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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

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