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Tee-Time for Sports Apparel Stocks: Nike, Inc. (NIKE) and More

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NIKE Inc. (NKE)In a day and age when athlete endorsements have been riddled with controversy, Nike, Inc. (NYSE:NKE) Golf signed 23-year old pro-golfer Rory McElroy to represent the brand. The Ireland native’s sponsorship contract is reportedly worth between $100 million and $250 million over the next five to ten years, which on the high end would represent the largest contract for the sport of golf ever.  McElroy, the 2012 PGA champion, and Tiger Woods share the stage as the two youngest pro-golfers with multiple wins in the Majors.

The endorsement also comes at a time of heightened competition among apparel and golf-equipment makers and just as the game is rising in popularity. Through September 2012, the number of golf rounds played in across U.S. courses climbed a record 7.5% over 2011 levels, according to Golf Datatech.

Nike has the cash for a sponsorship contract of this size, especially after the recent sale of the Cole Haan brand to Apax Partners in a $570 million deal. In 1988, Nike paid $80 million for the brand, according to The New York Times. Nike wants to focus on its core brands — which in addition to Nike include Jordan, Converse, and Hurley — and those that generate the highest returns of the company.

Contracts R Us

Last year, Nike inked a $1.1 billion contract with the National Football League, which will add an estimated $500 million to the athletic apparel company’s revenue growth each year.

As a result of the NFL contract, Nike is collaborating with NFL teams to produce team jerseys but must adhere to a league protocol that limits design changes from occurring more than once in any five-year period.
In its first year, Nike underestimated demand for Washington Redskins quarterback Robert Griffin III — “RG” — apparel and had to produce additional jerseys at the last minute. Nike is also focused on producing more NFL apparel, such as Jackets, for the consumer market, according to a recent CNBC report.

Nike’s fiscal 2Q revenues were $6 billion, which represented a 7% increase over the year-ago period. Gross margins, however, declined by 30 basis points in the period amid rising labor costs and an unfavorable impact stemming from foreign exchange rates.

Shares of Nike are up about 5% year to date. The stock has a trailing price-to-earnings ratio of 24, versus a more expensive 41 for smaller competitor Under Under Armour Inc (NYSE:UA). In its Fiscal 3Q, Nike is expected to report a gain from the completed sale of Cole Haan.

As for Under Armour, revenues increased 25% in 2012 to $1.8 billion while gross margins declined slightly amid “an unfavorable sales mix” coupled with higher transportation costs, the company indicated. Earnings per share were up 31% for the full year to $1.21 on a diluted basis.

Despite the high valuation, any slight pullback — such as the 5% decline that occurred in January when a key executive announced his departure — should be viewed as a buying opportunity at this point.

Several weeks ago, sports-industry veteran Gene McCarthy announced his forthcoming departure from Under Armour scheduled for later in February. McCarthy, whose resume boasts of experience from Nike and Reebok, has been instrumental in developing Under Armour’s footwear offerings, including cleats, over the past four years.

In 2012, revenues in Under Armour’s footwear segment increased 32% to $239 million versus $182 million in 2011. McCarthy was part of the team that turned around the company’s slumping footwear sales, which only three years ago was not a profitable unit.

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