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

nike-logo

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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Puma Joining Wearables Sector, Sued by Nike for Patent Infringement

Puma

Puma SE has announced it will be joining the wearables sector, signing a 10-year global licensing partnership with Fossil Group. The 2 companies will collaborate to bring Puma branded watches and smartwatches to market by the end of 2019. Fossil Group (FOSL) will design, manufacture and distribute the sport-focused line of watches, as it does for several high-end fashion labels (see: Diesel, Michael Kors). It is expected that the Fossil x Puma line will run on Wear OS (formerly Android Wear) software.

Howie Long-Short: Puma SE is a subsidiary of Kering, trading over-the-counter under the symbol PMMAF. The German athletic footwear and apparel brand reported net profit rose +36% YoY (to $82.5 million) in Q1 ’18, with sales increasing double-digits across all product categories and markets (+15.6% in U.S.). China/Asia experienced “exceptionally high growth” (+35%), while the running, training and sportstyle categories grew the fastest. In early April, with currency adjusted sales +21% YoY, PMMAF slightly increased FY18 guidance (from +10% to +10%-12%).

Puma SE’s cautious approach to entering the wearables sector (with a licensing partnership, as opposed to building their own technology) is a wise one. Both Nike and Adidas have already tried and failed, only to later sign partnerships with Fitbit (Nike) and Apple (Adidas) respectively. There’s no reason to believe Puma would have had a different result.

On a separate note, Nike is suing Puma, accusing the competitor of patent infringement in federal court. Nike alleges the unauthorized use of “Flyknit, Air and cleat assembly technologies”, related to Puma’s Ignite, The Jamming and evoSpeed SL FG products. NKE is seeking a permanent injunction and has asked that damages be awarded. Puma plans to dispute the charges and has no intention of stopping production in the interim.

Fan Marino: In other Puma news, the company announced it will become the official kit sponsor of AC Milan for the 2018-2019 season; and the official kit sponsor of Sao Paulo Palmeiras (Brazil) for the 2019 season. Those clubs join Borussia Dortmund (BORUF), Arsenal FC and the National Football Associations of Italy, Switzerland, Austria, Cameroon, Ivory Coast, Ghana, Czech Republic and Senegal in the Puma football portfolio.

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Kyrie Only Signature Basketball Sneaker to Grow Sales in 2017, No Adidas Stars in Top 5

Kyrie

According to the NPD Group, LeBron James had the top-selling signature basketball sneaker line of 2017, as Nike continued its domination of the $1 billion performance shoe market. 73.5% of all basketball sneakers sold in 2017 were made by Nike, with that figure ballooning to 81.3% if you count pairs sold by corporate subsidiary Jordan Brand (7.8%). Kyrie Irving (Nike) had the 2nd best-selling shoe, for the 2nd year in a row; with Kevin Durant (Nike), Stephen Curry (Under Armour) and Michael Jordan (Jordan Brand) rounding out the Top 5. It should be noted that Irving was the only player on the list to grow sales YoY, as performance basketball shoe sales have declined -13% from their 2015 peak ($1.3 billion).

Howie Long-Short: Nike controls the performance basketball sneaker game, but it’s sports leisure and retro that is in fashion; which explains why Adidas (see: Stan Smith, NMD, Superstar) shares are +17.5% YTD, while Nike trails behind at +6.9%. Adidas (ADDYY) just reported Q1 ’18 revenue grew 10% YoY, with North American sales up +21% YoY; for comparison purposes, NKE sales declined -6%, UAA was flat during the 1st 3 months of the year.

It’s worth pointing out that Adidas did not have a signature basketball performance shoe among 2017’s best sellers, despite having MVP front-runner James Harden on the payroll. Derrick Rose (post injury) and Damian Lillard are 2 other guys that fail to move the needle for the company.

Fan Marino: Curry falling from 3rd in ’16 to 4th in ’17 is disappointing, if not unsurprising, news for Under Armour; which overestimated consumer demand for the Curry 4. In wake of the disappointing release, UAA performance basketball shoe sales dipped -39% in 2017. The company now controls just 12.1% of the market.

While Jordan hasn’t laced up in 15 years, the AJ32 technically counts as his signature shoe. Retro AJ models aren’t counted in signature basketball sneaker sales figures, but if they were, Jordan would be running away with 1st place. The retro market did $3 billion in 2017 sales, 3x performance; and Jordan Brand took in 65% of that revenue.

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Fanatics to Take on Nike, Adidas, Under Armour

Fanatics 200x200

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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Nike Acquires AI Start-Up to Power “Consumer Direct Offense”

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For the 2nd time this month, Nike (NKE) has acquired a company capable of “advancing (its) capabilities in computer vision and artificial intelligence”. The technology developed by NKE’s latest purchase, Invertex, will power the company’s “consumer direct offense.” Invertex specializes in mass customization, developing 3D body scanning software that will “create the most compelling Nike consumer experience”; both in store and online. News of the purchase comes just 3 weeks after the company announced it had acquired Zodiac; a consumer data analytics firm capable of improving customer acquisition, reducing churn and enhancing the accuracy of sales forecasts. Financial terms were not disclosed on either deal.

Howie Long-Short: NKE’s desire for a “consumer direct offense” led to the formation of Nike Direct, a corporate restructuring focused on the 12 markets expected to generate 80% of corporate growth through 2020 (when it hopes to do $50 billion in sales); New York, London, Shanghai, Beijing, Los Angeles, Tokyo, Paris, Berlin, Mexico City, Barcelona, Seoul and Milan. While $50 billion remains a pie in the sky figure, the company did report 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 it beat analyst expectations (revenue + 7% to $8.98 billion) in fiscal Q3 ‘18.

Fan Marino: In a surprising development, the University of Washington spurned Nike following expiration of a 20-year pact, signing a 10-year, $118 million deal with Adidas; one of the 10 most lucrative apparel contracts in college athletics. The timing of the Zodiac and Invertex acquisitions give off the appearance that NKE is choosing R&D over marketing, but NKE likely made a conscious decision to pass on Washington once the deal’s total value passed $88 million; the amount they’ll pay rival (and Nike founder Phil Knight’s alma mater) Oregon, over the next 11 years.

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