Business Breakdowns
· Matt Reustle
[00:00:00] S0: I'm still amazed at that ability to transition from being known for distribution, manufacturing, all of that into building out this world-building, storyline, and all that goes with it because that is such a massive undertaking, and takes such creativity, and a special type of gene. So, more credit to them. I think you see now everybody's just dying to get a Wordle created and there's so much demand for people who can make games like that and get them attached to, let alone this. On the point of where margins go, are there any either headwinds or tailwinds where you expect them to materially change from the level that they're at? Obviously, if you have a mix shift, which sounds like it could theoretically happen in the future if you get more online consumption. But is there anything that you think would materially change that trend line from where they are today?
· Todd Wenning, Matt Reustle
[00:00:00] S1: So on the positive side, we touched on the network effects building, and the manufacturing facilities are high fixed costs. They have more throughput coming through them that should increase margins. The risk, you know, it's really trying to stay relevant because network effects are great when your product's relevant and they can unwind just as fast when you're irrelevant. That is something, I'm always keeping my eye on. Are they staying interesting to their fan base? One of the risks is that they gouge prices, right? They push prices too hard. And that's a common piece of feedback you see online. That doesn't mean people stop buying it, but people are saying, “Hey, this is just getting too expensive for me.” And, so I think Games Workshop does a good job, in my opinion, of stewarding that and thinking longer term. They have a very long-term view. I don't think that they are trying to maximize short-term profitability at the risk of long-term relationships and gains. But that's certainly a risk if they get to the point where they have to raise prices due to inflation, and that just gets out of control for their core customer. [00:00:00] S0: You started looking at it in '19. And that's certainly a tenure at this point in '26 of looking at the business and its history. Do you have any sense of whether it has ever had stretches of time where it maybe went out of popularity or lost some of the luster that was associated with it?
· Todd Wenning
[00:00:00] S1: For sure. If you look at the chart, you can see where it falls apart. What happened was they got the license, the agreement to manufacture the Lord of the Rings miniatures, those games. It was such a bonanza. I'm sure you can remember in the 2000s how big Lord of the Rings was, and they had three movies and everyone got really excited about it. What happened to Games Workshop was they kind of took their eye off the ball when it came to investing in their own IP. They were just making so much money working with Lord of the Rings that they weren't keeping their IP fresh. When Lord of the Rings movies stopped coming out, that traffic stopped. Now they didn't have fresh IP. They got in some real challenges. In 2008, there was a real scare that they might go under. That was an important moment. And I think a lot of great companies, if you look back at their history, there was probably a moment somewhere along the line where they had a near-death experience. Great companies say, we're never doing that again. We will not take on debt. We won't do whatever got us in trouble the first time. We're going to fix that. And that's certainly what Games Workshop has done. And so again, it's just super critical that they continue to invest in their IP. They release new editions, and so that keeps the IP fresh. Some people might say, oh, I didn't like this edition or whatever, but they'll buy the next one. The idea is just keep it fresh, keep it going, investing in the business, staying relevant. That's the key to Games Workshop's business.
· Matt Reustle, Todd Wenning
[00:00:00] S0: Is there a creative director that sits on top of managing that IP? I think a lot of the success of Marvel and those movies should be attributed to Kevin Feige, who was a diehard fan and made sure that evolution into the theater was done with thoughtfulness around the most enthusiast Marvel fans, but could also be consumable by normies like myself. How does Games Workshop approach that? Do they disclose who looks over it? What's the storyline there? [00:00:00] S1: They have a very unique organization as well. So, it's a flat organization. It's not a strict hierarchy. They actually have it set up where there's two groups. One group is focused on core retail. So, dealing with the stores, dealing with manufacturing, and there's another group that's focused entirely on IP. They take that IP part of their business extremely seriously, as they should. That's, I think, a key to Games Workshop's success. This modern success post-2008 is that they've realized we really need to build up this IP again, make a deep connection with the users and the game players. [00:00:00] S0: Back a bit to the financial model or the spreadsheet-oriented questions. In terms of capital allocation, I assume with EBITDA margins at 40%, a decent amount of that flows into free cash flow. What do they invest in if they do have to reinvest CapEx? And how would you just describe the overall capital allocation framework for the business? [00:00:00] S1: They have a very unique approach to returning capital to shareholders. I think their average dividend payout ratio is about 80%.
· Todd Wenning, Matt Reustle
[00:00:00] S1: They have a very unique approach to returning capital to shareholders. I think their average dividend payout ratio is about 80%. [00:00:00] S0: Very UK of them. [00:00:00] S1: It is very dividend focused. There's another company in the UK called Admiral Group, which is a car insurance company. They have a very similar process where they figure out, here's all the cash that came in. We're going to keep a buffer, make sure that we are able to be secure in case there's COVID or something different comes up, an emergency. And whatever's left over, we give it to our shareholders. It's very simple. I believe they have authorization to buy back stock, but I don't believe they've done it before. They haven't really had a 2008-type period where the stock was super cheap either. Their approach is, “Hey, we're just going to give you whatever is left over.” I think it's a very shareholder-friendly approach, especially for their type of business. Because you can imagine, being as cash-rich as they are, they could easily fall into the empire-building trap, where they just start buying up studios and all these sorts of things. And they are just relentlessly focused on what they do. I think that is the right capital allocation process for them. [00:00:00] S0: And you mentioned a bit about this stock not getting overly cheap. Do they have a way of thinking about valuation? Or do you have a way of thinking about – whether it's PE or anything else, just to frame the valuation framework that you would use for a business like this?
· Matt Reustle, Todd Wenning
[00:00:00] S0: And you mentioned a bit about this stock not getting overly cheap. Do they have a way of thinking about valuation? Or do you have a way of thinking about – whether it's PE or anything else, just to frame the valuation framework that you would use for a business like this? [00:00:00] S1: For this type of business, I think because it pays such high dividends, really cashflow oriented, a discounted cashflow model is what I use. I forecast what I think is going to happen with the margins and figure out what that turns into cash, and then discount that cash back to the present. And that's how I model the business. You might look at the stock today, I think it's trading for about 30 times earnings, which is not optically cheap. But if you think about the potential for margin increase and this network effect acceleration, we might look back and say, that wasn't too bad to pay. [00:00:00] S0: You had a very nice write-up recently where 40 times earnings, I think, was the actual headline – is actually cheap. I often think that there are some impressive businesses out there that are like that and you need to look for characteristics. And I can see your angle here, certainly. And 30 times, not 40 times. More reason. On the risk side of the equation, I think we've kind of alluded to several throughout, or what you would keep your eye on the most. Is there anything else that you would add to it, or one in particular that you would highlight as the risk that you think most about for the business?