Dick’s Blames Under Armour for Missing Sales Expectations

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Dick’s Sporting Goods failed to hit Q2 topline expectations (reporting sales of $2.18 billion, expectation was $2.23 billion) and CEO Edward Stack attributed the short-fall to “significant declines” in Under Armour (UAA) sales. Stack said it was the sneaker and apparel company’s decision to “expand distribution” into more low-priced retailers (think: Kohl’s) that created the headwind; a challenge the company expects to get “figured out” in 2019 (they’ll add new product to shelves). Athleisure as a category continues to perform well for DKS, the company reported athletic apparel (excluding UAA) delivered double-digit growth; eCommerce and private brands also posted double-digit growth during the 2nd quarter.

Howie Long-ShortDKS comparable sales were down -1.9% YoY, with the company’s hunting (i.e. guns) and electronics business responsible for nearly half of that decline. It’s important to note that the decline in the company’s gun business is systematic and not a byproduct of policy change following last February’s Las Vegas shooting. Even with comp sales down, the company blew past Q2 earnings estimates ($1.20 vs. $1.06). DKS shares tumbled by as much as -14% in pre-trading on the morning of Wednesday August 29th (earnings released after close in 8.28), but have since recovered, finishing last week +3% ($37.44) from the closing price on 8.28. Shares are up +27% YTD.

Under Amour (UAA) posted financials on July 26th. While the company’s U.S. business failed to gain much momentum (+1.6% YoY) – despite expanded distribution – international sales surged (+28% YoY) during Q2 ‘18 and the company managed to reduce excess inventory. Q2 wasn’t a “victory” for UAA though, as the company reported a quarterly net loss of $95.5 million and announced it would be committing another $80 million (in addition to the $130 million it already committed) to its long-term restructuring efforts. Despite the heavy spending on its turnaround (focus going from men to women/kids, $80-$100 price point) and the continuing headwinds (think: leisure over performance), UAA shares are up +36% YTD (though, down -2% since DKS reported); they’ll open on Tuesday at $20.45.

Fan Marino: Though shoppers have been bypassing DKS for low-priced retailers in search of UAA goods at a bargain, Stack did note that he was pleased to see the company has been receiving more “premium” merchandise from the Baltimore-based athleisure manufacturer. Products “like the HOVR sneaker, and sneakers and clothing from Under Armour’s new line with Dwayne Johnson” can help differentiate DKS from their low-priced competitors, but how do they compete with Under Armour who is selling the products DTC on their website?

Speaking of The Rock, according to a study by Spotted, his endorsement deal with Under Armour is the “best-matched celebrity-brand partnership in the fashion and retail sectors”; earning a perfect score of 100. The report added that “partnership was not only a spectacular alignment of brand celebrity personality match, audience match, overall brand values and consumer approval, but it also scored low in terms of risk.” Under Armour’s relationship with Steph Curry also rated highly (#14 overall).

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Dick’s Sporting Good Shares Have Best Day Ever as Gun Sale Restriction Fears Appear Overblown

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Dick’s Sporting Goods experienced its single best day since going public in October 2002 as shares rose +25.8% after the company reported fiscal Q1 ’18 sales and earnings growth (+3.2% YoY to $60.1 million). Dick’s also raised its full-year outlook despite having implemented restrictions on gun sales following the Stoneman Douglas school shooting. CEO Edward Stack in March predicted that the restrictions would hurt traffic and sales – and same store sales did decline -2.5% YoY – but the company managed to grow total sales +4.6% (to $1.91 billion) with the addition of new stores (including converted Sports Authority outlets) and an increase in full-price sales (i.e. fewer promotional deals). Dick’s hunting business suffered during the quarter, “an accelerated decline in an already challenged category”. The company is expecting those struggles to continue for the balance of 2018.

Howie Long-Short: Any concerns investors may have had that alienating the pro-gun crowd would be detrimental to DKS’ long-term bottom line have been alleviated. While Dick’s hunting business saw a decline in sales, a portion of those losses must be attributed to a cold spring that delayed the start of the outdoor season. Sure, some gun nuts are boycotting the company, but at the same time “there’s been a number of people who have started shopping us, or said they’re going to shop us more, because of the policy.” Sporting goods stores are in a tenuous spot right now as DTC sales momentum continues to increase, so DKS is wise to differentiate itself as a company that intends to remain on the right side of history. At the end of the day, it’s unlikely to save them from Amazon – but, it could help to outlast competitors like Bass Pro Shops and Cabela’s.

Looking for news that could prevent the company from becoming another Amazon victim? DKS increased e-commerce sales by 24% during the most recent quarter and online sales now make up 11% of the total business.

Fan Marino: Next time you’re in a Dick’s store, check out Wilson Sporting Goods’ (subsidiary of Amer Sports, AGPDYConnected Football system. Designed to help quarterbacks throw more efficiently (though it could also be used for punters and kickers), the ball tracks release time, spin rate, spiral efficiency and speed; delivering the data to a smartphone app. Jets rookie QB Sam Darnold is a believer. Darnold, who has struggled with an elongated throwing motion (and has experienced fumbling issues as a result) says the insight received has helped him to “hone in on keeping my release compact.” Jets fans (like myself) sure hope so – he fumbled nine times last season on his way to 22 turnovers. Note: Version 2.0 is coming out later this year, which explains why the product is discounted on the DKS website.

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Fanatics to Take on Nike, Adidas, Under Armour

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Aston Villa Football Club (AVFC) has announced that Fanatics, Inc. will replace Under Armour as the exclusive licensing rights holder for all club merchandise, in time for the 2018-2019 season; but, unlike traditional sports merchandising deals, the company logo will not adorn team gear. Instead, the online retailer of licensed sports apparel will negotiate separate pacts for various pieces of merchandise (think: match-day kit, practice gear, fan apparel) with multiple 3rd parties. The rising value of kit sponsorship deals for the world’s most prominent clubs and the resources required to turn a profit on those partnerships, have left second-tier clubs like Villa with little marketing attention, less merchandise to sell and inevitably depressed revenues; opening the door for a new entrant. With the deal, Villa becomes the first English club to adopt the manufacturing model used in North American sports; Fanatics will manage everything from production to point of sale (including the Villa Park store and e-commerce platforms).

Howie Long-Short: This deal is sensible from the Fanatics perspective because it requires minimal capital expenditure to enter the potentially lucrative English football market. Villa’s status as a second-tier club meant that Fanatics faced little competition for the rights; and the company already maintains production and warehousing facilities in the U.K., properties acquired in their $225 million acquisition of Majestic Athletic. It remains to be seen if the club can increase merchandise sales without a major sportswear label’s logo on their products (hint: they will be), but if successful, sponsorship rights will continue to rise as the traditional players (NKE, ADDYY) look to retain control over the apparel space. Much like cable television providers and sports broadcast rights, the current establishment can’t afford to lose their association with sports teams/leagues and still manage to hit their growth targets.

There are several ways to play Fanatics, as Bank of America (BAC), Alibaba Group Holdings (BABA) and Softbank (SFTBY) are all stakeholders. In September, Softbank invested $1 billion in to the company; bring its total valuation to $4.5 billion (or +/- 2x revenue). For comparison purposes, retailers Dick’s Sporting Goods (DKS) and Hibbett Sports, Inc. (HIBB) currently have market caps ($3.33 billion, $494 million); roughly half of what they generated in 2017 sales ($7.92 billion$973 million). Of course, Fanatics is far better positioned for long-term success, maintaining (among other advantages, like a DTC model) exclusive long-term licensing agreements with all the major U.S. sports leagues through at least 2030.

Fan Marino: The team’s match-day kit is going to be designed by Luke 1977, a Birmingham based (where the team plays) premium menswear brand. The company’s logo will replace Unibet on the new design. For what it’s worth, Luke 1977 was named the ’10 Young Fashion Brand of the Year, beating out Diesel, Fred Perry and Firetrap in the process.

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Upper Income Males Will No Longer Wear Under Armour

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Piper Jaffray Companies (PJC) has released results from its 35th semi-annual “Taking Stock with Teens” survey and they indicate that Under Armour (UAA) remains out of favor with Generation Z, “boxed out by resurgent Adidas and retro-category”. The company was the No. 1 label males most often cited as an “old” brand, for the 3rd straight survey; while the company debuted on the list of brands females won’t wear, at No. 10. Footwear sales are struggling, with the brand falling 10 spots to 24th overall; but, perhaps most concerning, UAA has lost the upper-income male demographic. 12% of upper-income males said they would no longer wear the label, compared to just 2% in 2017. Adidas (No. 1 “new” brand for males, No. 2 for females), Vans (highest mindshare for footwear among upper-income females), Supreme (No. 5 “up and coming” male brand) and Champion (moved into Top 10 among upper-income males) were among the survey’s biggest winners.

Howie Long-Short: It been a rough 2 weeks for UAA, or at least their PR team. On March 31st, the company’s fitness app, MyFitnessPal (bought for $475 million), was hacked; resulting in as many as 150 million users having their personal information stolen (though, no payment details were accessed). Then on April 2nd, analysts at Morgan Stanley and Credit Suisse wrote separate notes stating UAA merchandise sales had fallen below 10% of Dick’s Sporting Goods (DKS) total sales and that the company is at risk of being replaced by private labels. Despite all the negative news, share prices have increased 2.5% (to $16.74) since the March 29th close; the last day before this string of negative publicity hit. The company will report Q1 ’18 earnings on April 26th.

Fan Marino: With the share price down 13% YoY and a publicly stated goal to becoming “more operationally efficient”, Under Armour has decided to pass on hosting a hospitality tent at this year’s Preakness Stakes; a traditional day of celebration for the company. They won’t be the only ones sitting this one out. Ticket sales for the event are depressed, down 30% YoY in the infield and 4% YoY “in the building”. Of course, the event drew a record 140,327 fans last year.

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The Return of an Iconic Golf Label

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Dicks Sporting Goods (DKS), the largest golf retailer in the U.S., has announced the return of the iconic golf label Tommy Armour. Using innovative technology, not widely available in the country, to “promote forgiveness and distance”; DKS developed a line of game improvement woods and irons for mid-to-high handicap golfers. Designworks, a subsidiary of the BWM Group, designed the equipment; which DKS has priced lower than comparable products.

Howie Long-Short: Tiger Woods is back, but the decision to build an in-house golf brand has more to do with DKS’ “private label comp growth significantly outpacing the company average” and interest in increasing profit margins, than it does Sunday TV ratings. On the Q4 ’17 earnings call, CEO Ed Stack said that moving forward the company would be allocating more shelf space to private labels (i.e. Second Skin, Calia by Carrie), than they had received in years’ past. The decision to grow its private label business is a wise one. Its reliance on Nike (and other athletic apparel/sneaker companies that have chosen to pursue more DTC business) is among the leading reasons company share price is down 28% over the last 12 months.

Fan Marino: The Tommy Armour brand is named after the “Silver Scot”, Thomas Dickenson Armour, winner of 3 majors (’27 U.S. Open, ’30 PGA Championship, ’31 Open Championship). The label has been around since the 1970s, achieving peak success in the 80’s with their 845 irons (sold 600,000+ sets). Armour’s grandson Tommy III, a former PGA player with 2 tour wins (’90 Phoenix Open, ’03 Valero Texas Open), is currently active on the Champions Tour; he finished t-41st (-1) at the Toshiba Classic, the tour’s most recent event (March 9-11).

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NFL Merchandise Sales +40 YOY, Remains Biggest, Fastest Growing League

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NFL TV ratings were down another 10% for the 2017 season, indicating the league may not be as popular as it once was; but, Fanatics sales figures tell another story. The company reported that NFL fans spent 40% more on team apparel (jerseys, shirts, jackets etc.) YTD, then they did in Q1 ‘17. CEO Doug Mack also put to rest any talk that the NFL is losing popularity. Despite being Fanatics’ biggest league partner in terms of merchandise sales, it’s the company’s fastest growing league partner (YOY).

Howie Long-Short: The NFL acquired 3% of Fanatics in May 2017 for $95 million, at a $3.17 billion valuation; which was more than 2x revenue at the time. Noteworthy, as retailers Dick’s Sporting Goods (DKS) and Hibbett Sports, Inc. (HIBB) currently have market caps ($3.68 billion, $444 million) worth roughly half of what they generated in 2017 sales ($7.92 billion$973 million). That’s of no concern to NFL owners though, one was quoted as saying he could see Fanatics growing “anywhere from 8-10x”.

Fan Marino: NFL draft season is upon us (draft is April 26-28). It’s a particularly heavy QB class, with 6 players (Darnold, Rosen, Allen, Mayfield, Rudolph, Jackson) having the chance to be selected on Day 1. The NYJ, looking for a QB since ’69, gave up 3 2nd round selections (to Indianapolis) for the right to move from the 6th spot to the 3rd spot. One would think that would guarantee the team a QB, but ProFootballTalk isn’t so sure; Mike Florio believes Saquon Barkley (RB, Penn State) is the guy the team is targeting. As a Jets fan, I know where this is going (WATCH).

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Dick’s Sporting Goods to End Sales of Assault-Style Rifles, Permanently This Time

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In wake of the revelation that 17-year-old Stoneman Douglas High School shooter Nikolas Cruz purchased a gun (not the weapon used in the school shootings) at Dick’s Sporting Goods, Inc. (DKS), the company has announced that effective immediately it will cease sales of assault-style rifles (aka modern sporting rifles) at all 700+ stores. DKS’ new 4-point policy (also applies to subsidiaries Gold Galaxy, Field & Stream, True Runner and Chelsea Collective) will also prevent the sale of firearms to individuals under the age of 21, end the sale of high-capacity magazines and ensure the company “never will” sell bump stocks (it never has). CEO Edward Stack noted that while the company still supports the 2nd Amendment, “we hope that the Congress will come together” to pass gun control legislation.

Howie Long-Short: Back in May ’17, DKS announced it had failed to meet Q2 ’17 growth expectations, sending shares on their largest one-day decline in 3-years. Q3 ’17 wasn’t much better; while DKS beat analyst expectations, the company reported net income declined 24.5% YOY to $36.91 million. DKS shares are down 35% over the last 12 months, with declining gun sales among the reasons the company has struggled; a challenging retail environment and a decline in hunting related sales are also negatively influencing performance. The company will report Q4 ’17 and full-year 2017 financials on March 6th.

Fan Marino: Stack issued a definitive statement regarding the company’s position on assault-style rifle sales saying, “we’re taking these guns out of all of our stores permanently”; but, we’ve heard similar words before from the company. In the wake of the December ’12 Sandy Hook school shootings, DKS suspended the sale of modern sporting rifles; only to resume selling them when they opened a line of 35 Field & Stream stores in 2013, once the outrage had subsided. To be fair, the company did not state the word “permanently” in ’12; but, it’s hard for me to issue them credit knowing that revenue and politics overshadowed the deaths of 20 elementary school students (and 6 teachers), just 5 years ago. Better late than never; but, certainly late.

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Fanatics Announces American Express Jersey Assurance Program, Protects Fans from Free- Agency, Trades

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Fanatics announced the launch of the American Express (AXP) jersey Assurance program; enabling NBA fans who purchase a player jersey with an American Express card, within the Fanatics network (including Fanatics.com, NBAStore.com), to exchange said jersey if the player leaves the team (due to free agency or a trade) within 12 months of purchase. AXP has taken the initiative to back both Fanatics existing program (90 days) and to extend the protection (for those who purchase with an AMEX), offering fans the confidence required to spend $250 for a new authentic Nike (NKE) jersey; knowing unforeseen changes could occur at any time before, during or after the season. Should a player relocate (and over 100 are free agents in ’18), fans will have the option to trade their existing jersey for a model on their new team or another player on the existing team.

Howie Long-Short: The NFL bought 3% of Fanatics in May 2017 for $95 million, at a $3.17 billion valuation; which was more than 2x its revenue at the time. Noteworthy, as retailers Dick’s Sporting Goods (DKS) and Hibbett Sports, Inc. (HIBB) currently have market caps ($3.72 billion, $498 million) worth roughly half of what they generated in 2017 sales ($7.92 billion, $973 million). That’s of no concern to NFL owners though, one was quoted as saying he could see the Fanatics growing “anywhere from 8-10x”.

Fan Marino: If you’re requiring usage of a jersey assurance program, you’re doing it wrong; you must take the player’s potential longevity with the team in to consideration. Look for guys that will retire with the franchise or a rookie with star potential, not a journeyman! From October-December, the league’s Top 10 most popular jerseys were; Curry, James, Durant, Antetokounmpo, Porizingis, Embiid, Westbrook, Simmons, Leonard and Harden. Only those with a recently purchased James jersey (and maybe Leonard) need to worry about holding on to their receipts. I do need to point out though, that during the ’16-’17 season, 5 players with Top 8 most popular jerseys were traded or free agents (Irving, Wade, Butler, Rose and Anthony).

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Analyst Predicts 30% Decline for Under Armour, “No Fundamental Recovery in Sight”

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Susquehanna Financial Group Analyst Sam Poser has urged investors to sell Under Armour (UAA), predicting the share price will drop 30% in 2018; gains the company realized over the last 2 months. Poser believes the company’s decision to advertise with low-end retailers (i.e. KSS, DSW) is having an adverse effect on its efforts to sell product to “better retailers” (i.e. DKS, HIBB); insisting “there is no fundamental recovery in sight.” Stifel Analyst Jim Duffy has a contrary opinion, he’s pleased with the company’s recent cost savings initiatives and improved performance and foresees growth opportunities both internationally and within their footwear division.

Howie Long-Short: Following release of Poser’s note on Monday morning, shares declined 5.5%; closing at $15.11, the lowest the stock has been priced at since Summer ’13. Need a reason to believe UAA can turn it around? In June ’17, the company hired Patrik Frisk (former ALDO Group CEO) as President and COO. The 30-year industry veteran is considered an expert in preparing companies for a sale.

Fan Marino: Sloane Stephens, Under Armour’s long-time top female tennis endorser, has parted ways with the company and signed with Nike (NKE). Stephens, who signed with the brand as a teenager in 2010, won the 2017 U.S. Open wearing UAA tennis apparel. Financial terms of the deal were not disclosed.

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Amazon Takes on The Sports World; 25 Companies That Will Be Affected

Amazon has been credited with killing everything from book stores to electronics retailers since its 1994 launch. Now, with a market cap +/- $570 billion and $16 billion in annual operating cash flow, the company is taking aim at the sports world. In our final newsletter of 2017, we look at 4 of AMZN’s recent initiatives and the 25 companies most likely to be affected in 2018.

Amazon Expands Brand Registry Program, Now Includes Nike

In June, Nike (NKE) agreed to join Amazon’s brand registry program; seeking to curb counterfeiting and non-licensed selling within the e-commerce marketplace. The partnership also supports the athletic apparel and sneaker brand’s initiative to boost revenue through a shift to digital and DTC sales, relying less on struggling retailers. Competitors Adidas (ADDYY) and Under Armour (UAA) already have direct-sales deals in place with AMZN.

Names to Watch: FINL, DKS, FL, HIBB, BGFV; LON: SPD, LON: JD

Howie Long-Short: Athletic apparel and sneaker retailers count on NKE (70% of FL business comes from NKE); but NKE launched its “Consumer Direct Offense” strategy in fiscal Q1 ’18, increasing e-commerce business 19% YOY. Mediocre retailers beware, the company is maintaining just a few dozen wholesale relationships as it looks to increase its e-commerce business (from 15% of revenue to 30% over the next 5 years).

Amazon Entering Private-Label Sportswear Business

In October, Amazon (AMZN) announced it was entering the private-label sportswear business and working with the same Taiwanese suppliers, Makalot Industrial Co. (TPE: 1477) and Eclat Textile Co. (TPE: 1476), that some of the world’s biggest athletic brands use. Elcat’s involvement is particularly noteworthy as the company manufactures high-performance sportswear for Nike (NKE), Lululemon Athletica (LULU) and Under Armour (UAA).

Names to Watch: NKE, UAA, ADDYY, LULU; TPE: 1476, TPE: 1477

Howie Long-ShortAMZN wants to be in the private-label clothing business because it pushes retailers to sell inventory on the e-commerce site. Should a retailer choose not to, AMZN will simply produce the item themselves and compete directly against the brand.

The Pursuit of Exclusive Broadcast Rights

In September, the company hired Brian Potter to lead its sports video business. In November, Jim DeLorenzo, head of sports, Amazon Video, said the company was pleased with viewership numbers, engagement and the reliability/quality of the cloud-based streaming service during its season long experiment streaming Thursday Night Football (10 games, $50 million); though it is too early to say if the company will pursue future exclusive sports broadcasting rights. The company has since done deals that will deliver Prime subscribers 37 ATP tour events (previously owned by SKYAY), the AVP Beach Volleyball tour each of the next 3 summers and docu-series on Michigan Football.

Names to Watch: CBS, DIS, FOXA, CMCSA, FB, GOOGL, NFLX, AAPL, SKYAY

Howie Long-Short: NFL Senior VP, Digital Media, Vishal Shah recently said “we continue to think some of the best days are ahead [for traditional TV partners] despite some shifts in the media landscape.” That doesn’t sound like linear television will be excluded in the next round of negotiations, but the NFL is encouraging interested media companies to bid on both television and streaming rights for the leagues TNF package; leaving the door ajar for the tech giants to receive exclusivity for the first time.

Twitch: The Future of Game Broadcasts?

Twitch, the live-streaming platform most often associated with video games, has agreed to stream up to 6 live G-League (Gatorade sponsored NBA minor league) games. Broadcasts will include interactive overlays (viewers can click a team name/logo for player, team, game and season stats), a loyalty program to reward viewer engagement during broadcasts (i.e. custom emotes for group chat) and the ability for users to provide their own live commentary (over the game feed) via the Twitch co-streaming feature.

Names to Watch: CBS, DIS, FOXA, CMCSA, TWX, RCI, MSGN

Fan Marino: NBA Commissioner Adam Silver has gone on record stating he’d like to see changes in the way sports broadcasts are presented; pointing out the lack of live stats and chatter surrounding the broadcast, that gamers have become accustomed to. I’m not ready to give up Mike Breen, Marv Albert and Ian Eagle for Towelliee; but it’s worth watching to see if anyone else is.

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