On the surface, World Wrestling Entertainment (WWE) appears to be a struggling business. Television viewership for both Monday Night Raw and Friday Night SmackDown have steadily declined over the last eleven weeks (reaching record lows) and the company announced back in mid-April that it was laying off/furloughing hundreds of employees. Despite the outward appearance of a company in turmoil, WWE’s share price has steadily risen since the sports world came to a halt on March 11th (+40% to +/- $45) and Wrestlenomics’ Brandon Thurston says as long as the company manages to retain its television fees (and there’s no reason to believe they won’t) it will post a record $280 million in operating income in 2020 (the previous record was $116.5 million in 2019).
Our Take: It’s important to note that while WWE shares are up since mid-March, the company has lost 30% of its market cap YTD (and that’s an improvement over the -50% decline it experienced over the first two and a half months of the calendar year). The turbulence began on January 30th with the dismissal of co-Presidents George Barrios and Michelle Wilson. The share price slid -25% on the news and continued to spiral downward for the next six weeks as the company fell short of Wall Street’s Q4 ’19 expectations and the U.S. markets began reacting to the impending threat of the Coronavirus. The WWE share price bottomed out on March 16th (at +/- $30), the day it was announced WrestleMania would not be taking place at Raymond James Stadium as planned.
While the announcement certainly disappointed fans with tickets to wrestling’s ‘Super Bowl’, WWE’s decision to press forward with the event – at a time when pro sports leagues worldwide were suspending operations – was a turning point for investors (it signaled the company was committed to delivering new in-ring programing – necessary if they were going to honor the broadcast pacts that serve as the backbone of the business). Vince McMahon’s decision to cancel the XFL season on March 20th also proved to boost investor confidence as there had been concerns the long-time CEO had taken his eye off the ball. By March 24th, the share price had climbed back to +/- $39. WWE held steady in the +/- $40 range until the company’s Q1 ’20 earnings call on April 23 when reports of outperformance caused another spike (up to the current +/- $45).
The main reason WWE managed to post profits greater than anticipated in Q1 ’20 were the savings they incurred during the last 2-3 weeks of the quarter (i.e. the lockdown period). “It’s simply way cheaper to deliver TV content from the company’s Performance Center in Orlando than it is from [a rotating set of] arenas” (think: no building rental, no load in/load out). So, while other pro sports leagues can’t afford to play games without fans, eliminating 200+ live dates from the calendar – particularly the house shows (which lose money) – is actually net positive on the WWE P&L. Thurston said, “if you look at earnings reports from [H2 ’18, 2019 and H1 ’20], with the exception of the two quarters that had a WrestleMania show, the live events division posted negative operating income in every quarter.”
WWE may not be running on all cylinders (the loss of a live gate at WM cost the company +/- $15 million in profit), but the company is still almost assured to be more profitable than ever this year. That’s because in addition to the +/- $50 million/quarter they’ll save from doing shows in Orlando and the $4 million/mo. they’ll save on salaries, their new TV rights deals with Fox and NBC Universal will pay out 3.6x more than their previous five-year agreement (the deal began in Q4 ’19) – and as long as they continue to produce weekly content those revenues are secure (hence the importance of continuing to put on shows through the pandemic). The company also recently inked a new five-year deal with Sony Pictures Networks India (their second most-lucrative television deal) that will boost the top line in Q2.
WWE has proven durable in the midst of a troublesome time, but Coronavirus is still likely to have negative downstream impact on the pro wrestling business. Thurston expects network subscribers (because people don’t perceive the product to be as good without fans) and merchandise sales (because a large portion take place at live events) to be on the decline and with international borders closed it reasons to believe WWE won’t be headed to Saudi Arabia for a second show this year (which means +/- $50 million in revenue lost).
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