A Wild Ride

Speed. It's about speed. That may seem ridiculously obvious — like saying the sun is a tad on the warm side. But to witness up close how cars accelerate out of a turn, their 800-HP engines thundering, the g-forces pinning drivers to their seats as they streak past the grandstand, is to understand the visceral appeal of stock-car racing.

It's also about heroes, and villains, and rivalries. The original good ol' boys of the 1940s might have been ex-moonshiners, but today's stock-car racers are media-savvy celebrities — Jeff Gordon, Dale Earnhardt Jr., Tony Stewart. Their bumper-to-bumper duels are broadcast 10 months of the year, and their off-track lives are fodder for People magazine.

And, of course, it's about the cars themselves — Ford, Chevy, Dodge, and the new gunslinger in town, Toyota. And then there are the other corporate sponsors, whose colorful logos adorn practically every inch of cars and drivers alike.

No one understands all this better than the people who run the National Association for Stock Car Auto Racing (Nascar). Over the past decade, they have been growing the family-run sanctioning body, and the sport, at a blistering pace. Races have been added, TV coverage expanded, big-hitting sponsors signed up. Stock-car fans now number 75 million worldwide, and total industry revenues from racing — estimated to have increased at a 14 percent compounded annual clip during the past decade — reportedly top $3.4 billion (outpacing the National Basketball Association, among others).

Now, however, for the first time in memory, the money coming into the sport is leveling off. Nascar-licensed retail sales have hovered around $2 billion since 2004, following years of double-digit increases. Track attendance is down, as are TV ratings.

Racetrack operators like Speedway Motorsports Inc. (SMI) and the Nascar-connected International Speedway Corp. (ISC) are already feeling the pinch. So are racing teams, which are suddenly finding it harder to line up sponsorship money to fund an increasingly expensive pursuit. Last year, PPI Motorsports failed to attract sufficient sponsorship and closed its doors.

Even marquee teams like Roush Fenway Racing and Joe Gibbs Racing are starting to worry. Forbes magazine estimates that 4 out of the top 15 racing operations in Nascar lost money last year, while several others barely eked out an operating profit.

The very success of Nascar may now be working against it. Its decline in popularity "could be due to overexposure in some markets," says Michael Pitts, an associate professor at Virginia Commonwealth University's School of Business. "It could be that there are so many other choices. Or it could be that Nascar is becoming passé."

Running Wide Open
Critics suggest that teams should simply spend less. But as Scott Lampe, CFO at racing heavyweight Hendrick Motorsports, points out, throttling down on expenses is difficult in a business where operating units are measured by pole positions, not cash positions. "The frustrating thing about being a CFO in this business," says Lampe, "is that it's not like I can go to a crew chief and say, 'Hey, what does your P&L look like this year?'"

A visit to the Hendrick facility on the outskirts of Charlotte, North Carolina, reveals just how capital-intensive stock-car racing has become. A software programmer tests a powerful engine while sitting behind protective bulletproof glass. New paint schemes are applied to Jeff Gordon's and Jimmie Johnson's cars in cubicles that resemble clean rooms. Everywhere, well-educated, well-paid employees test, retest, and calibrate.

According to estimates, top teams spend anywhere from $150,000 to $175,000 to build a single race car, including the engine (which, repeatedly rebuilt, has a lifespan of about 15 races). Overall, the tab for running a top-tier racing team looks to be north of $20 million (see "Sticker Shock" at the end of this article). "It's getting very expensive to race," says Lampe, a former auditor who did Hendrick's taxes before joining the company in 1999.

In the past, the rising costs of racing were more than offset by sizable increases in sponsorship cash, licensing fees, and prize money. Indeed, over the past 10 years, annual revenues at Hendrick have jumped from $50 million to $200 million. One published account pegs its 2006 earnings before interest, taxes, depreciation, and amortization at around $39 million. But a bad racing year, with reduced prize winnings, would substantially lower Hendrick's profit.

That's not going to happen this year — Hendrick drivers have won 10 of the first 19 races in the Nextel Cup, Nascar's premier racing circuit. Nevertheless, a nearly double-digit increase in expenses, including racing costs, R&D, facility costs, and SG&A, is starting to eat into the company's margins. For CFOs at other businesses, the typical response to rising costs amid a market slowdown would be to limit budget increases. But for many teams, winning is the only KPI that matters.

"There are two ways to budget in this business," notes Lampe. "Figure out what you need to win, and that's your budget — that's how we do it. Or, figure out what your sponsors are paying, and that's your budget."

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