Real Madrid Inks Most Lucrative Kit Sponsorship Pact in Soccer History

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Real Madrid has agreed a 10-year deal with Adidas worth at least $1.25 billion, the most lucrative kit manufacturing pact in soccer history (previously: Manchester United/Adidas worth $97 million/year). The deal’s value, worth more than twice the $59 million/year Los Blancos currently earns from its kit sponsorship agreement (also with Adidas), could rise to as much as $171 million (from $125 million) annually should Adidas reach merchandising and performance milestones. The newfound revenue will be used to help fund the redevelopment (cost: $650 million) of Santiago Bernabeu stadium (their home field) and to sign top-tier talent; the club has been relatively quiet in recent transfer windows.

Howie Long-Short: While Real Madrid re-signed with Adidas (been with company since ’98), the German apparel company wasn’t bidding against themselves; Nike and Under Armour were also interested in outfitting the La Liga club.

For perspective on the deal’s size, consider that Nike is paying the same amount ($1 billion over 8 years) annually to outfit (game jersey, shorts & socks) all 30 NBA franchises. If you’re wondering who signed the better deal (Nike or Adidas), consider that the NBA boasts of more followers/fans (1.5 billion to 689 million) across social media platforms and delivers the greatest “commercial impact” (according to the POWA Index) of any brand in sports.

Fan Marino: Speaking of the NBA, Monumental Sports & Entertainment announced a multi-year jersey patch sponsorship agreement with Geico that will result in the insurance company’s logo occupying space on the Washington Wizards, Washington Mystics (WNBA) and Capital City Go-Go (G-League) game uniforms. Financial terms of the deal were not disclosed, though it’s known that the average patch sponsorship deal was worth $6.5 million to NBA teams in ’17-’18; the Warriors have the league’s most lucrative agreement (with Rakuten), worth $20 million/season. The Thunder and Pacers are the only NBA teams yet to take advantage of the newfound revenue stream.

MLS executives watched NBA teams bring in over $100 million in new corporate sponsorship revenue last season (from jersey patches) and decided they too should increase kit sponsorship inventory. Starting with the 2020 season, MLS clubs will have the ability to sign secondary sleeve sponsorship pacts (each team has a main partner, Houston is the exception); deals projected to be worth $1 million to $1.5 million annually. For those wondering, top-end MLS main kit sponsorship deals are worth $3-4 million/year, though it’s said D.C. United (who is replacing Leidos as its main kit sponsor at the end of this season) is looking to re-set the market; the club is reportedly seeking $5 million per/year, a figure that would place them atop the league (LA Galaxy is currently 1st, $4.4 million/year) in kit sponsorship revenue.

European soccer has a gambling advertising epidemic. 9 of 20 EPL clubs and 17 of 24 EFL Championship League teams have gaming companies as their main kit sponsor (sports betting ads also make up 95% of commercials during live matches in the U.K). MLS currently has restrictions on gambling partnerships, but they are said to be “under review by the league”. Gaming companies will certainly have interest in secondary kit sponsorships and they could bring MLS clubs much needed revenue, but here’s to hoping the league opts to avoid the low hanging fruit; a recent study indicated the U.K. has 430,000 “problem gamblers”, including 25,000 between the ages of 11-16. Incessant gambling advertising is contributing to (if not the root of) the problem.

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Louisville, Kansas and NC State Victims Ruled Victims in NCAA Basketball Corruption Trial

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Two former Adidas employees and a former sports marketing executive were found guilty of wire fraud and conspiracy to commit wire fraud in the first of 3 separate NCAA basketball corruption-related trials (the others involve coaches steering players to programs in exchange for kickbacks). A Manhattan federal court determined on Wednesday that former Adidas head of global basketball marketing James Gatto, former Adidas consultant Merl Code Jr. and former sports Christian Dawkins had “deceived universities (Louisville, Kansas and NC State) into issuing scholarships under false pretenses (players would have been ineligible if they took money)”, by funneling Adidas money to elite prospects. Sentencing is scheduled for May 5th.

Howie Long-Short: The jury’s unanimous guilty verdict would be laughable, if the 3 men weren’t facing 2-4 years in jail for compensating H.S. basketball recruits. The schools referenced weren’t defrauded by the defendants, they were complicit in a conspiracy (see: allegations that Bill Self asked an Adidas employee to pay the guardian of Silvio de Sousa) that provided them with 5 star prospects.

The ruling is unlikely to impact the Adidas’ bottom line, few believe the defendants are guilty of anything besides violating NCAA bylaws

Adidas (ADDYY) issued Q2 earnings back on August 9th, reporting 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. ADDYY’s has managed to grow the top line without resorting to discounts to sell shoes, reporting gross margins rose +2.2% (to 52.3%) in Q2 ‘18. Shares are up +6.5% (to $117.78) since the company reported. ADDYY will post Q3 financials on November 7th.

Fan Marino: There was so little coverage of Wednesday’s shocking verdict that it’s hard to believe the jury’s decision will impact college basketball’s black market. The financial incentives to sign top players remains (for both schools and sneaker companies) and the amateurism rules that prevent elite prospects from realizing their true value, still apply.

Earlier this week, we noted that the NBA was offering elite H.S. basketball prospects a new “professional path”; a six-figure payday (among other benefits) to forego collegiate basketball and play a single season in the G-League. While in theory the G-League’s new “professional path” offers players the opportunity to get paid (without anyone violating federal law), players projected to be selected in the top 24 picks of the NBA draft would be better off sitting out the season than taking a step up in competition; falling a single slot in the draft would cost the player more (over the first 2 years of their deal) than the $125,000 they’d receive for playing the entire season.

A federal court may have found Louisville, Kansas and NC State to have been defrauded, but that’s not a “get out of jail free” card if/when the NCAA comes knocking. Once the criminal investigations/trials are complete, the NCAA could pursue violations of their bylaws and all 3 programs involved in this case are guilty; defense attorneys acknowledged as much (while denying they had committed federal crimes), stating each school paid the families of high-profile players (Brian Bowen – Louisville, Billy Preston – Kansas, and Dennis Smith Jr – NC State).

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NBA Plans to Ban Yeezy Basketball Sneaker

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The NBA intends on banning players from wearing Adidas’ Kanye West basketball sneaker during league games, over concerns surrounding the shoe’s design; the league believes the sneaker’s “gleaming, reflective material heel” would be distracting to fans both in the arena and to those watching at home. The 2018-2019 season will mark the first NBA season where players are not required to wear sneakers that match their team uniform, but 3M (the reflective material) remains on the leagues footwear color restriction list. Several Adidas endorsees had planned to wear the Yeezy basketball sneaker during the ’18-’19 season.

Howie Long-Short: The NBA’s decision to ban players from wearing Yeezy’s won’t impact sales, but Adidas’ decision to sell the label’s products in mass will. The company’s latest Kanye drop (a mass release of the Yeezy Boost 350 V2 “Triple White” on September 21st) “still has not sold out” and the “resale price is barely above MSRP” ($230 is lowest ask on Stock X). That’s not necessarily unexpected, celebrity collaborations historically fail with commercial releases (see: Jay-Z, 50-Cent, Pharrell Williams). As we wrote last week, the paid endorser model is broken in the U.S.

The reason West’s label has always been highly sought after is because its products “could be flipped for multiple times the initial price” (due to their limited availability), not because the consumer wanted to wear them. As Matt Powell, NPD Group retail analyst explained, “if the reason people are buying this shoe is to flip it, and now you can’t flip it, are you ever going to come back and buy another (pair)?” The answer is no, you’re not. That’s a problem for Adidas because as we’ve seen with Jordan Brand, “it’s a long process to build back that credibility.”

Adidas (ADDYY) issued Q2 earnings back on August 9th, reporting 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. ADDYY’s has managed to grow the top line without resorting to discounts to sell shoes, reporting gross margins rose +2.2% (to 52.3%) in Q2 ‘18. Shares are up +11% (to $123.02) since the company reported.

Fan Marino: The league’s decision has nothing to do with Kanye’s bizarre SNL appearance last weekend. In fact, the league hadn’t even formally reviewed the sneaker as of Monday’s initial ESPN report; assumptions were made based on photos West posted of the sneaker on the Instagram. If Adidas were to redesign the shoe (removing the reflective material), it’s likely the league would approve the design and it’s possible NBA players could still wear them this season.

While possible Adidas basketball stars could wear Yeezy’s in an NBA game this season, it won’t happen before December. That’s because the league reviews new sneaker models 2x/year, once in August (for the start of the season) and again in December (for the balance).

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Paid Endorser Model “Broken” in U.S., Works in Asia

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Naomi Osaka, coming off the U.S. Open championship, will sign a contract extension with Adidas (ADDYY) worth $8.5 million/year at the completion of the season; the deal will be the largest the company has ever issued a female tennis star. Osaka’s half-Haitian, half-Japanese heritage, makes her particularly appealing to the western brand seeking to expand its reach in Asia. Interestingly, Osaka’s deal comes just 2 months after Uniqlo, another company “with plans for breakneck speed growth in Asia”, signed men’s tennis star Roger Federer (as a global ambassador) to a 10-year $300 million deal.

Howie Long-Short: NPD Group retail analyst Matt Powell recently said the “paid endorser model is broken”. He’s right, U.S. consumers have gotten smarter and they know “how phony these pay-to-wear (sponsorship) deals are”, which helps to explain how Under Armour could have Steph Curry, Tom Brady and Bryce Harper on the roster and still see their share price decline -60% (from $51+ to $20+) over the last 3 years (UAA shares are +39% YTD so that drop had been worse). Of course, the Osaka and Federer deals aren’t about the U.S. market and generally speaking the Asian consumer is more likely to be influenced by an athlete endorsing a product than the American consumer would be.

So, if sneaker/apparel brands are not earning a return on their investment in athletes, could the end of lucrative long-term (think: Harden. Adidas. 13 Years. $200 million.) sponsorship deals, for domestic stars, be far behind? According to Matt (and a couple of NBA agents), that reality is already here. Most NBA players receive just a “small fee and free product”, while NFL players are offered compensation packages “worse than your standard NBA deal.” One agent told hoops hype “there are probably five relevant superstars out there and while every is chasing deals there aren’t any deals out there to actually get.”

Fan Marino: Elite NBA players earn more money from endorsements than athletes from any other American professional sport. In 2018, the NBA’s 10 highest paid endorsees took in $234 million in off-court earnings, 2.6x ($90 million) the amount NFL’s 10 most marketable players generated; LeBron James ($52 million) alone will take in more than the Top 10 MLB ($25 million) and NHL ($20 million) endorsees combined.

On Friday, Sara Germano (WSJ) translated an investment research note stating, “there may also be potential upside in apparel, as recent NBA player moves to highly dense markets may have resulted in incremental sales” to “Wall Street for LeBron moved to LA.” LeBron is certainly going to sell a lot of jerseys in L.A. (he was #2 in the league last year) but don’t expect his Nike sneakers to fly off the shelves, performance basketball sneakers remain out of style in the U.S. and even Laker’s legend Kobe Bryant “never sold a lot of shoes in the U.S.”

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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 Become First Brand to Live Stream High School Football on Twitter

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Adidas (in collaboration with Intersport) will become the first brand to “live stream high school football games on Twitter”, when it kicks off its “Friday Night Stripes” series on September 7th. The 8-game showcase will feature weekly match-ups between nationally ranked programs nationwide. Live streams of the game feed will include a twitter timeline featuring “real-time conversation about the action.”

Howie Long-Short: Game coverage will be accessed by visiting @AdidasFBallUS, so Adidas should see their Twitter following rise. That should suit ADDYY well, as the company has done a good job (at least relative to NKE) converting brand sales once customers are on their site. It’s worth pointing out that H1 footwear sales rose +20% (see: retro) and apparel did even better, on the back of a strong World Cup (sold record 8 million jerseys).

Stephen Wilmot (WSJ) made a strong argument that ADDYY shares are undervalued. Even after an 8% jump on August 9th (following earnings), 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. Shares closed at $119.02 on Tuesday.

For those wondering, Intersport creates sports marketing platforms. While you may know them as the company behind the 3x3U basketball tournament for college seniors (held at Final Four), they own one of the most infamous pieces of video footage in sports history. Intersport was the only production company rolling on January 6, 1994 when Nancy Kerrigan was attacked with a police baton. The company has said it’s earned 7-figures from licensing the footage, receiving $10,000-$15,000 (or $250/second) each time it’s used.

Fan Marino: Fans of youth sports are going to experience a sharp increase in the number of games available to a broadcast audience over the next several years, as OTT platforms give rights holders the ability to reach niche audiences directly. How long before high school kids start complaining they aren’t being fairly compensated for their name, image and likeness?

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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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