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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WSJ: Just 7 Ways to Publicly Invest in Sports, JWS: Not the Case

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The WSJ published a recent story asserting there are few ways to directly invest in sports, a notion we dispute. The article deemed just 7 publicly traded equities to be sports-related and based their conclusion, that fans are better off watching and playing sports than investing in them, on the performance of 2 exchange traded funds; one of which (FANZ) has beat the S&P since its July ’17 inception, which would seem to counter to their argument. The article cites Matt Hougan, the CEO of Inside ETFs, and his belief that most of the economic value within sports (ownership and player contracts) “comes in private transactions”, to support the author’s thesis; but fails to pay consideration to the revenue streams that support those contracts (and generate ownership profits). It’s worth noting that JohnWallStreet follows over 100 sports-related equities.

Howie Long-Short: Sports teams generate revenue from 4 sources; broadcast rights, ticket sales, sponsorships and merchandising. Several publicly traded equities use a similar business model; Churchill Downs (CHDN), International Speedway (ISCA), Dover Motorsports (DVD) and Speedway Motorsports (TRK), and thus should also be included on the list. Others, like Acushnet Holdings Corp. (GOLF) and Callaway Golf Company (ELY), are undeniably directly tied to sports; and no one would claim your basket was unfocused if companies like Nike (NKE), Lululemon (LULU) and Fitbit (FIT) were to be included. Oh, and don’t forget Activision Blizzard’s (ATVI) new esports league (Overwatch); their inaugural season starts today.

Fan Marino: The story names the New York Knicks, New York Rangers (MSG), Atlanta Braves (BATRK), Manchester United (MANU) and Borussia Dortmund (BORUF) as the teams you can purchase equity in. The Toronto Blue Jays, Toronto Maple Leafs (RCI), Juventus F.C. (JVTSF), A.S. Roma (ASRAF) and SS Lazio (BIT: SSL) are also all publicly traded.

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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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Under Armour Investors Concerned Plank No Longer Focused on Company

Under Armour (UAA) investors have expressed concerns that CEO Kevin Plank is focused on Plank Industries, his private investment firm, and not on the struggling athletic apparel manufacturer. While “2017 sucked” (Kevin’s words, not mine) for UAA shareholders, Plank Industries (which includes a horse breeding and racing operation) opened a boutique hotel, a whiskey distillery and raised $233 million for a real estate venture in Baltimore. In June, UAA hired Patrik Frisk (former ALDO Group CEO) as President and COO. Frisk has since taken on a more public leadership role, speaking on the October earnings call; offering further evidence to those that believe UAA is no longer Plank’s top priority. Plank insists his “job is running Under Armour, period”; with Plank Industries’ Chief Executive Tom Geddes saying that Plank only reviews his outside investments on a quarterly basis.

Howie Long-Short: In 2017, UAA posted net losses in consecutive quarters, a quarterly sales decline (for the 1st time since going public) and laid off 300+ employees (and a handful of C-level executives) as the stock declined 45.7% YTD; so it’s understandable shareholders are looking to assign blame. For comparison purposes, NKE who had its own set of struggles in ‘17 is up 24% YTD (ADDYY is +13.2%). Regardless of Plank’s involvement, the company is in good hands with Patrick Frisk. Frisk has 30+ years of experience in apparel and retail, having led VF Corp. (VFC) brands The North Face and Timberland before joining Aldo Group.

Fan Marino: Under Armour has agreed to a 10-year deal with Major League Baseball that will make the brand the league’s official uniform supplier beginning with the 2020 season. UAA will be the exclusive provider of all on-field uniform components including jerseys, base layers, outerwear and training apparel. While it’s the company’s first professional uniform deal, they’ve been partners with MLB since 2000; initially as a base-layer supplier (2000) and then becoming a footwear partner (2011).

Under Pressure at Under Armour, CEO Says His Eye Is on the Ball

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Vince McMahon Sells $100 Million in WWE Stock, XFL 2.0 Next?

Chairman and CEO of World Wrestling Entertainment (WWE) Vince McMahon sold 3.34 million company shares, worth more than $100 million (shares closed at $31.87 on Thursday); noting the proceeds were “primarily to fund a separate entity from the Company, Alpha Entertainment LLC, which he established to explore investment opportunities across the sports and entertainment landscapes, including professional football.” On December 16th, Alpha filed for 5 different trademarks on “XFL”; in addition to recently registered marks on “URFL”, “United Football League”, “UFL” and “For the love of Football”. The XFL ran for just one season before folding in 2001.

Howie Long-Short: WWE shares hit an all-time high earlier this week ($32.92), so while Vince is selling a decent chunk of the company (4.3%); he’s cashing out at the right time. He’ll also still owns 41.8% of all outstanding WWE common shares (with 82.8% of the voting power). I simply question the feasibility of the XFL 2.0 success. The league lost $70 million the first time around and had the benefit of NBC’s (CMCSA) promotion behind it. Does a few extra months of training camp really make a difference? Fool me once (for a half), shame on you. I won’t be fooled again.

Fan Marino: While on the topic of upstart leagues, LaVar Ball’s Junior Basketball Association seems to be based on flawed logic. The top HS players can get paid $1 million to go overseas, so they aren’t playing for $100,000; and there is no market to watch second-tier HS players, without the emotional attachment of a college jersey on them. Oh, and who is funding this league? BBB is the apparel and sneaker provider, eliminating any potential for the usual suspects (NKEADDYY) to participate.

Vince McMahon sells $100 million of WWE stock as XFL reboot plan continues

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Nike Reports Q2 ’18 Revenue Up 5% YOY Despite Domestic Revenue Drop

Nike (NKE) reported an increase in international sales drove Q2 ‘18 revenue up 5% YOY (to $8.6 billion), but that growth couldn’t prevent the company from experiencing a 9% YOY decline in earnings (to $767 million) resulting from reduced gross margins and increased selling/administrative costs. Revenue in China was up 16% YOY (to $1.2 billion) during the most recent quarter, with sales in Europe, the Middle East and Africa up 19% YOY (to $2.1 billion). Domestically, sales were down 5% YOY (to $3.5 billion) with the decline attributed to disappointing footwear sales. As the company moves forward, it will continue to focus on a DTC strategy, relying less on struggling retailers.

Howie Long-Short: Nike announced back in October that it would scale back on the number of retailers it worked with, focusing on just a few dozen relationships, as the company looks to increase its e-commerce business (from 15% of revenue to 30% over the next 5 years). The decision appears to be a prudent one, as the brand continually appears atop lists of creditors with the biggest unsecured claims on bankruptcy filings (see: Golfsmith International HoldingsSports Authority and Shiekh Sports). The latest, The Sports Zone, Inc. filed for bankruptcy owning NKE $1.9 million. Good luck, collecting on that unsecured claim.

Fan Marino: Nike’s “pro hijab” went on sale in the U.S. on Wednesday, coinciding with a marketing campaign featuring fencer Ibtihaj Muhammad, boxer Zeina Nassar and runner Manal Roston. Muhammad is first US athlete to compete in the Olympics wearing a hijab. How did Muhammad end up fencing? It was a sport that allowed to her to compete while remaining fully clothed, as required by her religion.

Nike Sales Climb, Despite Declines in North America

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Nike Focuses on Supply Chain as Sales Lag

Nike (NKE) announced it will be adopting Feng Tay Enterprise Co. Ltd.’s manufacturing strategy and automation technology, enabling the sneaker giant to cut down on manpower (-30% on the A.J. XIII) while increasing output (+50% on the A.J. XIII). The change in philosophy includes the implementation of 11 new automated technologies; combined, they enable the company to complete and ship customized shoes within 3-4 days, which is less than half the initial projected turnaround time. By 2023, the company would like to offer automated customization on every shoe it produces.

Howie Long-ShortNKE struggled in fiscal Q1 ’18 (domestic revenue declined 3%, gross profit declined 4%), with several of the issues facing the company (i.e. basketball sneakers aren’t in style, heavy promotional market) unlikely to change short-term; so turning their focus to supply chain optimization is logical. Automation and smart distribution systems will make the business more efficient and increase profit margins, but it isn’t helping the company get any closer to Mark Parker’s goal of $50 billion in revenue by 2020. Nike is going to need to grow its women’s division and international business (see: China) if is going to hit that mark.

Fan Marino: Feng Tay and Nike have a storied relationship that dates to 1977; with the Taiwan-based sporting and athletic goods manufacturer first producing the AIR model in ’85. The company also first developed signature shoes for Michael Jordan in ’87 and LeBron James in ’03, produced the 1stgeneration of Shox in 2000 and both developed and produced the Flyknit Racer; one of Time magazine’s “Best Inventions of 2012”. Feng Tay trades on the Taiwan Stock Exchange under the symbol TPE:9910.

Building a Bigger, Faster Nike

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