NKE/UA - FIFA Allegations Could Disproportionately Accrue To UnderArmour
If you haven't heard, seven FIFA officials were arrested in Switzerland yesterday as part of a global bribery scheme centered around illegal cash payments and marketing/broadcasting rights. Nike appears to be caught in the fray, identified in the indictment as 'Sportswear Company A'. For starters the relationship with the Traffic Group (NKE paid the company $30mm from 1996-99) looks questionable. The owner and founder plead guilty to racketeering and money laundering charges late last year and forfeited about $150mm. The way the scheme worked, Traffic would acquire marketing rights for large soccer events and then auction them off the broadcasting and marketing rights to the highest bidder (or best connected bidder). The fact that the relationship with Traffic kicked off just days after Nike signed a deal with the Brazilian Soccer Federation adds a little fuel to the speculation fire.
We actually view this to be not entirely dissimilar to the zoning/real estate bribery scandal Wal-Mart battled in Mexico and the fraud Reebok 'allegedly' committed in India. We'd never in a million years say that this is 'part of doing business' overseas for any multinational. But it absolutely underscores the risk management procedures that are necessary once companies move beyond US borders.
As it relates to any financial impact, we're not too worried about Nike's exposure. We're more concerned about changes in regulation around FIFA and other leagues that deal with product and broadcasting licenses. In Nike's case, regulation is bad. It has a clear financial edge over any other sportswear company anywhere in the world, which is a major asset in a deregulated licensing environment. But if the field of play is more standardized, then we'd argue that it could accrue disproportionately to smaller brands like UnderArmour.
ANF: Another Muddy Print -- We're Still On The Sidelines
A few highlights: a) Comp improvement vs prior two quarters, despite lower promotional activity. b) Comp trends have improved in May. c) US AUR stabilizing, International AUR is down intentionally to driving better conversion. d) International DTC saw healthy growth, US DTC negative yoy (that's still a big red flag for us). e) AUC improving -- down MSD in Q1. f) Guidance: sequential comparable sales improvement into the second quarter and the second half of the fiscal year, in-line with prior guidance. Gross margin rate to be flat to slightly up, same as prior guidance. Op expenses down 40mm, guided roughly flat before.
As it relates to the stock, we have a hard time getting an edge on this one. We get the story around management, cost cuts, store rationalization, a more activist board, etc… But where we come up short is that when all is said and done, we'd still be left owning the Abercrombie brands, which are simply not relevant to what used to be the core teen consumer anymore.
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