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.

 

FULL DETAILS 

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. 

7 Tweets Summing Up What You Need to Know About Today's GDP Report

"There's a tremendous opportunity to educate people in our profession on how GDP is stated and projected," Hedgeye CEO Keith McCullough wrote today. Here's everything you need to know about today's GDP report.

read more

Cartoon of the Day: Crash Test Bear

In the past six months, U.S. stock indices are up between +12% and +18%.

read more

GOLD: A Deep Dive on What’s Next with a Top Commodities Strategist

“If you saved in gold over the past 20 to 25 years rather than any currency anywhere in the world, gold has outperformed all these currencies,” says Stefan Wieler, Vice President of Goldmoney in this edition of Real Conversations.

read more

Exact Sciences Up +24% This Week... What's Next? | $EXAS

We remain long Exact Sciences in the Hedgeye Healthcare Position Monitor.

read more

Inside the Atlanta Fed's Flawed GDP Tracker

"The Atlanta Fed’s GDPNowcast model, while useful at amalgamating investor consensus on one singular GDP estimate for any given quarter, is certainly not the end-all-be-all of forecasting U.S. GDP," writes Hedgeye Senior Macro analyst Darius Dale.

read more

Cartoon of the Day: Acrophobia

"Most people who are making a ton of money right now are focused on growth companies seeing accelerations," Hedgeye CEO Keith McCullough wrote in today's Early Look. "That’s what happens in Quad 1."

read more

People's Bank of China Spins China’s Bad-Loan Data

PBoC Deputy Governor Yi says China's non-performing loan problem has “pretty much stabilized." "Yi is spinning. China’s bad-debt problem remains serious," write Benn Steil and Emma Smith, Council on Foreign Relations.

read more

UnderArmour: 'I Am Much More Bearish Than I Was 3 Hours Ago'

“The consumer has a short memory.” Yes, Plank actually said this," writes Hedgeye Retail analyst Brian McGough. "Last time I heard such arrogance was Ron Johnson."

read more

Buffalo Wild Wings: Complacency & Lack of Leadership (by Howard Penney)

"Buffalo Wild Wings has been plagued by complacency and a continued lack of adequate leadership," writes Hedgeye Restaurants analyst Howard Penney.

read more

Todd Jordan on Las Vegas Sands Earnings

"The quarter actually beat lowered expectations. Overall, the mass segment performed well although base mass lagging is a concern," writes Hedgeye Gaming, Lodging & Leisure analyst Todd Jordan on Las Vegas Sands.

read more

An Update on Defense Spending by Lt. Gen Emo Gardner

"Congress' FY17 omnibus appropriation will fully fund the Pentagon's original budget request plus $15B of its $30B supplemental request," writes Hedgeye Potomac Defense Policy analyst Lt. Gen Emerson "Emo" Gardner USMC Ret.

read more

Got Process? Zero Hedge Sells Fear, Not Truth

Fear sells. Always has. Look no further than Zero Hedge.

read more