Nike, Adidas, and Under Armour: The High-Stakes Game of Endorsements
While Nike (NYSE: NKE) has grown its top line at an impressive 37.8% over the past five years, Under Armour (NYSE: UA) has grown at a 180.7% clip. Adidas has lagged its peers in this area, seeing top-line growth of 29.5% over the same time frame.
Both companies sponsor popular athletes in order to increase their brand exposure. For example, LeBron James is arguably the most popular athlete in the world right now, and Nike has a $90 million deal with him. When young kids and teens see LeBron wearing Nike sneakers, they're going to want the same sneakers. This puts the Nike name in young consumers' minds for life.
Look at the success of Air Jordans, which are still popular today. They began selling in 1985. Having sponsored Michael Jordan back in 1984 (five-year deal for $500,000 per year plus royalties) has paid enormous dividends for Nike. Adidas and Under Armour are attempting to sign the next superstar. Will they succeed?
Betting on famous
Nike has set the high bar when it comes to endorsements. It has landed names such as Maria Sharapova ($70 million), the aforementioned LeBron James ($90 million), Tiger Woods ($100 million), and Rory McIlroy ($200 million).
Adidas made a Michael Jordan-like bet with Derrick Rose. Only this bet is much more expensive, costing Adidas $200 million. Adidas had been watching Rose since he played at the University of Memphis. Adidas signed him the minute he went pro. In 2011, he was the youngest player to win an NBA MVP, at just 22 years old. An injury set him back last year, and after just 10 games this year, he suffered a knee injury. Potential is still there, but it looks like Adidas overpaid.
Adidas also endorsed David Beckham for $160 million. Beckham has an impressive history, including playing for Manchester United, AC Milan, and LA Galaxy. He has played in 100 Champions League matches, and he has won titles in England, Spain, and in the United States. However, Beckham's popularity never took off in the states as expected.
Under Armour didn't recently make a big bet on an athlete, but there are hints that it might do so soon.
Under Armour sponsors many big-name athletes, including Cam Newton ($1 million per year), Tom Brady (stock options), and Michael Phelps ($5 million). The list goes on and on, but these are three of the biggest names endorsed by Under Armour.
Tom Brady is one of the best quarterbacks ever to play in the NFL. And he might have a few more good years left. But he's still deep into the second half of his career, and this isn't the type of athlete that most young consumers look up to. Like it or not, they want flash and style and someone they can potentially be like in a few years. Of course, this almost never happens, but it's the dream that sells the sneakers and athletic wear to young consumers. And if it's not the dream, it's the dreams of others, which leads to a cult-like following of a specific brand.
As far as Michael Phelps goes, amazing athlete but now considered old news. Cam Newton looks like a win, but a trip to the Super Bowl would have really made a splash. While Cam has the potential to reach the big game at some point in his career, especially if the Panthers defense stays healthy, his ceiling doesn't appear to be as high as Johnny Manziel's.
The Baltimore Sun recently reported that Johnny Football visited Under Armour headquarters, where a banner awaited him. The banner read: "The Under Armour Family Welcomes Johnny Manziel."
Under Armour has stated that there are no endorsement deals to report, but when a banner awaits an athlete outside a company's headquarters, the writing is on the wall. And keep in mind that Under Armour loves to make a splash in the news.
Even if you disagree with Manziel's ceiling being higher than that of Cam's, he brings more excitement and personality to the table. Therefore, if he ends up being a winner, it could mean massive exposure, which would be a benefit for Under Armour is he's rocking the company's gear. This, in turn, would lead to increased sales of Under Armour merchandise.
The bottom line
Nike has been around much long than Under Armour, which allows for greater brand strength and cash flow generation. The cash flow can then be put back into the business for growth. Nike is also the current leader in the endorsement arena. However, Under Armour knows it needs to sign a big-potential athlete before that athlete reaches or exceeds expectations. Manziel seems like an ideal candidate.
Even if this deal doesn't come to fruition, look for Under Armour to make some key signings over the next few years, which will lead to increased brand exposure and higher sales. Under Armour uses 11% of annual revenue for marketing. With Under Armour's revenue climbing 180.7% over the past five years, the brand has reinvested in itself at higher levels every year. That kind of growth will be difficult to match over the next five years, but Under Armour's top-line growth has been very consistent. If this trend continues, it will mean more reinvestment into the business and increased brand recognition/sales. It's a positive cycle that isn't likely to be broken for a considerable amount of time.
If you would prefer to play it safe and conservative, Nike should take care of you -- 1.30% dividend yield included. Please do your own research prior to making any investment decisions.
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The article Nike, Adidas, and Under Armour: The High-Stakes Game of Endorsements originally appeared on Fool.com.Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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