face-off-and-laugh variety, they certainly deserve the love in my opinion. Unfortunately the line item is labeled "Citadel and Forge World", so there is no objective way to determine how Forge World by itself is doing (unless someone tells me they'd eaten Citadel, in which case all is well).
Interestingly, I doubt this is due to their customers switching to Internet vs. retail mode of purchasing (more so than in the past), since FLGS (GW or indie) is one of the primary means of meeting other players and actually playing the game. Or so I would suspect.
...
I would be remiss not to end this screed with a discussion of operating profitability and free cash flows.
I shall not repost my customary two-page rant about how "no-one cares about net income or earnings per share" and "equity analysts are dolts", and you all ought to thank me for that. Rather, I should only mention that the standard measure of a business in the industry - the measure used for valuing companies in acquisitions or in bankruptcy, in evaluating their creditworthiness, in valuing their securities, i.e. in any conceivable and significant way - is called EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization. In other words, take operating income (the money you earn from operating your stores, for example), and add back any non-cash expenses like depreciation (which is an accounting item, not an actual cost). This is how much money you generate before taxes, debt service, dividends, whatever.
GW EBITDA:
2012 = 25.7 (19.6% margin)
2013 = 25.0 (18.6%)
2014 = 19.4 (15.7%)
2015 = 21.5 (18.1%)
H1 2015 = 8.8 (15.6%)
H1 2016 = 8.0 (14.5%)
LTM 11/2016 = 20.8 (17.6%)
In the immortal words of Scooby Doo - ruh-roh.
In other words, not only are revenues sucking wind - but expenses are rising too, at least on a relative basis. I am prepared to give GW a pass for H1 2016, assuming that this is when they've expensed their AoS marketing costs (and I do not know if this is actually the case, but H1 2016 gross margins have actually improved a touch so perhaps I am on the right track) - but ye gods, they are not doing well as far as profitability goes. This is what they really need to turn around, and I'm afraid at some point it will be a matter of growing sales volume, because gross margins - computed as (revenue - cost of sales) / (revenue) - appear to have now sort of kind of stabilized in the 69%-70% range (vs. 77% in 2012). In other words, they now make roughly the same amount of money per box they sell, they just need to sell more boxes to offset their corporate costs (marketing, website, development, whatever).
And now, let's shift to free cash flow - so actual cash you generate or burn as a business after interest, taxes, capital spending, whatever - in my version, not counting any asset sales and such but including video game royalties.
2012 = pre-dividend +13.5, post-dividend -1.3 [so paid everything out to shareholders]
2013 = pre-dividend +9.6, post-dividend -8.8
2014 = pre-dividend +5.9, post-dividend +0.8 [again, full payout]
2015 = pre-dividend +5.6, post-dividend -11.0 [again burned some cash to pay a dividend]
H1 2016 only = pre-dividend -0.8, post-dividend -7.2
H1 makes sense since their H1 pre-dividend FCF tends to be flat, with most of the cash generated in H2 (Christmas season). It's the same for many retailers, by the way. But their dividends are certainly on pace with their annual average going back to 2012.
Which is a double-edged sword. If they pay everything out, the shareholders might be happy, but that's an extra 10-15 million pounds a year you could have plowed into development, or stores, or manufacturing or whatever. Or just saved it up for a rainy day. For a 120-ish million annual revenue business, that extra 10-15 million per year could have gone a long, long way. It's not like they rely on frequent equity raises to run their business, either, so at some point shareholders be damned...
...and on the other hand, even if they continue to pay everything out, eroding revenues and EBITDA translate into eroding FCF translate into lower dividends translate into unhappy shareholders. So you gave these guys (usually guys) everything you had, and they are still unhappy with you. Class, what have we learned about appeasement?
On the other other hand, dividends are a discretionary item (common stock dividends, that is - preferreds and hybrids are something else, but that does not apply here to my knowledge). So if you really, really need the money, you can choose to stop at any time. Moreover, and I cannot stress this enough, [B]GW has no debt. None. Zero. They used to have some, back when they were building out their U.S. factory operation, but not for a number of years. You cannot go bankrupt unless there is some liability you cannot pay, and without any debt the only such liability for them are basically their trade creditors - who are highly unlikely to squeeze a business that's still making money (not a lot, but whatever).
So any Internet talk of GW and bankruptcy ought to refer to Mark Twain's famous line about great exaggeration. At least based on the numbers we're seeing today - hell, even if you knock sales another 10%. [Thought experiment. Take 90% of 120 = 108 million. Let's say 100 million flat even. Let's say at that point EBITDA margin is 8%, half of what it is today, thanks to fixed costs. That's 8 million, and pre-dividend FCF is in the -5 million range. Which is tolerable, because at that point you'd assume store closures and lower capital spending on said closed stores. I.e. the business can still - hypothetically speaking - break even, before dividends, if both revenues and margins take very significant hits. The end.]
...
TLDR. Yes, you know who you are.
- We have no product line data. Hence, there is no objective and numbers-based way to draw conclusions about AoS - as of right now. More clues may be provided in the full-year 2016 release a couple of months from now. Until then it's just Internet rumours, conjectures and divinations about the real meaning of points values, and forum "debates" which really ever involve people talking past each other mainly for reasons of personal gratification.
- Nevertheless, sales excluding "Citadel and Forge World" mail order continue to erode. Especially in Continental Europe. AoS has not done anything to reverse this decline - though it is unknown whether it helped slow it or has in fact exacerbated it.
- The business as a whole is weakening, but not sliding towards bankruptcy. Which in any case is difficult to accomplish with a zero debt balance (excluding trade creditors). Can the alarms, for the moment.
- Management's commitment to paying out every last pfenning, centime and kopeika of cash flow to the greedy shareholders continues to both amuse and trouble me. It's a silly way to run a mature business, even from a shareholder value standpoint (investment in tomorrow vs. payout today), and I would infrequently argue that "shareholder value" is the best way to run any business over the long term. But whatever. The point is - when next you hear of any staff cuts or development cuts or whatever cuts at GW, don't blame AoS, blame the stupid and greedy management slash shareholders.
Here endeth the rant for this...date. I need a cup o'tea...
People who fear walls of text like the plague, do skip to the "TLDR" section at the very bottom.
...
Disclaimers.
Recall that GW's fiscal year ends on May 31, and they're a U.K. company and so are on a 2-a-year financial release calendar (November and May, filed 30-45 days after period end date) as opposed to the 4-a-year schedule for U.S. companies. As such, we only have numbers through November of 2015 to play around with; nevertheless, this already captures the initial AoS wave and so is at least partially instructive. Additionally, whenever I say "fiscal year 20XX", I mean year ended May 31, 20XX; similarly, H1 20XX means the first half (six months ended November 30) of fiscal 20XX. Thus, the latest numbers we have are for H1 2016 (period ended November 30, 2016). Plus or minus a couple of days, actually, depending on the specific year.
Also note that GW, as a rule, does not break out its results by product line. Which annoys me immensely, but then so does my neighbours' Newfoundland who is apparently a) afraid of the lifts and b) believes that the only way to deal with this fear is to rhino-charge into the lift at full tilt irrespective of who else might already be in it. For those of you blissfully unaware of what a Newfoundland is, the normal adult weight for one is at around 70 kilos or 150 pounds. This particular Newfoundland is, I would say, not the smallest example of his breed, damn his oversized and incredibly malodorous hide...
...I digress. The point is that we do not have any official numbers as to how an individual product - be it AoS, a specific 40k faction, or GW paints - is doing. The one highly notable exception is Forge World, which comprises the bulk of the "Mail Order" reporting segment and some of the detailed numbers for which are available, but more on that below.
Finally, all these numbers come from GW's financial filings, all figures are in millions GBP, and any calculations like EBITDA are done the way I do them (and so may differ from how someone else would have done them).
Consider yourselves warned.
...
So.
First, let us examine total revenues for H1 going back a few years.
H1 2012 = 62.7
H1 2013 = 67.5 (+7.6%)
H1 2014 = 60.5 (-10.4%)
H1 2015 = 56.5 (-6.6%)
H1 2016 = 55.3 (-2.2%)
It is not easy to infer anything AoS-specific from these unless you are already biased, precisely because we have no product line data. For example - were the 2014 and 2015 declines due to 40k, WFB, or both? Did AoS help slow the bleeding in 2016, or was 40k having a banner year and AoS pretty much derailed it? I have no idea. I know that some people on these very boards have made claims to some effect, but unfortunately I cannot accept these as anything other than "Internet rumours" - sometimes accurate, often not very - without an actual piece of paper with numbers on it to back them up. And, yes, that bit about GW bringing back points values, which probably means something, but I have no definitive evidence to that effect. Feel the difference.
What is evident, however, is that since fiscal 2013 - does anyone remember what GW was releasing that year? - the numbers have not been particularly good. You can see a similar trend in the full-year revenues:
2012 = 131.0
2013 = 134.6 (+2.7%)
2014 = 123.5 (-8.2%)
2015 = 119.1 (-3.5%)
LTM 11/2015 = 117.9 (-1.0%) [LTM == Last Twelve Months == 12 months ended November 30]
Incidentally, more sales have been shifting into the Christmas season, though I wouldn't read too much into that just yet.
The bottom line is - if GW had thought that AoS was going to be its silver bullet for restoring sales growth, well, that has not happened. On the other hand, unless one is prepared to claim truly outstanding growth rates for 40k sales in the past year, it is unlikely that AoS is selling so badly that "the end is nigh". I hope we will know more with the full-year 2016 release (July-ish, most likely), which would incorporate the 2015-2016 Christmas season...
...oh and incidentally, no, video games do not appear to be factoring into this. GW's royalty income has been consistently small (and I don't include it in revenues in any case).
...
But wait, there is more.
In 2015, GW had decided to ditch its traditional way of reporting sales and operating profit by region - Europe, North America, etc. - and instead switch to the following three segments: Trade, i.e. independent retailers; Retail, i.e. GW stores; and Mail Order, about 90% of which is labeled "Citadel and Forge World" without breaking out which is which. Separately, Trade and Retail are also broken down along regional lines, though Trade consolidates UK and Europe while Retail counts them as separate regions. Go figure.
The point is, we only have these new segment numbers going back to fiscal 2014, but I found them interesting nevertheless. Behold.
Incidentally, in terms of size - Trade and Retail are about equal and account for roughly 80% of sales. In other words in H1 2016, Trade was 22.4 million, Retail was 21.5 million, and Mail Order was 11.4 million.
Trade:
2015 growth = -6.3% [UK/Europe -11.8%, others positive]
H1 2016 growth = +2.1% [UK/Europe +5.8%]
Maybe it's people stocking up for the AoS release. If so, and if (!) AoS has not been flying off the shelf, then Trade should take a hit for the full year 2016 because people won't be restocking quite as quickly.
Retail:
2015 growth = -4.6% [UK positive - +5.2%, but Europe is -15.2%]
H1 2016 growth = -8.3% [Europe at a ridiculous -25.2%]
I have no idea. I don't think it's store count, since they closed 13 but opened 22+3 (22 one-man and 3 multi-man). I don't think a majority of it is currency because the Euro isn't down 25% versus the Pound, last I checked. My natural inclination is to blame the French, but then I blame the French for pretty much everything anyway. Is Europe sucking wind that much economically? Are people really that worried about the mere possibility of a Brexit? Is it all just a particularly insidious plot hatched by Putin personally to reinstall Tim Kirby as GW's CEO and thus bring down Western civilization? As I said, I have no idea.
All told, Europe is still bigger than NA for GW, but is now significantly smaller than UK. When your second biggest region by revenues is crashing like that, I would like to know why...
Mail Order:
2015 growth = +3.9%
H1 2016 growth = +2.3%
I would like to console myself with the happy thought that most of this is due to the good people of Forge World. While their prices may be of the rip-your-face-off-and-laugh variety, they certainly deserve the love in my opinion. Unfortunately the line item is labeled "Citadel and Forge World", so there is no objective way to determine how Forge World by itself is doing (unless someone tells me they'd eaten Citadel, in which case all is well).
Interestingly, I doubt this is due to their customers switching to Internet vs. retail mode of purchasing (more so than in the past), since FLGS (GW or indie) is one of the primary means of meeting other players and actually playing the game. Or so I would suspect.
...
I would be remiss not to end this screed with a discussion of operating profitability and free cash flows.
I shall not repost my customary two-page rant about how "no-one cares about net income or earnings per share" and "equity analysts are dolts", and you all ought to thank me for that. Rather, I should only mention that the standard measure of a business in the industry - the measure used for valuing companies in acquisitions or in bankruptcy, in evaluating their creditworthiness, in valuing their securities, i.e. in any conceivable and significant way - is called EBITDA, or Earnings Before Interest, Taxes, Depreciation and Amortization. In other words, take operating income (the money you earn from operating your stores, for example), and add back any non-cash expenses like depreciation (which is an accounting item, not an actual cost). This is how much money you generate before taxes, debt service, dividends, whatever.
GW EBITDA:
2012 = 25.7 (19.6% margin)
2013 = 25.0 (18.6%)
2014 = 19.4 (15.7%)
2015 = 21.5 (18.1%)
H1 2015 = 8.8 (15.6%)
H1 2016 = 8.0 (14.5%)
LTM 11/2016 = 20.8 (17.6%)
In the immortal words of Scooby Doo - ruh-roh.
In other words, not only are revenues sucking wind - but expenses are rising too, at least on a relative basis. I am prepared to give GW a pass for H1 2016, assuming that this is when they've expensed their AoS marketing costs (and I do not know if this is actually the case, but H1 2016 gross margins have actually improved a touch so perhaps I am on the right track) - but ye gods, they are not doing well as far as profitability goes. This is what they really need to turn around, and I'm afraid at some point it will be a matter of growing sales volume, because gross margins - computed as (revenue - cost of sales) / (revenue) - appear to have now sort of kind of stabilized in the 69%-70% range (vs. 77% in 2012). In other words, they now make roughly the same amount of money per box they sell, they just need to sell more boxes to offset their corporate costs (marketing, website, development, whatever).
And now, let's shift to free cash flow - so actual cash you generate or burn as a business after interest, taxes, capital spending, whatever - in my version, not counting any asset sales and such but including video game royalties.
2012 = pre-dividend +13.5, post-dividend -1.3 [so paid everything out to shareholders]
2013 = pre-dividend +9.6, post-dividend -8.8
2014 = pre-dividend +5.9, post-dividend +0.8 [again, full payout]
2015 = pre-dividend +5.6, post-dividend -11.0 [again burned some cash to pay a dividend]
H1 2016 only = pre-dividend -0.8, post-dividend -7.2
H1 makes sense since their H1 pre-dividend FCF tends to be flat, with most of the cash generated in H2 (Christmas season). It's the same for many retailers, by the way. But their dividends are certainly on pace with their annual average going back to 2012.
Which is a double-edged sword. If they pay everything out, the shareholders might be happy, but that's an extra 10-15 million pounds a year you could have plowed into development, or stores, or manufacturing or whatever. Or just saved it up for a rainy day. For a 120-ish million annual revenue business, that extra 10-15 million per year could have gone a long, long way. It's not like they rely on frequent equity raises to run their business, either, so at some point shareholders be damned...
...and on the other hand, even if they continue to pay everything out, eroding revenues and EBITDA translate into eroding FCF translate into lower dividends translate into unhappy shareholders. So you gave these guys (usually guys) everything you had, and they are still unhappy with you. Class, what have we learned about appeasement?
On the other other hand, dividends are a discretionary item (common stock dividends, that is - preferreds and hybrids are something else, but that does not apply here to my knowledge). So if you really, really need the money, you can choose to stop at any time. Moreover, and I cannot stress this enough, [B]GW has no debt. None. Zero. They used to have some, back when they were building out their U.S. factory operation, but not for a number of years. You cannot go bankrupt unless there is some liability you cannot pay, and without any debt the only such liability for them are basically their trade creditors - who are highly unlikely to squeeze a business that's still making money (not a lot, but whatever).
So any Internet talk of GW and bankruptcy ought to refer to Mark Twain's famous line about great exaggeration. At least based on the numbers we're seeing today - hell, even if you knock sales another 10%. [Thought experiment. Take 90% of 120 = 108 million. Let's say 100 million flat even. Let's say at that point EBITDA margin is 8%, half of what it is today, thanks to fixed costs. That's 8 million, and pre-dividend FCF is in the -5 million range. Which is tolerable, because at that point you'd assume store closures and lower capital spending on said closed stores. I.e. the business can still - hypothetically speaking - break even, before dividends, if both revenues and margins take very significant hits. The end.]
...
TLDR. Yes, you know who you are.
- We have no product line data. Hence, there is no objective and numbers-based way to draw conclusions about AoS - as of right now. More clues may be provided in the full-year 2016 release a couple of months from now. Until then it's just Internet rumours, conjectures and divinations about the real meaning of points values, and forum "debates" which really ever involve people talking past each other mainly for reasons of personal gratification.
- Nevertheless, sales excluding "Citadel and Forge World" mail order continue to erode. Especially in Continental Europe. AoS has not done anything to reverse this decline - though it is unknown whether it helped slow it or has in fact exacerbated it.
- The business as a whole is weakening, but not sliding towards bankruptcy. Which in any case is difficult to accomplish with a zero debt balance (excluding trade creditors). Can the alarms, for the moment.
- Management's commitment to paying out every last pfenning, centime and kopeika of cash flow to the greedy shareholders continues to both amuse and trouble me. It's a silly way to run a mature business, even from a shareholder value standpoint (investment in tomorrow vs. payout today), and I would infrequently argue that "shareholder value" is the best way to run any business over the long term. But whatever. The point is - when next you hear of any staff cuts or development cuts or whatever cuts at GW, don't blame AoS, blame the stupid and greedy management slash shareholders.
Here endeth the rant for this...date. I need a cup o'tea...