UA/NKE: Tom Brady -- Free Agent

Tom Brady is a free agent -- at least as it relates to retail. Under Armour struck first in the game of chess. Don't jump to conclusions before seeing who captures the king.

 

 

Anybody watch the Patriots/Dolphins game on Monday night? See Brady’s shoes? For the first time in his career as a Patriot, he was not wearing Nike.  Certain folks in the press have picked up on this, and are running with it in their own special, albeit inconsequential, way. No single deal can make a brand – and I don’t care what brand it is. If anything, we’d argue that a deal (and fincial terms therein) can break a company a lot easier than it can make or break the brand. But the key here is that you need to put the Brady endorsement into context. It’s important to watch, but not for reasons others might think. Consider the following…

 

UA/NKE: Tom Brady -- Free Agent - tbua

 

1)      Cross-Over Appeal: Brady is one of those cross-over athletes. Like Maria Sharapova, Lance Armstrong, or (at least the former) Tiger, Brady could be on the cover of Sports Illustrated and GQ at the same time. Add on the fact that he’s married to one of the most sought-after supermodels on the planet (Gisele Bunchen), and you can tack on People magazine as well due to the ‘Brangelina’ factor.

 

2)      But is Brady An Exception to The Rule?: Despite having all this going for him, Brady has  arguably been a low-return investment for Nike, who has been paying a minimum of $12mm in each of the past four years. Think about it in the context of a required return of 10% (below any of the major brands’ IRR). Let’s keep the math simply. $48mm over 4-years should result in about $53mm of EBIT. Using a 50% incremental margin, we’re talking $105-$110mm in revenue required to justify Brady. That sounds kinda big, especially given that he’s not exactly ‘Mr. Personality’ around game time. (Author’s note: what a sad note about public perception – as he so focused on winning that he generally could care less about the press, and sometimes gets dinged for it). But it does impact commercial value relative to athletes like Drew Brees and Troy Polamalu, who are also leaders in their own right, but are less expensive and are more marketable around game time.

 

3)      This Might Be a Game of Chess: Why?

  1. This is far from a done deal. Keep in mind that Reebok (adidas) currently holds the license for the entire NFL as it relates to ‘official on-field’ apparel. This is a 10-year deal that ends in 2012. Seems far off, but whoever designs the product for 2012 needs 18 months lead time at a minimum. So that’s up for bid now. Before we get a decision, they’ll be plenty of iterations of agents, brands, and even the NFL itself playing the pricing/positioning game through the press.
  2. In May, the Supreme Court ruled 9-0 against the NFL that it can no longer treat this contract as a single business, but rather a group of businesses. This is a win for the players association, as well as brands that don’t want to be obligated to pay for unprofitable parts of the license that they want no part in (mouthguards, gloves, whatever…).
  3. What’s the point? After seeing Brady win his 100th game on Monday wearing Under Armour cleats, you can be pretty darn sure that Nike’s head US Football dreaded going to work on Tuesday morning. Nike probably would admit that Brady is not worth as much coin as he’s been pulling down. But a bigger question might be the cost if they were to allow him to fall into the hands of its top competitor in football. In other words, has Nike gotten so big that people don’t give them credit for the endorsement, but will only penalize them for not having it?
  4. Does Under Armour know (or think that they know) that Nike won’t lose Brady, so they’re putting on the pressure on the comp level to pull resources away from pieces of the unbundled NFL license that UA will find more attractive?

 

This is the kind of media noise and speculation (including our own) that we won’t bake into our model just yet. We need to wait to get the facts. It’s a good news/bad news/good news scenario. The fact that UA is on such offense right now speaks to the health and trajectory of its business. On the downside, these deals are ALWAYS dilutive before they regurgitate any cash – no exceptions. But in the end, this is all consistent with a) what UA should do, and b) what management said it would do over the past several years.

 

 

UA/NKE: Tom Brady -- Free Agent - tb1

 

UA/NKE: Tom Brady -- Free Agent - tb2

 

UA/NKE: Tom Brady -- Free Agent - tb3


Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more