Fantasy figurines group Games Workshop Group yesterday reported a 73 per cent slump in full-year profit but maintained its dividend, sending its shares more than two per cent higher.
"In the short term our trading prospects remain challenging," said chairman and chief executive Tom Kirby.
"Throughout spring 2006 our year-on-year performance has been improving and by the end of the year our Games Workshop Hobby stores in seven of our nine sales territories, including both the US and the UK - our two largest businesses - were recording growth," he said.
"We believe that the business is now returning to growth.
"With 42 per cent of our sales made to independent retailers, however, 'calling the turn' is difficult."
For the year to May 28 the group, which in addition to serving independent retailers trades from 337 Games Workshop Hobby stores worldwide - including a number in the West Midlands - and direct through the internet and mail order, made a pretax profit of £3.7 million, down from £13.9 million last time, on revenue down 16 per cent £115.2 million, a performance broadly in line with analysts' expectations following a January profit warning.
It said sales and profits fell for two main reasons. Firstly, the continuing decline in sales following an exceptional trading period, and secondly, the continued reduction in sales to independent toy and hobby retailers, notably in the US, where many smaller independent operators are ceasing to trade.
Despite the hefty profit fall the group maintained its final dividend of 14.025 pence and its full-year payout of 18.975 pence.
However, this is not covered by earnings per share of 6.5 pence, down from 29.4 pence. "Despite the short-term difficulties of this year, we remain confident that the Hobby is in good health.
"In addition we have come to the end of our investment programme, which leaves the business seriously well invested," said Mr Kirby.
"The directors believe the prospects for the business remain very good."
In the long term, the chief executive reckons the group should be able to achieve similar levels of sales penetration in each of its markets to those it currently has in the UK.
"Achieving this would at least treble the current level of our sales," he added.
Having cut costs, retrained staff and started the process of re-establishing normal product life cycles Games Workshop also believes it is now in much better shape.
In the first half of the year it reported a sales decline of 20 per cent due to the bursting of the Lord of the Rings "bubble", but in the second half this decline slowed to 12 per cent.
Despite lower production volumes due to the decline in sales, the group was able to improve its gross profit margin to 70 per cent, the result of price rises, improved operational efficiency from manufacturing facilities in Nottingham and Memphis, and more cost effective sourcing of bought-in components and print from Europe and Asia.
Additionally, Games Workshop reduced over-heads by £2.8 million during the year, despite increasing expenditure including a net increase of ten new Hobby stores since May 2005.
Bridgewell Securities retained its 'neutral' stance, arguing the results contain ammunition for both bulls and bears.
"There's no definitive evidence of the turn yet encouraging year-on-year improvements in many parts of the business, continued question marks over visibility yet a robust maintenance of the dividend," Bridgewell Securities said.
Games Workshop shares closed up 363/4p at 3273/4p.