- Bloomsbury celebrates ‘rediscovered habit’ of reading
- Games Workshop plans international expansion
In the dreary depths of confinement, certain hobbies have become acceptable again. Activities such as crochet, embroidery and macrame – once practiced by the over-70s and the clinically bored – have acquired a certain charm during the long, long days at home. A question mark remains for investors, however. Will these activities one day have lasting appeal or is their success destined to be short-lived?
Two and a half years after the UK entered its first lockdown, there are encouraging signs. According to data from the Office for National Statistics, the proportion of online spending related to games, toys and sports equipment is still higher than before the pandemic. Gardening also continues to be popular, with sales of seeds, flowers and fertilizer continuing to increase.
This is starting to be felt by individual companies. In its annual results, the publisher Bloomsbury (BMY) celebrated the “new habit” of reading novels, adding that the pandemic had boosted sales of books that allowed customers to explore hobbies such as cooking and fitness. The reading boom is doing great things for the publisher’s performance: revenue grew 27% in the four months to June 2022, and the group repeatedly exceeded market expectations in the two last years.
We can also seek to Games Workshop (GAW), best known for its Warhammer range. Few would deny that spending hours painting “Khorne Lord of Skulls” with a small brush is a hobby in its purest form. Games Workshop has seen fantastic growth over the past five years, and the pandemic has only spurred demand for miniatures. The company has posted record results since the start of the pandemic: even this year, in the face of rising distribution costs and consumer concerns, Games Workshop increased its revenue by 12% and its pre-tax profits by 4%.
In some ways, its trajectory mirrors that of Danish toymaker Lego, which caters to an equally broad age range, and which continues to open physical stores.
Analysts are optimistic about these companies. Peel Hunt concluded that hobbies tended to be “quite resilient during a recession” – as evidenced by the global financial crisis – and said Games Workshop had plenty of new products to engage its hobby base. However, that doesn’t answer the question of whether they will remain popular in the long run.
To find out, it’s more useful to look at companies that haven’t.
Philately falls flat and Hornby goes off the rails
Stanley Gibbons (SGI) is a good starting point. At the start of 2014, the purveyor of stamps, coins, medals and rare banknotes is enjoying the joys of spring. He had made a big acquisition, he was expanding across the world and trying to create an online collectibles trading platform. Even better, the stock seemed to be cheap.
Alas: it was about to get much, much cheaper. In February 2014 – after the company had been trading rare stamps for almost 160 years – shares entered a precipitous decline and were trading at a tenth of their former price a year later. Demand plummeted as the band tried unsuccessfully to reach an interested audience, while debt ballooned and the company struggled to digest heavy acquisitions. Things got worse in 2016 when his auditors quit because the risks and uncertainties associated with Stanley Gibbons were deemed too high.
Last month, with a market cap of just over £6m, the group offered to delist from the London Stock Exchange. Its main shareholder, Phoenix Asset Management – which took a majority stake in the group in 2018 – is seeking to buy the whole company.
Phoenix has a thing for collectables: he is also the majority shareholder of Hornby (RHN), the “home of the model railways” and owner of Scalextric. Much like Stanley Gibbons, however, Hornby has had a killer stock market experience in recent years. After a series of profit warnings culminating in fears of breaching its banking covenants in 2016, shares have lost more than 70% of their value and the company now has a market capitalization of 44.5 million. pound sterling.
Shares rallied at the end of 2020 when the group returned to profitability for the first time in more than five years, but have since fallen again.
So what was wrong? In the case of Stanley Gibbons and Hornby, the request is the obvious answer. The products were too obscure, the audiences too niche, and sales plummeted. Is this the fate of hobby stocks, though, or could there have been another outcome?
Stanley Gibbons’ failure to thrive in the digital world seems significant. In 2014, the philatelist wanted to be “the Amazon of collectibles”. Its £6m market cap confirms that dream hasn’t come true, but it’s still trying to move online, appointing a new chief executive in July with a “strong background in the digital world”. A year earlier, she entered the world of virtual collecting, buying the world’s most valuable stamp and offering investors the option of fractional ownership.
Phoenix obviously thinks there’s potential here – but the strategy is unproven. At Bloomsbury and Games Workshop, however, management teams are already taking advantage of virtual opportunities. Bloomsbury’s ‘digital assets’ arm was set up in 2016 and is beating sales targets, generating £18.6m in revenue and £6.8m profit in the year to date in February 2022.
The literary world is also harnessing the power of social media – Bloomsbury chief executive Nigel Newton told a newspaper that TikTok was driving “huge sales” and creating new bestsellers, while retailer Waterstones has tables in its stores devoted to “more Tok-d on books”.
Meanwhile, Games Workshop’s revenue is increasingly supported by licensing revenue as its fantastical creations are turned into movies and video games. This approach is taken elsewhere. American toy manufacturer Mattel (US: MAT) – the mastermind behind Barbie and Fisher-Price – has seen sales growth languish in recent years. However, the group has recovered licenses for its intellectual property and is working to turn the toys into digital assets. Think non-fungible tokens with Hot Wheels cars.
strength in numbers
Back in the real world, Hornby sheds light on another important aspect of Games Workshop’s business case. Hornby customers have the opportunity to join a collectors club and attend railway shows and “steam fairs”. However, it failed to nurture as impressive a sense of community as Games Workshop.
Spanning a wide range of ages, Warhammer fans are a tight-knit bunch, using stores as hangouts – much like tech heads flock to Apple stores to try out the latest products. The group has gone to great lengths to attract young enthusiasts, and there are Warhammer conventions, painting classes and initiation sessions across the country.
In many ways, Stanley Gibbons also relies on this sense of community. Many of his financial failures were due to an inability to tap into enthusiastic collecting groups, particularly in the Far East. Much like Games Workshop, the company depends on a very particular type of customer and needs those customers to talk to each other – albeit at auction houses rather than board game cafes.
The challenge Games Workshop now faces is international expansion. Panmure Gordon analyst Alex Chatterton is confident that Warhammer will continue to grow in the United States. However, the larger Asian market could be trickier given the wider cultural divide. The group currently only has 18 stories in Asia – having closed four last year – but believes there are still “big opportunities” there.
Whether or not this is true remains to be seen. However, there is clearly a level of innovation demonstrated by today’s hobby stocks that companies lacked in the past. Technology is seen not as an existential threat, but as a means to drive sales and attract new generations of customers, and management strives to keep products exciting and relevant. At their core, however, these products still deliver an imaginative, screenless touch experience that humans have dreamed of for centuries.