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Bear of the Day: World Wrestling Entertainment (WWE)

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The entertainment industry can be a tough place to do business. Fickle consumer tastes and a constant flow of newer, more interesting competition mean that a company can be on top of the world one minute and struggling the next.

That’s what has been happening lately to World Wrestling Entertainment (WWE - Free Report) , the vast entertainment conglomerate that started with choreographed faux-wrestling matches, but has also expanded to adjacent businesses like video games, action figures and other promotional merchandise.

Though the WWE grew over decades from the creation of boxing promotors who were putting on legitimate athletic contests for paying audiences at venues like New York’s Madison Square Garden, the present company started to experience widespread success as the competitions became more like theatrical acrobatic exhibitions and the performers took on “good-guy” and “bad-guy” stage personalities, forming alliances and rivalries, almost like a soap opera.

The company that would eventually become WWE was founded by Vince McMahon in 1980. McMahon masterminded the evolution of business and still serves as Chairman and CEO of the company as well as owning approximately 37% of outstanding shares. That stake was even larger until recently as the CEO sold roughly $270 million worth of shares from his own personal account in March.

McMahon almost singlehandedly invented the variety of entertainment content and merchandise that WWE sells and he successfully shepherded the organization through a drug scandal, athlete injuries and deaths and numerous lawsuits about brand identities and trademark infringement and enforcement.

A recent quarterly earnings report highlights the competitive pressures facing the company.

Revenues of $182M fell well short of the Zacks Consensus Estimate of $199M. Those lower revenues were due to disappointing sales of both merchandise and tickets to live events.

Net earnings were an ($0.11)/share loss for the quarter. Expectations had been for a loss of only ($0.02).

Even as revenues fell, the company continued to spend heavily on new initiatives and marketing. Operating expense increased from $120M to $135M, marketing and selling expense grew from $20M to $23M, and general and administrative expense rose from $20M to $24M.

The sparse and disappointing report contained little commentary about what went wrong during the quarter and only a vague notion of the company’s plans to bring back lost revenues and rein in costs.

Though management confirmed full year revenue guidance for 2019 of $1B, investors punished the shares for the apparent lack of fiscal discipline and WWE now trades almost 20% below the all-time highs reached just before the April 24th report.

Several downward revisions in the wake of the report now have the Zacks Consensus Earnings estimate at $1.05/share, down from $1.24/share recently, earning WWE a Zacks Rank #5 (Strong Sell). 

WWE still has a devoted fan base who fill stadiums, buy t-shirts and subscribe to pay-per-view events, but a combination of insider sales, slipping revenues and rising costs are a terrible combination.

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