Puma: Female Athletes Do Not Translate on a Global Basis, Signs Entertainers

Puma

The development of the Puma SE (PMMAF) women’s division (now 1/3 of all company revenue) has helped lead the company’s revival; going from $6.3 million in ‘13 profits to $161.5 million over the first 9 months of 2017. CEO Bjorn Gulden attributes the turnaround to their relationship with Rihanna (began in ’14), believing she made the brand “hot again with young consumers”. Gulden signed Rihanna after coming to the realization that while male basketball and soccer stars translate on a global basis (see: GSW popularity in China), it is difficult to find a female athlete who could have the same impact; that female entertainers would have to fill the void. With the turnaround nearing completion, Puma parent company Kering SA (OTC: PPRUY) announced late last week it would be spinning off the sportswear brand; allocating 70% of Puma shares to Kering SA shareholders.

Howie Long-Short: NPD Group, Senior Industry Advisor, Matt Powell has been vocal that Adidas’ (ADDYY) rapid growth over the last 3 years has far more to do with their product line (see: Superstar, NMD, Stan Smith) than Kanye West; his signature line is produced in such limited quantities it doesn’t move the needle. I checked in with Matt to see if he thought Rihanna was making a bigger impact for Puma. He acknowledges Puma’s business turned after signing Rihanna, but isn’t prepared to give her the credit Gulden does; like Adidas, he says Puma’s growth (stock up 45% over last 12 mo.) has more to do with the quality of their products (see: Fierce, Fenty Creeper, Basket Platform) than her celebrity.

Fan Marino: Puma may not have big name female athletes on its roster, but it has a who’s who of female celebrities; Rihanna (59.4 million IG followers), Kylie Jenner (100 million) and Selena Gomez (132 million). For comparison purposes, the company’s biggest male endorsers; Arsenal F.C. and Usain Bolt, have 10.6 million and 7.9 million respectively. Females also accounted for 62% of all U.S. retail athletic apparel sales in 2017 (per NPD Group). Perhaps Gulden is on to something.

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Adidas Lacks Infrastructure to Grow U.S. Business

Adidas 200x200.jpg

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 NBAStore.com) 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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WWE Could Replace UFC on FOX, Receive $400 million annually

WWE

The UFC’s 7-year broadcast deal (worth $160 million in ’18) with 21st Century Fox, Inc. (FOXA) is expiring in 2018 and the mixed martial arts promotion is reportedly seeking a new deal worth more than twice as much annually ($450 million). FOXA is reportedly prepared to offer +/-$200 million/year, so it’s possible (if not likely) the UFC will be finding another broadcast home. Should that occur, Dave Meltzer (Wrestling Observer) has indicated FOXA would look to acquire WWE broadcast rights (expiring in September 2019), if not the entire professional wrestling promotion; though it’s been stated McMahon has no intention of selling (owns 41.8% of the outstanding common shares, but controls 82.8% of the company).

Howie Long-Short: NBCUniversal (CMCSA) currently pays $200 million/year for the rights to broadcast WWE Monday Night Raw and SmackDown. The speculation is the next deal will be closer to $400 million annually; potentially twice what the UFC will see. That’s noteworthy because WME paid $4 billion for the UFC in July 2016, $1.5 billion more than the WWE’s current market cap. I think it’s safe to say they overpaid.

Fan Marino: Should FOXA acquire WWE broadcast rights, the prevailing feeling is that RAW would air on network television; with SmackDown moving to FS1. That’s not great news for hardcore WWE fans, as it likely means reducing RAW to a 2-hour program once again (currently 3 hours); Fox affiliates tend to air local news at 10p EST. Speaking of RAW, the 25th anniversary will be held on January 22nd at the Barclays Center. It’s now the longest running weekly episodic show in U.S. TV history.

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DraftKings Increasing in Size by 75%, Pivoting to Legalized Sports Gambling?

Draft Kings

DraftKings has embarked on “an aggressive hiring campaign”, designed to increase the size of the company by 75% (from 425 to 700+) over the next 18 months; with 600 employees relocating to new office headquarters (still within Boston, but 105,000 SF), in 2019. The announcement comes just weeks after the SCOTUS heard New Jersey’s argument to revoke the federal ban on sports betting; a decision that many have assumed, if it were to go in NJ’s favor, would signal the end of daily fantasy sports. Instead, DraftKings is doubling-down; looking to build on its edge over rival FanDuel and continue to expand internationally (currently in UK, Ireland, Germany and Austria). The private company would not release user acquisition or revenue figures, but says both are up YOY.

Howie Long-Short: CEO Jason Robbins referenced the development of new products and the diversification of offerings in the company’s press release, leading many to assume he’s talking about legalized gambling. While the company owns a valuable user database that would significantly help its transition into the sports betting space, several pro sports leagues (see: MLB, NHL) are invested in the company; complicating a potential pivot. Then again, you don’t increase your staff by 75% to simply license your database; I would expect DraftKings to overcome the hang-ups and look to get-in on the sports betting gold rush.

Fan Marino: While DraftKings focuses on growth, FanDuel focuses on profitability; a goal it expects to reach for fiscal 2018. Why? There are rumors the company is actively pursuing a buyer.

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Study Finds Super Bowl Ads Worth the Spend

SuperBowl

30-second advertising spots during the February 4th Super Bowl are selling for more than $5 million (40% of U.S. TV households will be watching), but a collaborative study between Stanford University and Humboldt University (Germany) found that Super Bowl advertisers continue to see meaningful post-game sales during other major sporting events (i.e. March Madness, World Series), within the same calendar year, indicating the spend is worth it. Those that built a social media presence or digital campaign to follow their Super Bowl ad, were successful in keeping their product(s) on the consumer’s mind through baseball season. Companies that were the sole advertiser within a specific product category received the greatest long-term value (see: BUD, PEP). Long-term advertisers received a boost in sales during Super Bowl week, despite the product being purchased before the event (i.e. the ad has yet to run).

Howie Long-Short: Just 10 Super Bowl ad spots remain, so the study is unlikely to impact ad sales (and NBC’s bottom line) for this year’s game. If there are going to be immediate beneficiaries, it’s going to be CBS (rights to ’19 SB) and FOXA (rights to ’20 SB); the rights holders of the next 2 Super Bowls. NBC Universal (CMCSA) said it expects to generate $500 million in Super Bowl ad revenue, a figure in line with the total generated for the last 2 years. Advertisers aren’t worried about the NFL’s declining attendance, that trend hasn’t translated to the Super Bowl; last year’s game drew 111.3 million viewers, the 5th most watched TV event of all-time.

Fan Marino: Mean Joe Greene and Joe Namath participated in iconic Super Bowl commercials, but a lesser known collegiate All-American starred in one of my all-time favorites; Terry Tate as “Office Linebacker”, installing workplace discipline in a 2003 Reebok spot. At 6’5, 300 pounds, with 4.3 40 (yard dash) speed and collegiate All-American (Morgan State) game tape, Lester Speight (his real name) should have been an NFL star; position changes and injuries derailed his promising career. He never played in a professional football game.

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Kering to Spin Off Puma SE, Focus on High-Margin Luxury Brands

Puma

Kering (OTC: PPRUY) has announced plans to spin off a majority stake in Puma SE (PMMAF), enabling the company to focus on its high-margin luxury brands Gucci, Yves Saint Laurent and Balenciaga. CFO Jean-Marc Duplaix indicated the group would also look to rid itself of the boardsports label Volcom. The company will distribute 70% of Puma shares to its investors, reducing its own stake to 16%. The transaction price will be determined at April’s shareholder meeting. PPRUY shareholder Groupe Artemis (see: Francois Pinault), will become PMMAF’s largest shareholder; controlling 29% of the company.

Howie Long-Short: Kering paid $6.4 billion for Puma in 2007, slightly above the current market cap ($6.1 billion); despite the stock price climbing 45% over the last 12 months. Despite not yet having capitalized on the turnaround (profits fell from $324 million in ’07 to $6.3 million in ’13, before rising to $161.5 million over the first 9 months of ‘17), it makes sense for Kering to sell their sportswear (and lifestyle) brands; as Duplaix explained, the company has found itself in “a sort of imbalance, linked to the outperformance of the luxury sector.” In other words, their sportswear businesses were dragging down the overall performance of the company; particularly Gucci, among the hottest names in fashion.

Fan Marino: PMMAF, the German footwear and sports apparel manufacturer, will report full year earnings on February 12th; after having increasing profit guidance 3x in 2017. The company turnaround can be attributed to a refocusing on the world’s most popular sports (soccer, running, motorsports) and a boost in women’s sportswear sales. Puma publicly stated it welcomes the transaction, but shares closed -4.4% on Thursday amid concerns the company lost a powerful backer.

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Rising Cap, CBA Clauses Change NFL Team-Building Strategy

NFL 200x200

The NFL salary cap has risen from $120 million in 2012 to $167 million in 2017, escalating $10 million annually over the last 4 years; while the value of rookie contracts has simultaneously declined after the players negotiated to increase cap allocation for veterans, within the 2011 collective bargaining agreement. The current CBA also allows for teams to roll over available cap space to the next season, creating a situation where teams can stockpile money (see: Browns, 49ers and Jets all have over $100 million to spend this offseason). Those large sums of available cap space have changed the perception that free agency is a collection of desperate teams overpaying to acquire talent on the decline, to a viable roster-building strategy with empirical data to support those beliefs; 6 of the top 10 spenders during the 2016 offseason made the 2017 playoffs, with the Jaguars (spent $20 million more than anyone else last offseason) turning it around from 3-13 to 10-6.

Howie Long-Short: NFL players are underpaid relative to athletes in other professional sports. Their careers are shorter, their contracts are rarely guaranteed in full and there are simply far more players divvying up the revenue allocated. NFL teams also don’t tie contracts to a percentage of the salary cap, so as the cap rises, star player contracts become relative bargains. Only once a player receives a franchise tender (a tactic used to retain valuable free-agents) is the contract tied to a percentage of the salary cap, and even then, it’s an average of the Top 5 players at the position or a 120% increase from the year prior; far less than a player could earn on the open market.

Fan Marino: The Jets gave up a 1st and 3rd round pick to acquire restricted free-agent (and current HOF) Curtis Martin in March of 1998. There was another 1998 free-agent signing that receives far less acclaim, but deserves to be recognized among the all-time great free-agent acquisitions. In February of 1998, the Jets made Center Kevin Mawae the highest paid player at the position with a 5-year $17 million contract. Mawae, who went on to play 8 seasons with the Jets, including 7 times as a First Team All-Pro, is a 2018 HOF finalist. Pro-football-reference.com, compares Mawae’s career to those of Mike Webster, Gene Upshaw, Jim Otto, Larry Allen, John Hannah, Gary Zimmerman, Will Shields, Walter Jones and Jonathan Ogden. What do all those guys have in common? Their busts reside in Canton, Ohio.

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