Is Fanatics In Financial Trouble?

Fanatics has been utterly dominant in the collectors’ space for a couple of years now. We assume that they will remain the superpowers in the hobby for the foreseeable future.

However, there are signs that the company we see as all-powerful is in trouble. In July, reports surfaced that the company is suffering from crippling losses. Two attempts by Fanatics to venture into new territory, betting, and events seem to have failed.

That may have made the company difficult because there are reports of layoffs and cuts of entire departments.

But how bad is it? Let’s dive into it by answering the question, are fanatics in financial trouble?

First reports that Fanatics are in financial trouble

In July, a few stories in the press revealed that there were some chinks in the seemingly impenetrable armor of Fanatics. It can be challenging to know the actual situation in the company because they need to share financial information publicly.

However, the company’s highest valuation was 31 billion dollars in 2022. That came after a $700 million equity investment from Clearlake Capital, Aryeh Bourkoff’s LionTree, Silver Lake, Fidelity, and SoftBank, among others.

Since then, the value appears to have gone down. In September, Bloomberg reported that they were exploring the option of a tender for employee shares based on a company evaluation of 25 billion dollars. That is a 19% decrease.

Fanatics had an explanation for this. According to a spokesperson, “We are responding to incoming interest in our shares from numerous investors who are looking to increase their ownership in Fanatics,” a Fanatics spokesperson said. “And given we don’t need capital due to the strength of our businesses and balance sheet, we are giving our existing employees an opportunity for a certain amount of liquidity at a $25 billion valuation if they so choose.”

But that still seems like an admission of weakness.

Things take a turn for the worse with Fanatics financial position?

There have long been reports of a Fanatics IPO in late 2024. However, a few months ago, it became clear that this was not the case.

A spokesperson for Fanatics admitted as much but did not explain why, saying, “There will be a moment in time where it will make sense. Right now, we’re heads-down on building our business.”

Then, there were rumors that Rubin was looking to offload $1 billion worth of stock after the IPO failed to materialize. However, he denied that.

The company is still making a good deal of money. However, revenue for 2024 is lower than it was in 2023. Fanatics cleared $6 billion, 14% less than the $7 billionin revenue in 2023.

But remember that those are earnings before what accountants call EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). Therefore, Fanatics may have lost some money or more or less broken even.

Looking at that bottom line, credit rating agencies were concerned. S&P Global predicted that Fanatics will face “challenging operating conditions” for the coming year. Meanwhile, Fitch indicated that unless things change for the better with the company, “it could lead to a deterioration of its liquidity and put pressure on the company’s credit profile.”

Finally, Moody’s lowered the company’s credit rating, “citing significantly weaker than expected earnings and cash flow and the risk that the increasingly difficult operating environment will challenge its ability to achieve the appropriate level of returns on its current investments.”

Things only get worse with Fanatics financial trouble

Things have not gotten better since the summer. In October, Moody’s downgraded them again, noting that “While reported second quarter June 2024 earnings and cash flow usage improved year-over-year, EBITDA and free cash flow remained negative.”

The outlook for the company was considered negative before the lowering of the credit rating. So, it has gone from bad to worse.

Fanatics now has a Baa3 rating, the lowest among the lower medium grades, and one rung away from a non-investment grade speculative rating. The lower rating means that their stocks are one further downgrade away from being considered junk bonds.

Legal troubles For Fanatics

We have extensively covered the multifaceted legal battles between Fanatics and Panini over card rights and the potential monopolization of the hobby.

The highest-profile and most consequential of these is a broad antitrust lawsuit in which Panini alleges that since the sports apparel giant moved into the hobby, it has aggressively intended to monopolize the industry and violated federal antitrust law.

 Generally speaking, Fanatics has so far gotten the better of this confrontation. However, Panini has had some key victories. In particular, they held on to football card rights after a court rejected NFL Player Association claims that Panini had not upheld their contract. 

But these lawsuits and the uncertainty surrounding them have hurt Fanatics, even while hurting Panini even more.

Further legal issues that Fanatics has faced compound the costs and damages. We discussed here a lawsuit regarding Fanatics’ poaching of Panini executives. However, they used this method of operation far more widely.

DraftKings, the sportsbook giant, sued a Fanatics employee for leaving the company in violation of a non-compete clause and for inappropriately utilizing confidential information in the process of becoming the president of Fanatics’ VIP program.

The court sided with DraftKings. Though they denied an attempt to prevent the executive from working for Fanatics, they granted an injunction preventing the individual from providing services relevant to his role at DraftKings’ business.

It is fair to see that there is evidence that Fanatics’s very aggressive tactics in poaching employees, among other things, are backfiring. They are incurring legal action that is delaying their development and incurring financial costs.

Downsizing at Fanatics

In early 2024, the company had 22,000 employees, which indicates a healthy company. Since then, there have been some layoffs. In February, 100 employees were let go at one of their subsidiaries.

Now, some individuals have been fired at Fanatics Events, indicating further struggles at Fanatics.

Fanatics events

One great new expense for Fanatics in 2024 was the much-vaunted FanaticsFest. The massive event took card shows in a new and immersive direction. It included traditional card selling, star-studded panels, memorabilia signing meet and greets, and immersive sports experiences. In other words, it was freaking expensive.

Since these are new and cost-heavy expenses, some believe the events will first be on the chopping block.

They have also canceled events.

Lance Festerman, the head of events at Fanatics, explained that this was a regrettable once-off event: “After pausing our Orlando show due to the hurricane and tropical storms in Central Florida – and wanting to be sensitive to dealers and collectors who were impacted – we searched for appropriate dates in the Central Florida market and found no suitable availability in the first half of the year, so that means we will pause on launching in Orlando,” he stated.

“Our mission at Fanatics Events has not changed, and as such, we still love card shows and plan to continue to create and launch them next year – but our focus now is Fanatics Fest 2025, which we’re incredibly excited to share more news on soon!”

The main Fanatics Events showpiece is FanaticsFest, held for the first time in August in New York and was a great success. However, many have noticed that details about the event still need to be provided next year.

The Sportsbook fiasco

The executive in question is Michael Hermalyn, who was hired as part of an attempt by Fanatics to enter into the lucrative world of sports betting. But this is a difficult market to break into, and their path to success seems like it needs to be more assured.

On October 13, Fanatics lost $1.3 million in a single week of operation in New York alone as the favorites enjoyed a very strong week.

A spokesperson for Fanatics told the New York Post, “The last two weeks in New York and across the U.S., Fanatics Sportsbook customers have been winning big on football, and we love it.

We are doing things differently, making us 10 times more rewarding than the leading sportsbooks.” But if you think they really love losing money, I have a bridge to sell you. The problem is that this is the second week running, and Fanatics Sportsbook has lost money.

Indeed, we have seen that Fanatics Sportsbook limits users after winning a few good bets. One individual was limited after winning less than $150. One Reddit user complained, “That’s a bunch of bullshit, meaning they only want their customers to lose. I tell them to f**k off, take your money and open another sportsbook. I am a VIP and love DraftKings and have for years. And last year was up 6 digits.” 

Another said, “Maybe less stupid promos and bonuses, and then they wouldn’t have to worry so much about a single bettor winning a few hundred bucks. It should be illegal to ban someone as soon as they finally start winning.”

Is the situation for Fanatics really that bad?

It depends on what you look at. Fanatics has precious assets, with sports apparel being the epicenter of its business. But sports cards are also massively successful and almost a way to print money.

Fanatics also has a good bit of cash on hand. Moodys reported that with the $1.7 billion they have in cash, the company could reduce its debt if it wished. 

But investors are still concerned. AirMail reported that “According to one Wall Street trader familiar with Fanatics’ secured debt, after the rating agencies issued their warnings last fall, investors started demanding a higher yield—they wanted to be better compensated for the risk of owning the Fanatics debt—than they have been demanding for loans of comparable companies. He also said that the demand for better compensation has faded in recent weeks, suggesting credit concerns about fanatics in the market are reducing.

But the newly reduced credit rating will change that. Fanatics already has a $1.5 billion debt, and now borrowing to pay that down will cost even more money due to the lower rating. Paying it down with their own money will challenge the liquidity of the company. Moody’s has expressed concern about the ability of Fanatics to pay the interest rates on the debt they have already incurred. That is why Moody’s says that the current debt and interest are “far outside the band of comfort for the current rating.”

An important stress test

Fanatics is now receiving new licenses for sports cards, which will certainly help the company’s income. If the downsizing was effective, it would also increase the company’s profit margins.

Then there is the skill of CEO Michael Rubin and his staff. Say what you want about this guy; he has overseen a successful company that has grown tremendously. It seems unlikely that he will let Fanatics go down the drain.

The next quarter is going to be crucial for Fanatics. If they cannot get their debt under control and get another cut, plunging the company into the junk bond zone, the trouble will look more severe and immediate.

It will be interesting to see if they can make betting pay off because, so far, it looks more like a drag on their profits than a boon.

We will also be watching what these issues do to the release schedule. Will it become more modest as a result or more aggressive in milking collectors for every penny?

Final world on troubles at Fanatics

Chances are that Fanatics will be okay, but there is reason to be concerned. Some new investments in events and gambling have not paid off so far. However, there are also issues of inflation and financial insecurity.

That has been a major issue. If people are concerned about the price of groceries, they will certainly cut down on sports card and jersey spending. There will be fewer splashy events and celebrity cooperation.

Another thing they may want to cut is the needless and combative lawsuits. Because those are certainly a drain, listening to their lawyers and not trying to strong-arm competitors may be more beneficial in the long run.

The advantages the company retains should be enough to reduce the debt and raise the company’s credit rating. However, if they do not do so and Moody’s downgrades the company again in the next quarter, having a junk bond status will attract a lot of attention and force Fanatics to shake things up quite seriously.

That is when we will see serious trouble for Rubin as the board demands answers and immediate changes.

However, in the last few months, we have learned that even Fanatics’s vast monopoly is vulnerable. The market is merciless.