NKE vs. UA – Endorsements Deep Dive

Takeaway: UA sponsorship portfolio is evolving rapidly. That’s not bad. But costs are accelerating more than many realize. Rev matters more than ever.

Conclusion: Here’s a detailed financial look at athlete endorsement trends between Nike and UnderArmour. These are long-term trends that don’t serve as a smoking gun for a given quarter. That said, it is fascinating to see how the portfolio of sponsorship deals is both growing and maturing at an accelerating rate. Furthermore, we can see the costs that are coming down the pike. For example, next year NKE is looking at an incremental $82mm (or $991mm in total) in endorsements. To justify that without being margin-dilutive, NKE needs to generate an extra $585mm in revenue. That’s 2.1% growth, which it can pretty much do in its sleep. UA, on the other hand, is looking at a 39% jump in minimum sponsorship payments to $81mm, its biggest jump ever. UA can cover that with a 9% incremental sales boost, or $210mm – not a problem for UA. But keep in mind that this past year it only needed $45mm to cover a measly $5mm incremental bump in endorsements. If there’s any real takeaway here it’s that as UA grows and succeeds in its own right, it is competing increasingly against the big boys (NKE, Adidas, Reebok, Puma) for marketable talent. It has a great advantage in that the brand is so hot, authentic and relevant. But those factors do not trump the economics associated with a higher ante-chip for sponsorship deals. We can see what’s coming on the cost side, now we just need the revenue to follow. It’ll probably come. But anyone looking for margins to go up might be in for a surprise. The revenue growth did not matter as much over the past year – but now it matters materially, especially with the stock trading at 70x+ earnings.



When people think of the biggest costs associated with competing in the athletic footwear and apparel business, they usually talk about raw materials, labor, distribution and physical infrastructure. All those things matter. But one of the biggest costs is athlete endorsements. This line item is so big, in fact, that the companies are required to file all minimum required payments in almost exactly the same way that retailers are obligated to outline future minimum lease payments under operating lease agreements.


We think that the comparisons are particularly interesting between NKE and UA. Obviously, there is a huge difference in aggregate sponsorship amounts, but in looking through the numbers we can pull away some interesting trends as to how each company’s portfolio is structured and evolving. Here are some key takeaways:


1. Gap is Huge, But Closing: Nike has $4.7bn in forward obligations to pay its athletes and teams, while UnderArmour is sitting at $273mm. That’s a huge difference, but keep in mind that UA was only 2% as large as Nike four years ago, and is 6% today. That far outpaced UA’s revenue growth.


NKE vs. UA – Endorsements Deep Dive - ua chart1


2. Both Follow The Same Trend.  We’d go to the mat with anyone who claims that UA and NKE don’t compete against one another for talent (yes, many people make this case to us). The reality is that when we chart sponsorship obligations over time as a percent of sales, the trends are unmistakable for these two companies. Nike operates on a higher (more expensive) plane than UA. But in each of the past seven years, they have moved in exactly the same direction. Nike’s not worried about this. UA probably should be at some level.


 NKE vs. UA – Endorsements Deep Dive - UA chart2


3. As a % of Demand Creation Spend, UA has become Nike. This chart is fascinating to us, as it shows how sponsorships went from 15% UA’s Demand Creation budget in its earlier years, and has more than doubled to a level that sits just higher than Nike.  This is neither good nor bad. It simply tells us that sponsorships and endorsements are a key part of the UA model.  Unfortunately, we’d point out that Nike has 4x more sponsorship obligations globally today ($4.7bn) than UnderArmour has generated in Operating Profit since the brand’s inception in 1996. UA is going to have to get more active with some bigger name athletes, and Nike won’t be too keen to lose that battle.   


NKE vs. UA – Endorsements Deep Dive - UA chart3


4. Obligation Weighting: UnderArmour generally has an endorsement portfolio with obligations that are more near-term weighted. Today, about 65% of its obligations are due by the end of 2016. Again, that’s neither good nor bad…it’s simply UA’s strategy.  Nike is more back-end loaded with almost a third of its deals due after 5-years. This is due to Nike’s long-term deals with the leagues like the NFL and national teams like Brazil. It’s in the process of exiting its 10-year deal with Manchester United, which saves it about $38mm annually.


NKE vs. UA – Endorsements Deep Dive - UA chart4


5. In looking at UA more closely, there’s actually been a fairly dramatic change in its sponsorship duration composition over the past two years alone. UA went from having 84% of deals due within 3-years and only 1% after 5-years, to having 19% due after year 5. This shows that UA is playing in the big leagues - competing for higher profile athletes and teams.


NKE vs. UA – Endorsements Deep Dive - UA chart5


Takeaway: Developing quant signals & fundamental data are supportive of investors adopting a defensive allocation w/ respect to the intermediate term.

In the following ~3-minute video, Senior Analyst Darius Dale walks through the key takeaways from our revised macro strategy, which we detail in a new 50-page slide deck jam-packed with thoughtful analysis and non-consensus conclusions.  


CLICK HERE to download the associated presentation.


CLICK HERE to view the aforementioned summary video. The investment conclusions are detailed below:




As always, please feel free to ping us with any follow-up questions.


All the best,




Darius Dale

Associate: Macro Team

BNNY: This Will Be Ugly

BNNY remains on the Hedgeye Best Ideas list as a Short.


Annie’s is reporting 1QF15 earnings on August 7th AMC.


Trading at 33x P/E (NTM), BNNY continues to be overvalued and is likely to contract further as we believe the company will disappoint on Thursday and guide lower for the remainder of the fiscal year.


Over the long run, the Annie’s brand and continued growth of organics should power above average sales growth, but earnings will remain elusive.  Importantly, BNNY will not generate any operating profit this quarter.  The competitive pressures in the organic space, specifically in the Mac ‘N’ Cheese segment, will not abate anytime soon.


Earnings estimates have moved slightly lower during the quarter, as the organic segment continues to see slower trends.  Depending on how well the company is able to manage SG&A, we believe earnings will come in around ($0.05) for the quarter.  This is $0.02 below consensus, but it wouldn’t surprise us if the company is able to manage expenses to limit the damage in the quarter.


Our model generates lower sales than the Street, as well as lower gross margins and SG&A margins.  We’re expecting sales growth of +3% in the Meals segment, which would imply a slowdown from recent trends in the category, reflecting the recent deceleration in consumption and the UNFI deloading.


BNNY: This Will Be Ugly - 1


Following the release, we expect the FY15 consensus EPS estimate of $0.90 to be revised lower by $0.10-0.20. 


The risk to staying short is an outright sale of the company, but we don’t see this happening any time soon!


The table below outlines our risk/reward profile for the company.


BNNY: This Will Be Ugly - 2


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



Home Price Appreciation Slowing

July CoreLogic Home Price Report

CoreLogic released its monthly home price report for June/July earlier this morning. Unlike S&P/Case-Shiller, which is a rolling 3-month average repeat sales index,CoreLogic is a single month index released on almost no lag. Essentially, it gives you information three months more current than what you get from Case-Shiller. 


CoreLogic estimates that home prices rose +7.0% YoY in July, a deceleration vs the +7.5% in June and +8.3% in May. We show this in the first chart below.


Interestingly, in the past few months we've seen material upward revisions to the preliminary estimates for the most recent month-ended. In the last two months, however, the revision was negative. The preliminary estimate for June was +7.7% and the final number came in at +7.5%. Meanwhile, May has been downwardly revised twice in the last two month. It began at +8.9%, was cut to 8.8% and is now 8.3%.


Its also worth noting that while sales comps begin to ease through 2H14, price comps don’t really begin to ease until Feb 2015 (hardest near-term comp is Oct which was +11.9% YoY). As such, we think the next 6-8 months of worsening pricing data will weigh on the housing complex.


Our main thesis on housing is that the rate of home price appreciation will slow meaningfully over the course of 2014 and into 2015. Historically, inflections in the rate of HPI or HPD have been major macro drivers of relative positive or negative performance.


Home Price Appreciation Slowing - chartA


Drilling down, MGM’s quarter was not as good as advertised.  Macau commentary flashed some warning signs.




We remain negative on most of the Macau operators – Galaxy (0027.HK) is the exception – and MGM’s Q2 earnings and call did not provide any relief.  MGM maintains the lowest exposure to Macau of the major gaming operators but the company disappointed us in the US as well.  Going forward, lower flow through, tough comparisons, and new supply could temper sentiment for the Strip.  However, our real concern remains Macau and MGM management’s tone and commentary seemed to provide some backing for our Mass decelerating thesis.



Here are two takeaways from MGM’s Q2 earnings release.

  • MGM reported wholly owned adjusted EBITDA of $414 million, up 10% over last year.  However, if you normalize hold in both periods, EBITDA was roughly flat.  That seems disappointing to us given the excitement about a surging Las Vegas recovery and the solid RevPAR gain of 6% generated in the quarter.
  • MGM Macau disappointed with net revenues in line with our projection but EBITDA fell $14 million below our estimate and $18 million below the Street.  From our estimate, it looks like yet another Macau property missing on margins.  The below normal VIP win % of 2.7% was already reflected in our model.  We estimate margins should’ve been over 100bps higher than the actual EBITDA margin of 25.4%, given the higher Mass mix of revenues in Q2 2014 versus Q2 2013.



MGM’s earnings call probably provided the most important takeaways.  MGM China CEO Grant Bowie seemed to hint that there could be a Mass slowdown this summer.  While not discussed by the Street because it conflicts with their "Mass Is Great" thesis, June Mass growth decelerated to +27% from 30-40% in recent months.  Bowie’s comment about Macau seasonality emerging similar to other mature markets suggests that Mass growth in July and August could continue to decelerate.  Mass deceleration has been our thesis as articulated in our 06/13/14 note, MACAU: HANDICAPPING MASS DECELERATION.


Second, Mr. Bowie also seemed to suggest that conditions in the Mass market are very competitive.  We believe these market conditions may have contributed to the across the board softer margins for the Macau operators in Q2. Meanwhile, while probably stable, it doesn’t look like there is any meaningful uptick in VIP trends.  This is in line with our view that VIP seems to have bottomed but growth remains elusive.



Our primary concern remains intact:  Mass is decelerating and operators may face increasing pressure to grow this business. While VIP continues to struggle, the decelerating Mass would be the biggest delta from investor expectations.  The sell side seems focused on a 30% Mass growth rate for 2H 2014 but the math and anecdotal evidence (some of it from the MGM call) seems to suggest a rate 5-10% lower.  We see Mass growth decelerating to the high teens by the end of the year.  While we remain positive on Macau long term, Mass deceleration would likely pressure the stocks further.

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