Tee-Time for Sports Apparel Stocks

Gerelyn is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

In a day and age when athlete endorsements have been riddled with controversy, Nike (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 Armour (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.

Since Under Armour's intra-day low on January 24th, the stock has climbed 13%. Unless the company has a major unexpected setback, these minor pullbacks are opportunities for future profits.

More broadly, there was a 5% jump in U.S. athletic footwear sales in 2012 to $13.8 billion, according to NPD data cited in The Wall Street Journal. The higher sales were driven by higher prices, and that trend is expected to continue into 2013 as consumers are willing to spend for the latest trends (such as spikeless golf shoes,) colors and technology that retailers and manufacturers offer, NPD suggests. 

The trend stands to benefit speciality retailers, including Foot Locker (NYSE: FL), which according to a recent Barron's article is well positioned to capitalize on the market trends particularly in light of the company's strength in basketball shoes. Foot Locker generated a 10.2% increase in its 3Q comparable store sales, which surpasses the 3.6% increase that competitor Finish Line achieved in the similar period.  Shares of Foot Locker are up 10% year to date and the company hosts a shareholder meeting in March.

 

 U.S. PGA

In recent days, professional golfer Brandt Snedeker's currency went up at the Pebble Beach National Pro-Am when he won the event along with $1.17 million. Snedeker is ranked second only to Tiger Woods among U.S. pro-golfers. It was TaylorMade, the maker of golf clubs and accessories used by Snedeker, that got the most publicity in Pebble Beach, California -- not Nike -- but the FedEx Cup-PGA tour isn't over yet. 


GerelynT has no position in any stocks mentioned. The Motley Fool recommends Nike and Under Armour. The Motley Fool owns shares of Nike and Under Armour. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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