The Hamilton Ave Journal 11.22.08: Volume 1 – Issue 61

And where is Hamilton Ave? That is the location of the WWE Production Studio in Stamford, CT, and thus the most powerful place in the wrestling world. Besides, The East Main Street Journal just does not have the right ring to it.

Who am I? I am JP Prag: consultant, entrepreneur, businessman, journalist, and wrestling fan.

Now, ring the bell because the market is open.

LEAD STORY: WWE tries to buck the trend

A few weeks back, the WWE released their Q3 earnings report. As covered by the Journal, despite a slight rise in revenue, net income dropped significantly due to continued rising costs that have been apparent to this reporter and other financial analysts since the beginning of the year. With the worsening of the economy worldwide, the WWE knew that they could not sit on these rising expenses and just depend on other division (home entertainment) to cushion the fall. So WWE CEO Linda McMahon announced a program to cut $20 million in costs before the end of the year. Although the WWE does need to cut costs, they had already lost an additional $20 million this year that they will not be able to make up.

Still, that has not stopped the WWE from trying to get their house back in order. Unfortunately—but as expected—the WWE has gone about cost cutting in the revenue generating area of the business instead of looking at their top level corporate structure. Several wrestlers have been released or were granted their release, including the latest at this point Armando Estrada. Still, the cuts to wrestlers is expected to continue and will move down as far as the FCW development system where people make $500 a week. Meanwhile, inside WWE corporate, an organization with around 550 employees has levels of Executive Vice Presidents, Senior Vice Presidents, and regular Vice Presidents; creating layers of redundancy and many people doing the same job. The Journal would not wish anyone to lose their job, but the WWE continues to go after the little fish and revenue generators rather than the core of issues.

The next turning point came this week when the WWE decided to end the brand extension for referees. Instead, referees will serve on all three brands where more senior officials will work for one week straight and then get a week off while the other crew works. Anyone not on this tour will be sent down to FCW or be cut from the roster entirely. It was just a few short months ago that the WWE was actively looking to hire and bring more referees up to the main roster, yet here they are again cutting in a spot where they are not losing a lot of money. And in this case the situation becomes even worse because it breaks down the walls between the brand extension even further.

In theory, the brand extension is supposed to create 3 separate companies that share overhead costs. Instead, the brand extension has replicated overhead costs and shares components that make them look exactly the same. Where each brand could be used to capture a different type of audience, now the share they exact same audience. Consequently, with the same audience watching the programming exclusively, ratings have dropped in all three brands this year with RAW bearing the worse of the brunt. While ratings matter less to the WWE now that they do not sell directly to advertisers, it takes television viewers to convert them into PPV buyers, and the PPV buyrates have been dwindling downward for the last three months.

Still, despite what is in their control, there is much that the WWE cannot control. People are spending less money so they will not sell as much merchandise, have as many people at their shows, or be able to create as many new products. What is really out of control is their stock price that closed at $9.31 on Thursday, 24% lower than at the start of the week and near all-time lows.

What most people do not realize is that the stock price has nothing to do with the company. The stock price is just a Wall Street reflection of intrinsic value; what someone would pay to own a small percentage of the company. The WWE does not receive any money if their stock price goes up or down, so there are no worries from a financial perspective. From a human resources perspective, many people in the company have incentives tied to receiving stock. If the stock price is down 24% and now actually over 50% from earlier in the year, the incentive is far less. Say for instance someone was to receive 100 shares at the end of the quarter. If the price were $20 per share, that bonus would have a value of $2,000. Now, with a stock price near $10, that bonus is only worth $1,000, much less than what this person signed up for.

In the current economy, though, the WWE does not have to worry much about employees going looking for work elsewhere. The unemployment rate in the United States is at 15 year highs, so there simply are far fewer jobs available. Most people will stick to their job to weather out the storm and take any compensation they can get. The WWE will also most likely curtail on raises and bonuses for office employees, and unfortunately they know that there is nothing their employees can do.

Despite not having control, the WWE has tried to change the street by sending out several press releases. This included one toting the financial success of the recent European tour, which grossed a record $15.1 million. Says WWE Vice President of Global Media Shane McMahon:

“This is a clear indication of WWE’s continued international growth… Even though these are tough times in the global economy, WWE remains the best value in entertainment.”

Also sent out this week were “better late then never” announcements for the WWE social networking site “WWE Universe” and another for the WWE’s HD media player. Both have been around for months, but the WWE used this week to make the announcements. Despite the late showings, both stories have been picked up by related media outlets that are impressed with the WWE technological and social advances.

Despite all this, the stock continued to drop. Some might ask why, and the answer falls into hedge funds and investment houses. Hedge funds are small shops that do stock and other investment purchasing, trying to gain top dollar in a short amount of time. When the market dropped so low that they could not possibly make a profit in a designated time frame, the hedge funds simply dumped all their stocks and went out of the business, cutting their losses and taking whatever cash they could get. Similarly, investment houses are dumping stock because they reach certain sell points for them. When the number of sales greatly outnumbers the number of buyers, the price will simply drop until an equilibrium is hit.

Pretty much all stocks are falling prey to this game. The price is not a reflection of WWE performance so much as a reflection of economic times. Day-to-day, the price does not affect the operations of the WWE. Still, much of the McMahon family wealth—as well as the wealth of their top executives and friends—is tied to the WWE’s performance, so they will want to bolster the price as much as possible. How far they can take it remains to be seen, but in current conditions they may be better focusing internally and let the stock go where it may.

One possibility for the stock is if the WWE Board of Directors elects to buy back their own shares. Since the Board of Directors (including Vince McMahon) already own 90% of the voting shares, there seems little need to decrease the availability of stock. If the WWE went this route, they do have a large pile of cash to buy back much of the company. Investors and other share holders would not be happy if the WWE used their cash to just buy back parts of the company instead of using that money to grow the business or give it back to investors. Given that the WWE dividend is already four times the rate of earnings, the WWE actually needs to look more toward curtailing cash spending rather than finding ways to spend more.

For this entire decade thus far, the WWE’s greatest strength has been the pile of cash they sit on. It was designed to have for times like these. The WWE may want to consider lowering their dividend as a way to hold on to that cash. Although they do not project things to get so bad that they will be cash negative, there is always the possibility and this is the time to be frugal and smart.

Newsbites

Some items of note in the rest of the wrestling business world: