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Nike Vs.Under Armour: Deep Dive into Endorsements

This note was originally published August 05, 2014 at 17:48 in Retail

Here’s a detailed financial look at athlete endorsement trends between Nike and Under Armour.


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.


Nike Vs.Under Armour: Deep Dive into Endorsements - 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.


 Nike Vs.Under Armour: Deep Dive into Endorsements - 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.   


Nike Vs.Under Armour: Deep Dive into Endorsements - 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.


Nike Vs.Under Armour: Deep Dive into Endorsements - 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.


Nike Vs.Under Armour: Deep Dive into Endorsements - UA chart5

RL – Big Win If They Get This Right

Takeaway: The key question here is the duration of the transition and investment needed to launch the company into its next mega-growth cycle.

Not much in this RL quarter to get excited about one way or the other. The market already made that abundantly clear.  While there were a few interesting takeaways for us on the specific business units and growth levers, the big question for us is simply when the time will be right to step up and make a definitive long call on RL.  We don’t think it’s a question of If, but When.


Simply put, virtually every negative factor associated with the investment case around RL can ultimately be tied back to the company transitioning from one long-tailed cycle of repurchasing licenses/regaining control of the brand, to accelerating organic growth of its content on a global scale. Opportunities don’t come along very often where the stock of a quality company is out of favor due to the near-term financial impact of the company doing the right things to re-fuel growth. Operating profit – in absolute dollars – just hit a 4-year low with the quarter that RL reported today. The growth algorithm was horrible. Sales +3.3% (closer to flat excluding Chaps), EBIT -6.2% and EPS -7.6%. Not much to get excited about, and certainly not what one expects from a quality company like RL.  But that’s precisely why the stock is trading at 16x earnings – near the biggest discount  to Nike in the modern history of both companies. It’s also why the short interest is up 240% in six months.


We still have a lot of work to do on this one. Specifically, this ‘investing period’ everybody talks about is a lot more than that. It’s a major shift in direction for the brand(s), company, management and infrastructure. The question in our mind is whether this takes another 2-3 quarters to take hold instead of 2-3 years. If it’s the latter, then this stock is going nowhere but down.  But ultimately, if our model as outlined below is correct, then we’re going to see this company earn $10.00 per share next year, and $16.00 in year five of our model. As it exits ‘investing mode’ we’ll see organic growth accelerate to the high single digits, margins blow through prior peak to 18%, $5bn of cumulative free cash flow (which we have buying back stock), and RNOA approach 40%. Today the stock is trading at 16x next year’s earnings, and less than 10x EPS in year 5 of our model. That’s a story that not only offers considerable downside if our initial model is right, but long-term upside to $300. With a story like that, we’ll let the consensus bicker all it wants about Polo stores and Ricky bags.


RL – Big Win If They Get This Right - rl financials

RL – Big Win If They Get This Right - NKE RL PE Spread

We Called It: A Slowdown in Mass Business in Macau

Takeaway: Our gaming, lodging and leisure team predicted the deceleration in the mass business in Macau.

The Street’s bullish thesis of Mass in overdrive has grinded to a halt with the release of the July Macau detail.  Mass revenue grew only 17% year-on-year, well below our projection of +24% and consensus of +30%. 


The disappointing Mass performance is in line with our Mass Decelerating theme for the second half of the year but the slowdown is occurring faster than even we thought.


In this video from June 13, Gaming, Lodging and Leisure Sector Head Todd Jordan and Senior Analyst David Benz discuss the likelihood for a slowdown in the mass business.



Cartoon of the Day: Small Caps, Big Problems


Cartoon of the Day: Small Caps, Big Problems - Small cap cartoon 08.06.2014


The Russell 2000 continues to struggle.


LEISURE LETTER (08/06/2014)

Tickers: CZR, WYNN, H, CCL, NCLH


  • Aug 6:
    • RLJ 2Q 10am:
  • Aug 7:
    • Revel Auction Proceedings
    • MPEL 2Q 8:30am: , pw: MPEL
  • Aug 8:
    • CHH 2Q 10am: , pw: 30848466
    • DRH 2Q 10am: , pw: 153358818
    • AHT 2Q 11am:
    • SHO 2Q 12n:
  • Aug 11:
    • HPT 2Q 1pm:
    • CZR 2Q 4:30pm: 844.231-441, pw: 55917191
    • STN 2Q 430pm
    • HTHT 2Q 9pm: , pw 7103 4558
  •  Aug 12:
    • HMIN 2Q 9pm: , pw HOME INNS


8156:HK – China Vanguard Group Ltd  is paying RMB17.5 million (US$2.8 million) for an electronic marketing and administrative platform, Trans Pacific Associates Ltd. Trans Pacific, a British Virgin Islands holding company, provides interactive electronic marketing and administrative services to the lottery industry in mainland China – including the China Welfare Lottery Center and the China Sports Lottery Administration Center. 


Separately, China Vanguard announced that an indirect non-wholly owned subsidiary had entered into a cooperative agreement with the Shandong Province Sports Lottery Administration Center. The deal covers provision of “lottery solution, sales distribution and other related services”. The company will be paid a percentage of total sales generated. Shandong province recorded RMB12.24 billion of Sports Lottery sales in 2013, ranking second amongst all provinces in mainland china, with a year-on-year growth rate of 15.5%.

Takeaway: A lot of growth in China lottery play.


CZR – The Horseshoe Casino on Russell Street in Baltimore is readying for its opening on August 26. The casino is located a few blocks from M&T Bank Stadium, and will have an outdoor tailgating area that will be used before Ravens games. The casino is expected to be ready for a pair of controlled demonstrations, on Monday, August 18, and Thursday, August 21, where invited guests will be permitted to gamble in the casino, with the proceeds going to charity. The benefiting charities have yet to be announced.

Takeaway: On schedule


WYNN – There’s a state bond bill sitting on Gov. Deval Patrick’s desk that will provide $50 million to clean up the old Monsanto site in Everett if Wynn can’t build a resort-style casino on the property. Revere residents will get the change to argue their points before the last public commission meeting on Monday, the day prior to Everett's final open meeting. The Massachusetts Gaming Commission will make its final decision on the license by September 12. 

Takeaway: Stay tuned.


H – a wholly owned Hyatt subsidiary has completed its acquisition of the 100% of the 210-room Park Hyatt New York for approximately $390 million, inclusive of pre-opening and related costs.  Park Hyatt New York is expected to open later this month.

Takeaway: As discussed during the company's recent earnings call.


CCL/NCLH (kiroTV) – two cruise ships return to Seattle with different issues

The Norwegian Pearl was turned around because of a passenger’s medical emergency.  The Grand Princess experienced a problem with an engine and returned to sit at Pier 91 for almost four hours.


Delays, delays, delays –

  • River Spirit Casino's Margaritaville in South Tulsa won't open until Fall 2016 because of a permit hold up
  • Baha Mar, the $3.5 billion resort, will delay its grand opening until late spring 2015, and will open in stages starting in December. The entire resort was originally to have opened in December.  Darron Cash, chairman of the Free National Movement, blamed the government for failing to implement new gaming laws as a reason for the delay. 
  • Construction on Dan Kehl’s Davenport casino has been delayed because of questionable wording on the project’s development agreement, the Quad City Times reported.

Takeaway:  It's not just Macau/Philippines encountering new project delays. 


South Korea Gaming Expansion (Reuters) Paradise City, a Paradise Co Ltd and Sega Sammy Holdings, joint project near South Korea's main Incheon airport should open in Q1 2017.  Groundbreaking is planned for October.  The joint venture plans to open the first phase of the resort with casino, hotel, shopping, entertainment and convention facilities, at a cost of about 1 trillion won. The phase will include 120 tables, 400 slot machines and 300 electronic gaming tables, small by the standards of mega-resorts elsewhere.  Paradise City will also rely on junket operators to bring in 20-30 percent of its business. 

Takeaway:  Little impact overall as long as S Korea does not ease the local play ban


Atlantic City New Casino Development – Discussions begin today on plans to build an 850-room casino-hotel and 3,000-space parking garage in the city’s Chelsea District.  A.C. Gateway Owner LLC, which is a joint project of Goldman Sachs Mortgage Co. and the real estate investment fund Arefin US Investment LLC, has revived a waterfront-development permit (called a CAFRA permit, for the Coastal Area Facility Review Act) which was originally opened when Hard Rock International attempted a development on the same parcel. The plan at issue calls for phased construction of a casino on land bounded by Pacific Avenue, Hartford Avenue, the Boardwalk and Roosevelt Avenue. A garage would be built on an adjacent tract, near O’Donnell Memorial Park.

Takeaway: We doubt such a new development will see the light of day.


Revel Proceedings – The bankruptcy court overseeing the Chapter 11 proceeding of Revel AC Inc. laid out the following timeline:

July 19: Letters of intent to bid were due

August 4: qualified bids submitted

August 7: an auction, if require

August 8: sale hearing according to a court order.

The auction would take place at the New York offices of the company’s counsel, White & Case, and the sale hearing at bankruptcy court in Camden, N.J.

Takeaway: Expect news very soon.


Trump Atlantic City – Donald Trump filed a lawsuit on Tuesday demanding that his name be stripped from the two Atlantic City casinos, the Trump Plaza and the Trump Taj Maha as Mr. Trump has not been involved in their operations for more than five years. Trump's lawsuit, filed in state Superior Court in Atlantic County, seeks a court order directing Trump Entertainment Resorts to immediately cure what it terms a breach of Trump's licensing agreement with the company or remove his name from the casinos and the company itself. Trump Plaza is set to close on September 16, 2014. 

Takeaway: Mr. Trump attempting to disassociate from the demise of Atlantic City and the properties which bear the Trump name.


Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye

Macro/Financials team is turning decidedly less positive. 

Takeaway:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

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