With NFL Deal, Nike Is Ready to Play

by Susan J. Aluise | April 9, 2012 12:20 pm

Football coaching great Vince Lombardi once said, “Success demands singleness of purpose.”

Of course, it also doesn’t hurt to have a five-year exclusive apparel deal with the National Football League.

When Nike (NYSE:NKE[1]) unveiled its new uniforms[2] for all 32 NFL teams last week, it kicked off a new era both for the league and the global sports apparel giant.

Back in 2010, Nike beat out Adidas’ (PINK:ADDYY[3]) Reebok unit on the $1.1 billion deal for exclusive rights to sell NFL jerseys. Reebok, which has had that exclusive licensing deal for the past decade, recently said the loss of the deal will cost the company $200 million to $250 million a year in lost revenue.

Reebok sold $500 million in NFL merchandise[4] last year alone, according to sports apparel analyst Matt Powell. With high-profile free agency moves by fan favorites — like Peyton Manning to the Denver Broncos and, subsequently, Tim Tebow to the New York Jets[5] — Nike is likely to blow away Reebok’s final-year numbers. Powell estimates Nike could rack up $750 million in NFL merchandise sales this year alone.

When there’s that much on the line, you leave everything on the field to protect your turf. When Tebow, the former Broncos quarterback and Heisman Trophy winner, was traded to the Jets on March 22, Reebok promptly cranked out new green-and-white Tebow jerseys. Nike responded to that trick play by filing suit in a federal court in New York[6], saying Reebok’s new No. 15 Jets jersey could harm its sales of Tebow-related merchandise. Nike won the challenge — at least for now: The judge granted an injunction against Reebok’s sale of the Tebow Jets jerseys.

While Nike has had deals with individual NFL teams in the past, the exclusive license that took effect on April 1 marks the first time its on-field uniforms and sideline gear will be worn by the entire league’s players, officials, coaches and assistants.

Nike has branded its new NFL collections the “Elite 51,”[7] and it boasts that the uniforms are designed for speed with a body-contoured fit and four-way stretch fabric for better range of motion.

The new uniforms also eliminate the double-layer padding over the shoulders, while adding more padding to the “hit zones.” There are no radical fashion changes in the new uniforms — at least not yet. But NFL insiders expect a more extreme makeover for some team uniforms as the relationship progresses.

The new uniforms are all well and good, but what does that mean for investors?

Nike on March 22 reported that third quarter earnings grew by 11%, beating analysts’ estimates. Revenue also increased by 15%.

Still, concerns over higher commodity costs and slimmer profit margins rattled analysts, who fear Nike and other retailers will find it difficult to pass on these higher costs to consumers. Nike also is grappling with higher than normal inventory levels and headwinds continue from Europe.

Although Nike is mum about the financial impact it expects from the NFL deal, one early indicator may lie in its “futures” orders for products that will be delivered between March and July. During its earnings call, Nike put that number at $9.4 billion — that’s 15% higher than last year.

The Nike deal will continue to boost the company’s fortunes for a couple of reasons:

  1. The new uniforms will drive higher sales as superfans run out to buy the latest gameday gear.
  2. NFL fans tend to be far less price-sensitive than buyers of generic retail apparel.

Despite the margin pressure, I think Nike is a buy right now.

I like its fundamentals. NKE is trading around $110 and is up more than 43% since its 52-week low last May. With a market cap of more than $50 billion, it has a price-to-earnings ratio of 1.7, indicating it may be overvalued. That said, Nike has $3.2 billion in total cash and total debt of only $369 million. NKE also offers a modest 1.3% dividend yield.

I also like the business opportunity. The NFL deal will be big for Nike; its sponsorship of the Rio Olympics and a win to equip the English Premier League soccer club will further strengthen its position. I see a nice long play for NKE, with a price target of $117.

Nike is a winner, and as Lombardi said, “If winning isn’t everything, why do they keep score?”

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

  1. NKE: http://studio-5.financialcontent.com/investplace/quote?Symbol=NKE
  2. unveiled its new uniforms: https://investorplace.com/2012/04/nike-unveils-new-2012-uniforms/
  3. ADDYY: http://studio-5.financialcontent.com/investplace/quote?Symbol=ADDYY
  4. sold $500 million in NFL merchandise: http://www.thestar.com/business/article/1157748--from-the-nfl-to-mlb-new-uniform-designs-mean-new-revenue-streams.
  5. Tim Tebow to the New York Jets: https://investorplace.com/2012/03/nike-fighting-reebok-over-tebow/
  6. filing suit in a federal court in New York: https://investorplace.com/2012/03/nike-fighting-reebok-over-tebow/
  7. “Elite 51,”: http://nikeinc.com/nike-football

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