UA vs NKE Endorsements: Financial Deep Dive

Takeaway: Here's a financial snapshot of UA's endorsement profile vs NKE. While NKE has the edge, there's oppty for UA if it plays its cards right.

Conclusion: The financial composition of athlete endorsement structure is more different in comparing Nike vs. UnderArmour than one might think. UnderArmour has wiggle room to be less conservative and take on more implied leverage with longer-dated sponsorship agreements as Nike’s long-dated deals outpace UA’s by over 200x.  This could offer UA margin leverage on a TREND and TAIL duration, which it sorely needs. But NKE’s size, scale and balanced portfolio of deals is tough for anyone to compete with.  This is not enough for us to get constructive on UA today, but it's something we'll watch develop.



Much like off-balance-sheet leases, companies are also required to disclose any contractual obligations as it relates to endorsements and/or sponsorships. In the case of Nike and UnderArmour, this is Athlete Endorsements – and the numbers are quite significant. These are minimum payments that are required regardless of whether or not the athlete performs or even plays. We’re given good disclosure here, even though they are rarely analyzed or discussed by most of Wall Street.


UA vs NKE Endorsements: Financial Deep Dive - endorsement1


Here are some notable differences in the financial composition of Nike’s athlete endorsement portfolio versus what we see at UnderArmour.

  1. Size Matters: The obvious difference between the two is the raw size, with Nike logging in $3.8bn in sponsorships on its books. UnderArmour is $158mm. While you could argue that this is to be expected given the size gap between the two companies, NKE’s obligations net out to be 16% of current year sales, while UA is only 9%. Nike is 13x the size of UA, but it’s athlete endorsement pool is 25x the size of UA.

    UA vs NKE Endorsements: Financial Deep Dive - endorsement2
  2. Nike is More Balanced, But Opportunity for UA: It’s important to look at the duration of the obligated payments. As a percent of total, nearly 90% of UA’s payments are scheduled in less than 3-years. That compares to Nike at 61%. Conversely, 22% of Nike’s payments take place in years 4-5, and 16% are after year 5 (UA is 2%). We’re mixed on the implications here.
    On one hand, Nike’s portfolio is balanced between short-term deals, longer-dated agreements that are soon coming to an end, and long-term agreements (ie the $628mm for NKE covers NFL, LeBron and the Tigers of the world). We like that.
    On the flip side, NKE’s $628mm compares to UA’s long-term dollar tally of only $3mm. NKE’s long-term agreements are 209x UA’s.  While this shows the opportunity for UA to sign more deals that are longer-dated (and presumably requiring lesser up-front investment), it shows how much powder Nike has even relative to a powerful competitor like UA. Deep pockets breed deeper pockets.  

    UA vs NKE Endorsements: Financial Deep Dive - endorsement3
  3. Percent of Demand Creation/Marketing: Last year, 32% of Nike’s Demand Creation budget was ‘locked’ under these contractual agreements, and it’s noteworthy that in any given year over the past seven, the lowest Nike ever got was 27%. That’s incredibly stable. UnderArmour was remarkably close to NKE at 28% last year,  but that number is up from 15% in 2006. Simply put, as UA matures, a greater proportion of its Marketing budget is being allocated to Athlete Endorsements as opposed to flat-out brand marketing. We’re ok with this, as it is a sign of a company maturing in this industry. But we’d rather not see it much higher (same goes for NKE).

    UA vs NKE Endorsements: Financial Deep Dive - endorsement4
  4. Note: The only way these minimum payments can cease to exist is if there is a breach of contract on the part of the athlete/team in question. That could be failure to participate in advertising/marketing campaigns, but that’s rare. More often, the factor comes down to an athlete breaking Morality clauses that are built into nearly all such agreements. When certain events are triggered, the Brand can look the other way (rare), sever the agreement (more frequent), or often in the case of Nike (Tiger, for example), the minimum obligation is materially lowered and the performance-based piece goes up materially. 

CAG Q3 - Steady as She Goes

ConAgra is scheduled to report Q3 2013 EPS this Wednesday, April 3rd before the market opens.  Consensus for the quarter is $0.56 per share, and for the full year $2.15 (one quarter remaining after Wednesday’s report).  The quarter closed the week following CAG’s presentation at CAGNY (February 19th) where the company raised full-year guidance to “approximately $2.15”, so we expect few surprises.  We are at $0.57 for the quarter.

While we don’t expect this week’s earnings release to be a positive catalyst for the name, we do think that we can hear some commentary that may support the investment thesis, specifically, early commentary regarding merger integration and any commentary on the input cost environment.


Finally, to the extent that value exists anywhere in consumer staples these days, CAG at 14.8x ’13 EPS (calendar) makes sense to us given the opportunity we see for outsized EPS growth over the next 2-3 years due to the combination of merger synergies, deleveraging and a more benign commodity cost environment that could stand to substantially benefit both the branded business at CAG as well as the legacy and recently acquired private label business.


CAG is one of our preferred names in the staples universe and we are going to stick with it.


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

All Eyes On China

March's Chinese PMI (Purchasers Manufacturing Index) reading came in at 51.6; missing expectations despite hitting an 11-month high and having accelerated sequentially versus February's print of 50.4. On the margin, however, this is a positive improvement for China after last week's banking and credit regulation debacle. We don't have a position in China currently, but will keep a close eye on the TREND line of 2207 on the Shanghai Composite Index. If it holds, we may be inclined to hop back into the market.


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Russian Stocks Crash And Burn

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Food Prices Plummet

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MKC - Valuation is Absurd, but Q1 Consensus is Achievable

Investors are in a tough spot trying to short anything in consumer staples these days and MKC is an excellent example of why that is the case.  The company guided down 2013 significantly when it reported Q4, to the point where Q1 is achievable based on where consensus has settled ($0.56).  Since the guide down, the company’s multiple has expanded significantly (and significantly may be understating it, massively may be a better word).  At some point, valuation is going to matter in this name, but as we are fond of saying, valuation isn’t a catalyst.  Earnings are, however, a catalyst, so here is a quick look at where we shake out on the quarter:

MKC is up against its toughest revenue comp of the year (+15.8% reported, +9.5% constant currency organic).


The company’s 2013 outlook contemplates a 1% benefit from pricing, which seems reasonable to us - keep in mind that the company anticipated pricing of 5% across both of its segments in 2012, and was only able to achieve that target in 1H (Q3 pricing +4.5%, Q4 +3.2%).

The company’s 2-4% volume/mix forecast is likely 2H weighted given the progression of volume/mix in 2012 (+4.3% in Q1 moving to -0.3% in Q4).


We are at the lower end of the company’s range for our Q1 estimate.  Acquisitions won’t be a factor in sales growth in Q1 and currency should remain a drag on top line – the net result is our revenue forecast of $924.8 million, slightly below consensus of $925.7 million.


However, the company’s gross margin comp (-274 bps) is the easiest year over year comparison of 2013 as the company is lapping a significant increase in input costs.


Material cost increases are forecasted to increase 3% in ’13 (high single digit cost inflation in 2012), and that should be a trend that improves throughout the course of the year.  Consensus gross margin is 39.4%, only a slight improvement versus 2012 (39.19% reported).  We think consensus may be too conservative on this metric – we are looking for a 50 bps increase, with a net result of a 3.3% increase in gross margin dollars versus 2012.


While SG&A as a % of sales declined 102 bps in Q1 2012 and the company is lapping a $9 million increase in brand marketing support, we are forecasting a modest increase in this metric - +15 bps.


Taken together, we forecast a modest gain in EBIT margin of 35 bps.  In Q1 2012, the company’s EBIT margin declined 172 bps making this quarter the the easiest comparison of the year for MKC.


Finally, the tax rate will be lower year over year (29.5% forecasted full year annual tax rate).


Where does that leave us?


Our forecast is for EPS of $0.60 per share, $0.04 ahead of consensus, recognizing that Q1 2012 consensus declined versus the prior year (-2.9%).   This is precisely why it has been so tough to be short anything in staples – the combination of money flows and the fact that there aren’t a heck of a lot of names where we have a clear path to an earnings miss.  Having said that, we don’t see beating a sandbagged Q1 as a positive catalyst for MKC, particularly in light of the recent multiple expansion in the name.  Quite frankly, it’s hard for us to see how you get hurt on the short side here, but in the spirit of full disclosure we have thought that for about $3, or 1 full P/E turn.  Also, it seems that unless a staples company posts a clear EPS miss followed up by a conference call where management lights themselves on fire, staples names only go up on EPS, regardless of quality (GIS?).  Finally, we should also point out that short interest has crept up in the name in recent weeks and, unfortunately, it seems that any short in consumer staples is a weak short, so we wouldn’t take in a full position and would be prepared to short higher – the multiple will matter at some point.


MKC - Valuation is Absurd, but Q1 Consensus is Achievable - MKC PE 4.1.13

Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

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