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


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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Under Armour Using Snapchat to Sell Basketball Sneakers


Under Armour (UAA) has developed an effective formula to sell basketball sneakers to the U-16 demographic on Snapchat (SNAP). While SNAP ads run for 10 seconds, UAA has been designing their ads to run 5-6 seconds; with the call-to-action occurring within the first 2 seconds. As a result, they’ve found that consumers are watching the ad 1.5 times (thus more likely to catch message), as opposed to “clicking away from it.” Under Armour’s success on the mobile app has come in the form of lens campaigns and mobile gaming; advertising that took advantage of the platform “to move beyond video and create interactive experiences for consumers.”

Howie Long-Short: The U.S. athletic shoe market grew 2% in 2017 to $19.6 billion, with the kids’ sector growing 1% YOY. Under Armour’s footwear sector had a strong Q4 ‘17, growing 9% YOY and Founder Kevin Plank says he expects the sector (along with women and international) to drive company growth in 2018. With that said, UAA shareholders should temper their excitement. As a category, sport leisure (+17% to $9.6 billion) outperformed performance (-10% to $7.4 billion) in 2017 and there wasn’t a single performance shoe (UAA’s niche) in the Top 10, for sales. It is also worth adding that while UAA’s SNAP campaigns have been successful, NPD Senior Analyst Matt Powell reiterated, “Under Armour has always overindexed with kids and has never carried them to high school.”

Fan Marino: The U-16 crowd spends an exorbitant amount of time on SNAP, so offering a highly-engaged audience entertaining interactive experiences is a sound philosophy on Under Armour’s part. Among their recent successful campaigns were a Dennis Smith Jr. (UAA athlete) lens, during All-Star Weekend (he competed in dunk contest), and a game featuring Steph Curry. Users spent an average of 79 seconds posing next to the virtual version of the Mavs rookie, while the Curry game was played more than 3 million times; with the average user spending 3 minutes playing.

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Under Armour Shares Spike 17%, International Growth More Than Off-Sets Declining North American Sales


Despite declining revenue in North America (-4.5% to $1.02 billion), Under Armour (UAA) announced Q4 ’17 revenue increased 4.6% to $1.37 billion; buoyed by a 47% increase in overseas business (23% of total sales). On Tuesday’s earnings call, CEO Kevin Plank said the company anticipates ’18 sales will continue to grow in the low single-digits; while announcing an expanded restructuring plan ($110-$130 million pre-tax, on top of the $85 million booked last year), projected to save the company at least $75 million annually beginning in ’19. UAA lost $87.9 million in Q4 ’17, following a one-time expenditure related to the new tax laws and $36 million in restructuring charges (i.e. facility terminations, severance costs); on an adjusted basis, the company lost just $579,000.

Howie Long-Short: UAA’s 4th quarter wasn’t overwhelmingly successful, but it did beat analyst expectations ($1.37 billion vs. $1.31 billion) and that was enough for investors as shares climbed 17.36% on Tuesday; closing the day at $16.70. Moving forward, Plank sees “footwear (+9.5% in Q4 ’17), women’s and international (projecting +25% in ’18)” sales driving growth. Of course, he’ll have some competition with NKE looking to grow abroad too; projecting a $15.6 billion increase (to $50 billion) in revenue by 2020, with 75% of that growth expected to come from overseas markets.

Fan Marino: Sneaker brands release limited edition colorways to showcase their signature lines on All-Star weekend (2.16-2.18). Under Armour has unveiled the Steph Curry 4 “City of Angels” (on sale on 2.16, $130), the sneaker the Golden State star will wear as he leads his hand-picked squad against Team LeBron. James will wear the LeBron15 “All-Star”, a colorway inspired by the Hollywood Walk of Fame.

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Adidas Lacks Infrastructure to Grow U.S. Business

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Adidas (ADDYY) maintains an estimated 10% of the U.S. footwear and athletic apparel market, but CFO Harm Ohlmeyer says the company’s infrastructure has prevented further growth. The demand apparently already exists, but delivery issues plagued the company throughout H2 2017. The (medium-term) goal is to control 15-20% of the U.S. market share, as it does in every other market it operates within (according to Ohlmeyer); so ADDYY is focused on building out the logistics to handle the business. Ohlmeyer also noted that while Reebok remains unprofitable, he expects to see growth (in the U.S. market) from the restructured company in 2018.

Howie Long-Short: Back in November, ADDYY reported Q3 ’17 sales rose 9% (to $6.6 billion); with U.S. revenue up 23% YOY to $1.3 billion. In late December, (NKE) reported Q2 ‘18 revenue within the region was -5% YOY to $3.5 billion. The U.S. remains NKE’s largest and most profitable market, but the company hasn’t experienced double-digit revenue growth since Q3 ’16. As long as leisure (as opposed to performance) remains popular within the footwear and athletic apparel sector, ADDYY is positioned to continue to outperform (and shrink the gap with) NKE, in the U.S. Of course, personalization and customization is also trending within the industry; so, it’s possible performance gear could be in vogue, sooner than later.

Fan Marino: The NBA released a list of players with best-selling jerseys (on during Q4 2017. Steph Curry (UAA) led the way, with LeBron (NKE), Durant (NKE) and Giannis Antetokounmpo (NKE) right behind. Adidas was represented in the Top 10 by Kristaps Porzingis (5), Joel Embiid (6) and James Harden (10).

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


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

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

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

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

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

Amazon Expands Brand Registry Program, Now Includes Nike

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

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

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

Amazon Entering Private-Label Sportswear Business

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

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

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

The Pursuit of Exclusive Broadcast Rights

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


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.


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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