NKE/UA: Math You Need to Know

Nike re-signing Michael Vick and UA endorsing Kemba Walker are two high-profile deals. But the underlying risk reward is vastly different. It’s very important to understand the off-balance sheet liabilities at play here. UA’s making a lot of the right moves, but Nike is much lower-risk near-term. Nike still one of our top names. We like UA at a price…a lower one.

 

 

Nike and Under Armour have made their latest endorsement bets and each matter, but for different reasons. On Friday, Nike resigned Michael Vick (football) followed by Under Armour announcing the signing of former UConn basketball star Kemba Walker yesterday morning. The terms of both deals were undisclosed, but there are multiple takeaways to consider here:

 

Nike’s Vick Endorsement:

1)      This is a Boom or Bust deal. While the dollar figure may be low, the stakes are high.

2)      Terms of the deal were undisclosed, but we know that Vick was earning $2mm when his deal was severed back in 2007. As the first major endorsement since returning to the game from prison, we’ll assume Nike struck this deal at a considerable discount to the prior level – we’d be shocked to see Vick pull down more than $500k, but with outsized incentives if he sells.

3)      Some might view this as reputational risk given Vick’s jail time – and the reason behind it (dog fighting). After all, Nike severed the deal when he put on his orange jumpsuit. But let’s face some facts, Nike stood behind Tonya Harding after she and Jeff Gillooly tried to break Nancy Kerrigan’s kneecaps. They also stood behind Tiger after his marital problems, and Kobe after his rape accusation. The fact of the matter is that Nike cares about athletic ability above all else. They’ve never been afraid to put their reputation on the line, and they’re not going to start now.  Now that he’s playing again, they’ll put their marketing muscle to work.

4)      Keep in mind, Nike just landed the NFL license a deal that likely cost $30-$40mm a year. This certainly prompted Nike to re-evaluate its spend on players in the NFL. It ‘lost’ Tom Brady to UA – but the reality is that if Nike wanted to keep Brady, then it would have. Brady might be great for UA’s brand, but he was very low – if not negative – roi for Nike.

5)      How we view this as Nike trading a high-fixed-cost but low-revenue-generating asset in Tom Brady for a call option on a variable cost Vick. Makes sense to us.

 

UA’s Walker Endorsement:  

1)      The company is clearly focused on growing its basketball business and presence in the NBA as well as stepping up its endorsement activity in a big way (Michael Phelps, Lindsay Vaughn, etc…).

2)      UA signed Brandon Jennings to its first basketball endorsement for a reported $2mm back in 2009 and Cam Newton, the #1 pick in the NFL, just recently for around $1mm. After winning the MVP in the NCAA tournament following UConn’s national championship run, we suspect Kemba signed for somewhere in the ballpark of Jennings-type money – if not more.

3)      Interestingly, Kemba was drafted 9th by the Charlotte Bobcats owned by none other than Michael Jordan. There’s hidden value in this deal that simply can’t be measured by a dollar figure alone.

 

SG&A is usually the first thing that comes to mind when people think about athlete endorsements. But the reality is that the more optimal thing to look at is the change in off balance sheet liabilities.  This is a lot like looking at a retailer that is manipulating its leases to increase/decrease its SG&A and comp leverage hurdle.

 

Take a look at our updated analysis of both UA’s and NKE’s endorsement obligation commitments below.

 

Nike’s deals are spread very  consistently – about 17-18% per year over 5-years.

 

Under Armour’s, on the other hand, are more front-end loaded with 69% of its obligations due in 3-years or less.  This is down considerably from 86% only two years ago, which makes sense given the addition of more long-term contracts. But total commitments are still double vs a year ago. Nike's, on the flip side, are actually down by $400mm (about 10%).

 

The punchline is that UnderArmour need to execute on these obligations in order to keep margins in the right place. They probably will. But if you own the stock, you should be aware of this.

Nike is the complete opposite.

 

NKE/UA: Math You Need to Know - UA NKE Endorsement Liab Chart 7 11

 

 

 


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