Can WWE Get Off the Ropes?


By Brian Hindo How's this for ringside drama: The World Wrestling Entertainment's flagging fortunes now rest in part on the shoulders of somebody dubbed The Undertaker. Ironic? Well, these are trying times for the once-high-flying professional wrestling outfit. TV ratings for WWE's flagship shows, WWE Raw and WWE SmackDown!, have sunk 15% and 20%, respectively, since 2002. Pay-per-view buys for WWE's special events -- a key profit center -- have dropped more than 18% over the past year. And audiences for live matches in the U.S. have dwindled 25% from last year, to around 6,600 per event.

Small wonder WWE (WWE) has turned to the erstwhile Mark Calloway to reprise his musclebound, pasty-faced Undertaker act. It's just one of the company's many attempts to regain the Wall Street sizzle it enjoyed a few years ago. WWE went public at $17 on October 19, 1999 -- the same day, incidentally, as another foundering stock, Martha Stewart Living Omnimedia (MSO) -- and peaked at $34 a share soon after. WWE was growing so fast that it ranked No. 3 on BusinessWeek's annual Hot Growth Company list in 2000 (see BW, 5/29/00, "WWF: One Rock-'Em, Sock-'Em Company").

TIMES SQUARE BATH. It has been rough going since. First came the flame-out of the XFL -- WWE's short-lived foray into professional football (see BW, 9/03/01, "Smackdowns Are Taking Their Toll at the WWF"), which resulted in a $46.9 million loss in 2001. Then a British Court last summer forced WWE to cease using the acronym WWF -- for World Wrestling Federation -- saying the initials belonged to the World Wildlife Fund.

The third blow: The company took a $36 million bath on a theme restaurant located in New York's Times Square that it has shuttered. Result: WWE swung to a net loss in fiscal 2003 of $19.2 million, vs. a profit of $42.2 million the previous year. "We're clearly in a rebuilding period," says new CFO Phil Livingston, an ex-football player for the Oakland Raiders. The stock has traded in a narrow range since hitting its low of $6.76 in October, 2002, closing at $10.42 on July 8.

No longer is the WWE a Wall Street darling, with all but one analyst dropping coverage of the stock altogether. Bear Stearns, which took WWE public, was the latest to get out of the ring, saying in a May 29 note to clients in part, "We believe the company lacks significant growth prospects in the future."

REALITY BITES. The lack of coverage "is a problem," says Chuck Hill, director of research at Thomson's First Call. "When you get down to zero or one [analyst], it's hard for portfolio managers to buy the stock." Which, in turn, makes stock-price appreciation tougher. Beginning July 7, WWE began offering key weekly performance metrics on its Web site to compensate, CFO Livingston says.

The lone analyst remaining on the WWE beat is Dennis McAlpine of McAlpine Associates, and he has a sell rating on the stock, citing falling audience indicators. McAlpine figures WWE will take in $335 million in revenues in 2004, down 10% from $374 million in 2003, and book about $25 million in earnings. Both estimates are in line with WWE's guidance, which is hardly upbeat: It sees continued slides in average live attendance, pay-per-view buys, and TV ratings for 2004.

Where are the fans going? WWE blames reality TV and the Internet for siphoning off viewers. The company hasn't been helped by the absence of one of its most charismatic stars, Dwayne Johnson, a.k.a. the Rock, who's now pursuing a career in movies, and injuries to key performers such as Triple H and "Stone Cold" Steve Austin. To try to staunch fan loss, WWE is bringing back older stars like the Undertaker and Hulk Hogan. Problem is, no new stars have caught fire -- even with the acquisition of WWE's main competitor league, WCW. Introducing new wrestlers to the fans takes upward of 12 to 18 months.

"TESTOSTERONE MARKETING." Not that pro wrestling hasn't peaked and troughed for decades. The mid-'80s heyday of Hulk Hogan and Randy "Macho Man" Savage gave way to a relatively lean period. The sport received a big jolt from an adult-oriented revamp that brought on the mid-'90s surge. Livingston says WWE's creative team -- headed by company chairman and sometime performer Vince McMahon -- is sticking with the traditional formula. "It's always been about testosterone marketing," says Livingston.

WWE has the resources to keep chugging along "for many years," says McAlpine. Its balance sheet would be the envy of many media companies. WWE is sitting on a hefty $128 million in cash reserves and has only about $9 million in debt. Even with lowered guidance on almost all key attendance and viewership metrics, WWE expects to rake in between $325 million and $350 million in revenues next year, booking $21 million to $25 million in income from continuing operations.

Plus, WWE's shows draw a young male demographic coveted by advertisers. The ratings, while flagging, are still relatively robust. SmackDown, which airs on Viacom's (VIA) UPN network, pulled in a 6 share for the week ended July 6, and was the second-most popular show on the network (by contrast, a rerun of NBC's Friends drew an 11 share). Raw, seen on the New TNN cable network -- also a Viacom property -- is by far the channel's highest-rated show, according to Nielsen Media Research.

WHY BE PUBLIC? Indeed, WWE's sexed-up, testosterone-addled matches dovetail nicely with TNN's new marketing campaign as the "first network for men" and complement such offerings as Pamela Anderson's Striperella cartoon and James Bond movie marathons.

While WWE has scrapped plans for a Las Vegas casino, Livingston says it's still looking to diversify into other entertainment arenas. But the most recent move made with its cash reserves was to begin issuing a dividend -- four cents a quarter.

With doldrums as far as the eye can see, some WWE watchers question why it needs to be a public concern at all. With its huge cash reserves, depressed stock price, small debt load, and 75% of the stock in the hands of the McMahon family, some have speculated the WWE could be a likely candidate to go private. "It's unclear what benefits the company is getting by remaining public," says McAlpine. Livingston's reply: "The family likes the discipline and business sophistication being public has brought to the company."

FOR WIDOWS AND ORPHANS? For investors ready to rumble, McAlpine offers this simple rubric: If TV ratings start to go up again, the stock price should follow. As fan interest rises, so will pay-per-view buys and merchandise sales. In the meantime, with a dividend, the stock probably should yield no more than about 1.6% a year.

Heck, that's about what some money-market funds yield these days. WWE a stock for widows and orphans? Now there's a story line not even Vince McMahon could've imagined. Hindo, who was on hand to watch Hulk Hogan smack down Honky-Tonk Man in 1989, covers the financial markets from New York


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