Nike Makes Wise Business Decision, Kaepernick Face of 30th Anniversary Ad Campaign

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Colin Kaepernick has extended his relationship with Nike (has been with company since ’11) and become the face of their new 30th anniversary “Just Do It” campaign. The campaign debuted on Monday with a simple message that read “believe in something, even if it means sacrificing everything” over a picture of Colin’s face. Kaepernick, who has been portrayed as the leader of the NFL player protest movement, has been unsigned (by NFL teams) since the end of the 2016 season. While financial terms of the deal were not disclosed, it’s been reported that Kaepernick’s deal is worth “millions per year” + royalties, putting it on par with the contracts held by the NFL’s top players. The deal is expected to include a “Kaepernick 7” line of shoes and apparel.

Howie Long-Short: Nike made the decision to extend Colin and make him the face of this campaign anticipating backlash from the political right, but the company is wisely playing the long game here understanding any negative short-term noise will be far outweighed by future sales gains. Nike’s target client is America’s youth (18-29), not the 60-year-old racist white guy cutting swooshes off his socks, and Colin remains popular with the younger demographic; in fact, his jersey ranked as the 39th (as of Q2 ’17) best-seller among all NFL players despite his absence from an NFL roster. Sacrificing older, low discretionary-income red state buyers for younger, affluent, progressive buyers in blue states seems like a wise decision; even if most Wall Street analysts refuse to say so because they’re avoiding the divisive topic.

Sadly, Nike’s decision to sign Colin wasn’t about protesting racism or social injustice (though, the company would like the media to position it as such), but about the bottom line; as Twitter user @MichaelMirer so perfectly put it, “democratic socialists buy sneakers, too”. If the snark went over your head, Mirer is playing off Michael Jordan’s famous line when asked why he avoids discussions about politics – because “republicans buy sneakers, too.”

Nike (NKE) shares declined -3.16% on Tuesday (to $79.60), making it the worst performer within the Dow Jones industrial average, but the decline is not tied to fears over boycotts related to the Kaepernick news. Adidas (ADDYY, -2.4%) and Puma (PMMAF, -2.62%) were also down on Tuesday, leading us to believe the downturn is more closely related to the NAFTA negotiations.

For what it’s worth, according to Apex Marketing Group, the “Just Do It” campaign generated $43 million in media exposure over its first 19 hours; less than one quarter of the responses were negative.

Fan Marino: Nike’s decision to place Kaepernick at the center of a campaign that kicked off just 3 days before the start of the NFL season can’t be sitting well with league owners. Nike is among the league’s top partners and signed a 10-year deal (through ’28) to become the NFL’s game-day uniform and sideline apparel provider back in February; the same league Kaepernick is currently suing in court over allegations its owners have colluded to keep him unemployed because of his activism. Last Thursday, Colin earned a small victory in his grievance against the league as an arbitrator ruled the case can advance.

While Kaepernick’s involvement will certainly draw the most attention, he’s just one of several athletes represented in the 30th anniversary “Just Do It” anniversary campaign. Serena Williams, Odell Beckham Jr., Shaquem Griffin (Seahawks) and Lacey Baker (skateboarder) are all also featured.

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Adidas to Replace Puma as Arsenal Kit Manufacturer, Shares Rise +8% on Q2 Earnings

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Arsenal has agreed to a 5-year $385 million kit deal with Adidas that will replace the club’s existing pact with Puma, at the completion of this season. Adidas will pay +/- $77 million/season (beginning in ‘19) to become the official kit provider of the Gunners, double what Puma had been paying. The deal is being touted as the 3rd most valuable kit pact in the world, behind just Nike’s agreement with Barcelona ($134.5 million/season) and Adidas’ contract with Manchester United ($96 million/season).

Howie Long-Short: Adidas (ADDYY) issued Q2 earnings on Thursday, reporting group sales rose 10% YoY (to $6 billion) during the most recent quarter. North America (+16%), Greater China (+27%) and the e-commerce sector drove the growth. Perhaps ADDYY’s most impressive feat has been continuing to grow the top line without resorting to discounts; the company reported gross margins rose +2.2% (to 52.3%) in the quarter ended in June, as the company continues to sell shoes at full-price. Shares increased +8% on Thursday’s report, closing at $119.89.

Stephen Wilmot (WSJ) made a strong argument that ADDYY shares are undervalued. Even after Thursday’s 8% jump, Adidas is trading at just 23x prospective earnings; compared to Nike’s 29x. That’s despite Adidas growing sales (16% vs. 3% in U.S.) and profits faster than their rival, not having to deal with any potential #MeToo backlash or increase employee wages.

Fan Marino: The newfound revenue should give Arsenal additional cash for transfers next summer. It’s been reported that new manager Unai Emery was given just $90 million to work with during this summer’s window.

Arsenal will become the 7th Premier League team to be outfitted by the German footwear and apparel company, joining Manchester United, Leicester City, Cardiff, Fulham, Watford and Wolves.

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Rice Commission Recommends Summer Camps as Alternative to Shoe-Sponsored Tournaments

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The NCAA Commission on College Basketball has recommended the installation of regulated summer camps to help offset the number of shoe-sponsored tournaments (think: AAU) that top prospects participate in. Seeking to stem the influence shoe companies have over players within the recruiting process, the Rice Commission has proposed regional events that would be run by USA basketball and supersede (in terms of talent/coaches attending) existing tournaments. The Commission isn’t recommending the elimination of all shoe-company sponsored events though, as the proposed camps would only account for +/- 15% of the prospects in a given class; USA Basketball CEO Jim Tooley explained, “our job is to help grow the game, not stifle it.” Recommendations are expected to be voted on within the next 30 days; if approved, the changes could be implemented in time for summer ’19.

Howie Long-Short: Nike, Adidas and Under Armour are all active on the travel basketball circuit, each running their own leagues.

On May 3rd, Adidas reported that efficiency savings drove bottom line growth +17% (to $647 million) in Q1 ’18. Accounting for currency effects, sales rose roughly 10% YoY (to $6.4 billion) with the company’s Adidas Originals line and running, training and soccer verticals driving the growth. North American sales rose +21% YoY and sales in China rose +26% YoY; Asia-Pacific (+15%) and Latin America (+10%) also experienced double-digit growth during the most recent quarter. NPD Group Analyst Matt Powell is reporting that “H1 footwear sales are up more than 20%; apparel even better.” The company will publish H1 financial results on August 9th.

Nike (NKE) reported fiscal Q4 earnings on June 29th. News of sales growth in North America (+3%) following 3 straight declining quarters, increased revenue growth guidance for fiscal ‘19 and a $15 billion share buyback plan sent shares rising +11% to an all-time high ($81.00). The share price has declined -4.5% since, closing on July 30th at $75.96.

Under Amour (UAA) is the most recent shoe/apparel company to post financials, having done so on July 26th. While the company’s U.S. business failed to gain much momentum (+1.6% YoY), international sales surged (+28% YoY) during Q2 ‘18 and the company managed to reduce excess inventory; news that was welcomed by investors, as shares rose 5% on the report.

Of course, Q2 wasn’t a “victory” for UAA, 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 a turnaround (focus going from men to women/kids, $80-$100 price point) and continuing headwinds (think: leisure over performance), UAA shares are up +39% YTD; closing on Monday at $20.11.

Fan Marino: The NCAA is likely to continue allowing coaches to attend shoe-sponsored tournaments in April (at least for now), so the Commission’s recommendations are just for the July recruiting period. While that makes little sense (and is unlikely to curb corruption), the NCAA is already complaining that the $9 million price tag to replace the summer’s recruiting events is prohibitive; they certainly won’t go for the spring events too, at least not now. It’s tough to pity the NCAA though knowing the organization takes in +/- $1 billion in media rights revenue annually through 2032.

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All 3 Winners of 2018 Men’s Majors Had Mixed Golf Bags as Equipment Sponsor Free Agents

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For the 3rd time in 2018, a USGA golfer won a men’s major without an equipment sponsorship. Francesco Molinari (British Open) joined Brooks Koepka (U.S. Open) and Patrick Reed (Masters) as tour members with Nike apparel/footwear deals, but without an exclusive equipment provider; enabling each to play the 14 clubs (and balls) best suited to their game. Francesco Molinari and Brooks Koepka have been playing as equipment free agents since Nike’s ’16 exit from the golf equipment space, while Patrick Reed left Callaway following the ’17 season after attributing his tour struggles to the equipment. Molinari won last weekend’s British Open playing with TaylorMade clubs and a Bettinardi putter (he does have a deal with them), Brooks Koepka won June’s U.S. Open with a mixed bag that included TaylorMade, Nike, Mizuno and Titleist clubs (including a Scotty Cameron putter), while Patrick Reed played Augusta with Ping, Nike, Titleist, Callaway sticks and an Odyssey (Callaway subsidiary) putter. All 3 players won their respective majors using Titleist Pro V1x balls.

Howie Long-Short: Several of the club manufacturers associated with this year’s major winners are publicly traded; including Nike (NKE), Mizuno (TYO: 8022), Titleist (GOLF) and Callaway (ELY).

Golf stocks are far outperforming the S&P YTD; Callaway Golf (ELY) is +37% YTD ($19.06), Acushnet (GOLF) is +13% YTD ($23.83) and the S&P is +5.5% YTD ($2,820.40). While it would be easy to attribute the sales growth to Tiger Woods’ return, both companies have been headed in the right direction for some time; ELY is +104% over the trailing 3 years, while GOLF is +32.75% since its ’16 IPO. The U.S. Golf Economy Report indicated that the industry’s strongest sales growth was coming from the equipment category, a far more logical reason for ELY & GOLF’s outperformance. Both ELY and GOLF are expected to report Q2 ’18 earnings next week (August 2nd).

For those wondering, Bettinardi and Ping have never been publicly traded. TaylorMade was acquired by KPS Capital Partners (P.E.) for $425 million in late ’17.

Fan Marino: Howie may not be willing to credit equipment sales to Tiger’s return, but there’s no doubt that Tiger contending for his first major championship in a decade was the catalyst for last weekend’s British Open drawing the tournament’s highest television rating since ’06 (5.0 overnight); the last time Woods won the claret jug. In fact, the only British Open to draw a larger audience was the 2000 tournament, which Woods also won; to complete the career grand slam. Interestingly, the highest rated tournament of year thus far has been the Masters (7.6 overnight); where Woods failed to make the cut.

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Demand High for LeBron’s Lakers Jersey  

Lakers

LeBron James’ signing (4 Years, $153.3 million) with the Los Angeles Lakers is expected to boost Nike retail sales as the company is both the league’s official jersey manufacturer and James’ footwear outfitter. According to NPD Group, no NBA player sold more basketball sneakers in 2017 than LeBron, a figure that includes sales of both his signature line (LeBron 15) and Soldier series. However, the move is expected to have the biggest impact on jersey sales, not footwear; Fanatics reported that presale orders (NBA store sold out) rose 600% in the first 3 hours following James’ announcement relative to his return from Miami to Cleveland in ’14.

Howie Long-Short: LeBron’s impact on sneaker sales is likely to be minimized by both trends (basketball sneakers aren’t considered to be in fashion) and the market he’s headed to. As NPD Group analyst Matt Powell explains, “L.A. is not an important basketball shoe market”; performance styles sell best in the Northeast.

Nike (NKE) reported fiscal Q4 earnings on June 29th. News of sales growth in North America (+3%) following 3 straight declining quarters, increased revenue growth guidance for fiscal ‘19 and a $15 billion share buyback plan sent shares rising +11.1% to an all-time high ($81.00). The share price has steadily declined since, closing at $76.28 on Tuesday July 3rd.

Wish, an e-commerce application, should also benefit from James’ relocation to Hollywood; the company is the Lakers’ jersey sponsor (for at least the next 2 seasons). According to GumGum (AI company with expertise in computer vision), no company received more value ($21 million) from earned media impressions on social media platforms (only includes content shared by team accounts) than Goodyear (the Cavs jersey sponsor) did during the 2017-2018 season. Wish finished 4th among jersey sponsors, despite the Lakers missing the playoffs and lacking star power.

Wish has raised $1.3 billion to date, but the only way to play the company is via China Everbright; a Hong Kong based financial services company. China Everbright and IDG Capital Partners (PE) launched a joint venture known as Everbright-IDG Industrial Fund; together they led Wish’s $500 million Series F round in November ’16. China Everbright trades over the counter under the symbol CHFFY.

Fan Marino: If you purchased LeBron’s Cavaliers jersey on Fanatics within the last 90 days (or with an AMEX within the last 12 months), you’re eligible for the site’s Jersey Assurance program. The program gives fans the opportunity to exchange the jersey for another player on the team (i.e. Collin Sexton) or the new player’s new jersey (LeBron Lakers) at no charge. However, paperwork for the exchange must be submitted within 14 days, so the clock is running!

It should be noted that despite the assumption LeBron would be leaving Cleveland at the end of the season, his jersey was the 2nd best-selling in the NBA during the postseason (behind Curry) and sales were up 25% YoY during Q2 ‘18.

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Federer Signs $300+ Million Endorsement Deal, Becoming Face of Uniqlo

Uniqlo

Roger Federer has left Nike (after 21 years) for Uniqlo, signing a 10-year endorsement deal worth more than $300 million with the casual wear company. Federer immediately becomes the biggest star sponsored by the brand, joining Japanese tennis player Kei Nishkori and Australian golfer Adam Scott. The 20x grand slam champion, who appeared for his Wimbledon opener (as the men’s top seed) dressed in Uniqlo gear, will continue to wear Nike sneakers as Uniqlo does not have a footwear line. Uniqlo is expected to acquire the rights to the RF logo (owned by Nike) synonymous with the tennis champion.

Howie Long-Short: Uniqlo is a subsidiary of the Japanese retail holding company Fast Retailing (OTC: FRCOY), as are J Brand and Theory. Uniqlo generated $14 billion in 2017 sales, 75% of all FRCOY revenue; CEO Tadashi Yanai intends on growing that figure to $20 billion by 2020, including $10 billion in U.S. sales. Shares of the fast-fashion brand declined 2% on Monday’s news, closing at $44.85.

Nike (NKE) reported fiscal Q4 earnings on Friday. News of sales growth in North America (+3%) following 3 straight declining quarters, increased revenue growth guidance for fiscal ‘19 and a $15 billion share buyback plan sent shares rising +11.1% to an all-time high ($81.00). The good times didn’t last through Monday though, NKE was among the Dow’s biggest losers on the day, down -1.67% (closing $78.32); a decline unrelated to the Federer news.

Nike isn’t the only company using cash to buy back their own shares. Corporate buybacks are occurring at rates never before seen in market history; 31 companies announced buybacks of more than $1 billion in June alone. In total, companies announced record share repurchases totaling $433.6 billion during Q2, up from $242.1 billion in Q1 (previous record). Corporate cash isn’t just being used on buybacks though, companies paid out a record $111.6 billion in dividends during the most recent quarter and the dollar volume ($726.3 billion) more than doubling YoY (quarter ending May 31st) on M&A activity.

Fan Marino: Federer is going to be 37 next month, so Uniqlo is going to be paying him to be a “Global Brand Ambassador” long after he retires. While I can’t justify the figure (Nike was paying him $10 million/year), the decision makes slightly more sense if you understand that unlike Nike, Adidas, Under Armour and now Puma, Uniqlo is a fast-fashion brand that produces performance athletic apparel; as opposed to a sports apparel brand. For comparison purposes, Kevin Durant also has a 10-year $300 million endorsement deal (Nike). LeBron James has a lifetime contract with Nike said to be worth up to $1 billion.

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Fashion Labels Take Activewear Market Share, Activewear Brands Now Reside on 5th Ave

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Activewear brands and the retailers who sell their products have had a difficult start to 2018, as sales were “essentially flat between February and April.” NPD Group senior sports industry advisor Matt Powell attributes the struggles to “the proliferation of fashion brands emulating performance wear” (think: Moncler’s Grenoble collection, BIT: MONC); including high fashion labels like Isabel Marant that are now launching activewear lines. It’s not just the athleticwear labels (think: Under Armour – UAA, Columbia – COLM) that are hurting from the industry crossover though, athletic specialty/sporting goods stores are also struggling as “department stores now capture more activewear sales than the true sports channels.” Activewear is the fashion industry’s fastest growing category, expected to grow 6-7% in ’18; compared with 2-3% for the balance of the fashion and footwear industry.

Howie Long-Short: One company that has not been negatively impacted by the trend is Lululemon Athletica. LULU posted “astonishing” Q1 ’18 results, before increasing its full year financial forecast. Net income grew +141% YoY (to $75.2 million) on revenue that rose +25% YoY (to $649.7 million), with e-commerce growth (+62% YoY), new customer acquisition (+28% YoY, 30% of which were men) and a significant rise in gross margin (from 49.4% to 53.1%) highlighting the quarter. Shares popped 16% (to $122.19) following the June 1st report; they’re up 55% YTD and 135% over the last 12 months despite the February resignation of CEO Laurent Potdevin (workplace misconduct) and other public missteps (think: see-through tights). Adidas (ADDYY), Champion (HBI) and Patagonia were also all strong performers within the activewear category during the first quarter.

Fan Marino: While fashion brands are working to take activewear market share, activewear companies are taking up residency on 5thAvenue (NYC) alongside high-fashion retailers. Why? As Powell explains, “to be next to some of the most prestigious names in the industry really elevates the prestige of the athletic brands.” Adidas, Asics (TYO: 7936) and The North Face (VFC) already have stores open on 5th Avenue, Nike (NKE) and Under Armour have signed leases on space and Puma just announced it’ll be opening a 24,000 SF retail store on the street.

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Fanatics to Replace Nike as Exclusive Manufacturer/Distributor of NFL Fan Gear

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Starting in 2020, Fanatics will become the exclusive manufacturer and distributor of all Nike-branded, adult-sized (i.e. no kids), NFL fan merchandise. The league wants a partner with on-demand production capabilities so it can provide fans with “instant gratification” (think: Chiefs fan who seeks rookie Kareem Hunt jersey after 246 total yards/3 TDs in season opener) and maximize revenues; as opposed to the consumer finding the product “out of stock” (Nike would not have printed the jersey of a 3rd round selection in quantity before the season) and leaving money on the table. Fanatics produced Nike fan gear (to include the Swoosh) will be sold on NFL Shop (Fanatics controlled), on all team sites and in all team stadiums (some of which Fanatics controls), through Fanatics.com and also at brick and mortar retailers like Dick’s, Modell’s. Nike will continue to manufacturer jerseys and the balance of their on-field product line for players and coaches. The deal runs through 2029.

Howie Long-Short: Sure, fans will benefit from Fanatics printing on demand, but this deal doesn’t happen unless everyone involved was going to benefit. Nike had been compensating NFL owners with a percentage of the wholesale price on all merchandise sold, but the new deal entitles team owners to a percentage of the retail price on products sold through Fanatics — in addition to their cut of the wholesale price on sales to brick and mortar retailers. Increasing the take on retail sales will help the league continue to grow the pie, particularly with Fanatics’ ability to increase sales by an estimated 50% over the life of the deal (thanks to its wide product line and on demand availability). Commissioner Goodell has openly stated the league’s intention to generate $25 billion in revenue by 2027 (currently at +/- $14 billion). NFL owners will receive ancillary benefits (think: increased valuation) from Fanatics’ “higher sales base”, as the league is a minority investor in the company.

As for Fanatics and Nike (NKE), they’ll come out on top too. Fanatics will increase sales (and ultimately their valuation), while Nike can refocus on what it does best – develop best in class sports performance footwear and apparel. Nike may not make more money with this deal, but any losses will be negligible since they’ll gain extra exposure with more Nike NFL product sold. MLB was the first to pursue this on-demand DTC model that split the rights between a performance brand and Fanatics, but with the NFL now on board it’s safe to say we’re looking at the future of fan gear sales – one’s an accident, two’s a trend.

There are a couple of ways to play Fanatics, as Alibaba Group Holdings (BABA) and Softbank (SFTBY) are stakeholders. In September ‘17, Softbank invested $1 billion in to the company at a valuation of $4.5 billion (+/- 2x revenue), bringing the total capital raised to $1.7 billion. Fanatics is well positioned for long-term success, maintaining exclusive long-term licensing agreements with all the major U.S. sports leagues through at least 2030.

Fan Marino: Fanatics has had a busy month, doing a deal with Aston Villa to become the exclusive licensing rights holder for all club merchandise (noteworthy as they’ll be competing with the big apparel brands) and another with Formula One (FWONK) to become the exclusive merchandise retail partner on race-day (they’ll have an enclosed Superstore in the Fanzone) and online. F1 fans can expect a wider range of merchandise for each of the 10 teams and custom gear designed for each of the 21 Grand Prix.

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“Nike Effect” Working, Shares Sit Just Below All-Time High

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Nike’s (NKE) transformation from wholesaler to mobile-first DTC retailers has been successful (+16% YoY in ’17 vs. overall corporate growth +6% YoY) and the company’s market cap ($118.84 billion) continues to rise as a result, despite recent C-level turnover. Dubbed the “Nike Effect” by CEO Mark Parker, the revamped strategy has NKE focusing on just 40 retailers while prioritizing its direct to consumer sales channels (think: storefronts, nike.com, Nike app, SNKRs app). Nike uses the data collected from its 100 million “members” to create a more personalized/rewarding shopping experience on those channels and to identify underserved demographic groups (think: females). Wedbush analyst Cristopher Svezia recently wrote that he expects Nike’s DTC sales to “push overall sales into positive territory in fiscal 2019.”

Howie Long-Short: Nike decision to control the means of distribution has helped the company alter its image with “sneakerheads”, which soured when the company began to overproduce its most desirable lines (i.e. Jordan). The lack of buzz surrounding the brand contributed to the loss of market share it experienced in 2017 (-1.6% to 32.9%). While limited edition drops make up a small portion of Nike sales (+/- 5%), the enthusiasm generated by the company’s most engaged consumers helps the perception of the brand and leads to mainstream consumer sales.

The “Nike Effect” has been validated by a “significant reversal of trend in North America”, growth in DTC sales and improved international sales (+24% YOY in China, +19% in Middle East and Africa) as the company beat analyst expectations (revenue + 7% to $8.98 billion) in fiscal Q3 ‘18.Shares closed at $71.31 on Tuesday, just below their all-time $72.19.

Unfortunately, Nike’s old brick and mortar partners (think: FL, FINL) have struggled to replace the revenue Nike product generated. FINL reported same store sales declined -7.9% in Q4 ’17, while FL reported same store sales were down -3.7% during that same period. FL will report Q1 ’18 financials on Friday 5.25.

Fan Marino: Limited edition Nike sneakers (including Jordans) are distributed through Nike’s SNKRs app (separate from NIKE app), a digital platform that gamifies (including a virtual queue) the shopping experience for company’s most wanted products. On June 23rd, SNKRs will have one of this summer’s most highly anticipated sneaker drops, the Travis Scott “Cactus Jack” Air Jordan 4. While the shoes will retail for $225, the current asking price on GOAT is $2,015; so, unless you have a lot of cash to burn, make sure to download the app, have your credit card information stored and be ready for the alert at 10a on 6.23.

Fun Fact: Prior to being acquired by NKE (in ’16) and rebranded as SNKRs, the community building and shopping app was named “Virgin Mega” and backed by Richard Branson’s Virgin Group. Financial terms of that deal were not disclosed.

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