Affliction's Day of Reckoning May Be Further Away Than Anticipated

January 27, 2009

Despite a solid card that produced several spectacular finishes and cemented the emerging legend that is Fedor Emelianenko, the MMA community’s focus when it comes to Affliction remains on one thing: its finances. It’s a narrative that has dogged the company’s entertainment brand since it launched last year with payrolls at levels previously unseen. While it’s fair, even accurate, to say that it is unlikely, if not impossible, for Affliction to recoup its costs through traditional live event revenue streams (i.e. pay-per-view, gate, sponsorships, licensing fees, etc.), that doesn’t tell the whole story.

Affliction is after all a t-shirt company at the end of day, as Dana White loves to remind everyone, and ultimately any money they make on these MMA events is icing on the cake to the brand building they are accomplishing. As a private company we don’t have much evidence as to how briskly sales are moving, but a recent BusinessWeek feature provides some insight.

An item from the January 26th edition titled “Youth Will Be Served” focused on the success of youth-oriented retailer Buckle. The company posted a 13.5% year-over-year gain in same store sales for the month of December’s, a stunning success in the current environment. For some perspective retail heavyweights Macy’s, Gap, American Eagle, and Abercrombie & Fitch posted declines of 4%, 14%, 17%, and 24% respectively in the same month.

Buckle is one of Affliction’s closest retail partners and was previously featured on the canvas at Affliction’s first MMA event. The article credits Affliction Clothing and MEK Denim as two of the hottest brands that have made the store successful. In 2008 overall sales for Buckle rose 26% to $780 million. While all of that is not Affliction, the point is: they’re selling a lot of t-shirts. More importantly, the company believes that these events help sell those shirts. Large sales spikes have been reported around both of its events.

Based on previously reported statements, Affliction Clothing does an estimated $125 million in annual sales with its MMA brand accounting for 20-25% of that or roughly $25-35 million in annual revenue. Using what I think would be a conservative profit margin of 40%, that would be profits on MMA apparrel alone at somewhere between $10 and $14 million annually.

Those numbers help put into perspective potential multi-million dollar “losses” on the MMA events themselves. These events really amount to an aggressive marketing/advertising campaign for Affliction’s core clothing business at worst. At best, if the company finds its footing as a live event promoter, it will have opened up a new revenue stream and diversified its business.

This isn’t exactly a groundbreaking approach. Red Bull has taken a similar path in NASCAR. After spending several years as a sponsor of events, the company chose to make the leap into team ownership. In the expensive world of Sprint Cup Racing it is very unlikely that the team turns a profit, but Red Bull doesn’t sit around wringing its hands about its multi-million dollar “losses.” Instead it watches its energy drink sales rise and is satisfied knowing that ownership of the racing team gives it a potential upside and possibility of recouping its investment that other traditional advertising and marketing expenditures simply don’t offer.

It’s essentially the difference between renting and owning your own home. Both accomplish the goal of having a roof over your head, but ownership allows you to simultaneously build equity.

So while Affliction may ultimately decide that its money is better spent outside of live event promotion, that decision will likely not rest entirely on the financial bottom line of the events themselves, but rather their contribution to the company’s overall finances, i.e. its clothing line.

Without understanding this essential difference between the company’s financial calculus and that of its chief competition (Zuffa) it is impossible to accurately and fairly evaluate the success or failure of the company’s promotional efforts.

At the end of the day Affliction really is a t-shirt company and that fact makes all the difference in evaluating its fate.

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