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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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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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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Nike, Not Under Armour To Become MLB’s Official Uniform and Apparel Provider

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Sports Business Daily reported that Nike, not Under Armour, will be the official on-field uniform and apparel provider of MLB come 2020. Back in December 2016, Under Armour announced it had made a 10-year commitment to replace Majestic Athletic (since acquired by Fanatics) as the league’s supplier of game-day outerwear, base layer undershirts and year-round training apparel. It now appears they’ve asked out of the deal, looking to reduce overhead amidst declining U.S. sales (down -1% in Q1 ‘18, forecasting a mid single digit net revenue decline in ‘18); a decision that will save the company +/- $50 million. Fanatics, which acquired the rights to make and sell fan gear at retail as part of UAA’s 10-year pact, is expected to retain those rights; the company announced a similar product licensing agreement with the NFL earlier this week.

Howie Long-ShortUAA has openly spoken about its intention to simplify operations and run leaner, so the decision to cut back on what equates to a brand marketing expenditure aligns with that philosophy. Investors were pleased to see the talk wasn’t just lip service, as shares closed +2.5% on Thursday; at their highest level since July ’17 ($20.58).

That’s not to say that being the official outfitter of a pro sports league doesn’t bear returns. Analysts suggest long-term agreements could boost sales by “hundreds of millions per year.” That should bode well for Nike shareholders as the company also holds NFL and NBA uniform and apparel licensing agreements through the middle of the next decade. Adidas is the official supplier of NHL team uniforms.

For reference purposes, on May 1 UAA reported a $30 million loss for Q1 ’18 on revenue of $1.19 billion; the company’s second straight losing quarter. Looking for some reasons to believe the company is headed in the right direction? Total revenue grew +6%, apparel was up +7% (to $766 million), international sales rose +27% (now roughly 25% of total revenue) and DTC sales grew +17% (to $352 million, now 30% of total sales) during the latest quarter.

Fan Marino: Did you know that Puma, not Under Armour, is now third in sales among athletic apparel brands? Nike and Adidas hold the first and second spots, respectively.

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

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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

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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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Nike to Remain NFL On-Field Apparel Supplier Through ‘28

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Nike has signed an 8-year extension to remain the NFL’s game-day uniform and on-field apparel supplier. The company will also continue to issue cleats and gloves to players who maintain individual endorsement deals with the brand. As part of the long-term agreement (’21-’28 seasons), Nike has agreed to participate in “several programs; including youth and player initiatives.” Financial terms of the deal have not been disclosed.

Fan Marino: It’s safe to assume the deal’s value at least matches the $1 billion commitment (over 8 years) Nike (NKE) made to the NBA in June of 2015. While NKE has the NFL and NBA under long-term contracts, Under Armour (UAA) landed MLB’s uniform contract with a 10-year commitment (no terms disclosed) in December 2016; replacing Majestic Athletic. Adidas (ADDYY) has contracts in place with both the NHL (7 years, estimated $490 million) and MLS (6 years, $700 million) through ‘24.

Howie Long-Short: The 10-year deal that MLB signed with Under Armour (UAA) was supposed to begin in 2020, but Fanatics’ May ‘17 acquisition of VF Corp’s (VFC) Licensed Sports Group (which included Majestic Athletic) expedited the timeline. Fanatics’ $225 million acquisition means that UAA and Fanatics fan gear will now be available in time for the MLB 2018 season (including the postseason dugout collection) and Under Armour uniforms will be on-field for Opening Day 2019.

As for NKE, CEO Mark Parker stated the company was experiencing a “significant reversal” in North America following a 3rd quarter where they effectively “tightened distribution” (see: Jordan brand), “accelerated innovation” (see: Russell Westbrook signature line, Justin Timberlake Super Bowl edition) and increased digital sales double digits.

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Sneaker Companies Offering “Blank Checks” to AAU Programs Run by Parents of Star Players

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The Oregonian released a piece worth reading, detailing how sneaker companies skirt NCAA regulations by sponsoring grassroots teams run by the family members of top prospects. Sponsors are permitted to provide shoes, uniforms and cash for under-funded travel to teams; but, the story describes a system where Nike, Adidas and Under Armour are targeting the family members of star prospects who control their own programs, offering a “blank check” for their allegiance. The cash being pocketed by the family (it’s alleged Josh Jackson’s mom gets $10,000 mo.) equates to a “direct endorsement” of the player, an “extra benefit” that theoretically would make a prospect ineligible under NCAA guidelines. Of course, the sneaker companies are writing these checks, are doing so for good reason; an analysis of 2017 NBA first round picks indicated that most players signed professional shoe deals with the company who sponsored their grassroots team(s).

Howie Long-Short: Basketball sneaker sales have fallen off a cliff in the last 24 months, down 26% to $950 million. Nike (NKE) controls 80% of the market, with Under Armour (UAA) in a distant 2nd place (12.1%). Adidas (ADDYY) accounted for less than 5% of all U.S. basketball sneaker sales in ’17; but, Mark King, the President of Adidas Group North America, has said the brand will “focus on improving its basketball products this year.”

Fan Marino: The NCAA has never investigated the Bagley case, but the circumstances appear to be particularly questionable. In 2008, the Bagley’s filed for Chapter 7 bankruptcy; claiming a household income of $44,000. Four years later, shortly after Nike sponsored the Phoenix Phamily (the team Bagley III played on, coached by Marvin Jr.), the Bagley’s moved into a California home estimated to be worth between $750,000-$1.5 million; with rent in the area ranging from $2,500-$7,500/mo. The elder Bagley readily acknowledge he was using Nike money to “make ends meet.” That’s not great news for Duke fans. In 2010, Renardo Sidney (Mississippi State) was declared ineligible after it was found his family received “preferential treatment” from Reebok. It was later announced Reebok had signed Sidney’s father to a $20,000/year consulting agreement. Duke is headed to the Sweet 16, but their appearance very well may be vacated at a later date.

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Adidas Increases 2020 Profitability Outlook, Announces Share Buyback Plan

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Adidas (ADDYY) released its Q4 ’17 earnings report and while the company missed analysts’ revenue expectations, it reported top line growth (+16% YOY) and bottom line growth (+32% YOY) that left CEO Kasper Rorsted “extremely happy with the results.” The company expects to continue growing sales (+10%) and profits (+13%-17%) in 2018, albeit at a slower rate. On Wednesday’s earnings call, Rorsted also announced that the company had raised its 2020 profitability outlook to 11.5% and announced a plan to buyback $3.72 billion worth of shares (+/- 9%) by ’21; news that sent ADDYY’s share price up +9.4% ($116.80) by the days’ close.

Howie Long-Short: Adidas sales were up 35% YOY in fiscal 2017, enabling the company to surpass Jordan Brand in U.S. sneaker sales (and Under Armour in apparel sales). ADDYY now holds the #2 spot in the category behind NKE. How did that happen? As UAA and NKE focused on basketball sneakers (-20% in ’17), ADDYY built a pipeline of desirable lifestyle sneakers (Superstar, NMD, Stan Smith). Simply put, they’re producing a quality product desired by the consumer.

Fan Marino: Fun fact: Adidas sold 1 million pairs of sneakers in 2017 that were constructed from plastic found in the ocean. The Ultraboosts, each reusing 11 plastic bottles, were created in collaboration with Parley for the Oceans (an environmental organization).

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