Nike and Adidas Better Look in the Rearview Mirror
Hans is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In 1994, the World Cup finally came to the USA. It was the start of FIFA’s (the world soccer organization) intensified quest to expand soccer globally, starting with one last shot at the largest untapped market: the US. It was the right call.
The 1994 World Cup was, despite loads of skepticism prior to the event by the rest of the world, a resounding success. Fast-forward 20 years later: the USA has a professional league, top star players who this time around not at the very end of their career want to play in the MLS (e.g. Beckham, Henry), American players are performing at the highest levels across Europe (e.g. Landon Donovan on loan spells with Everton, Jozy Altidore with AZ Alkmaar, Clint Dempsey with Tottenham Hotspurs, Tim Howard also with Everton), and the USA has earned respect as a team to reckon with in international competitions. Soccer is here to stay, and in my humble opinion, if the development of players continues at this pace, I would not be surprised to see the USA amongst the best teams in the next decade.
But consider this. As big as Nike was at the time, not even the 1994 US national team played in Nike’s (NYSE: NKE) kit. By the 1998 World Cup in France, Nike had contracted 6 six national teams, including Brazil, Holland , Portugal, and the USA. Nike also started to sign deals with individual soccer players to wear Nike boots. Today, Nike, with a 36% market share, and has almost passed the once-dominant Adidas (NASDAQOTH: ADDYY) who has 38% of the market. In terms of popularity one could argue that Nike has already taken the number one spot, considering some of the most popular teams in the world wear Nike’s kit, including Manchester United, Arsenal, Juventus, Inter Milan, Barcelona, and Celtic, in addition to the prominent national teams they partner with.
I hope for Nike’s and Adidas’ sake they are looking in the rearview mirror because someone is about to eat their lunch. Under Armour (NYSE: UA) is taking a page out Nike’s book. While Nike and Adidas are battling for global soccer domination, Under Armour is very quietly making its soccer debut.
Last year, Under Armour signed Tottenham Hotspurs, the current #4 in the English Premier League and home to Clint Dempsey, arguably the USA’s best player, to a 5 year contract,. The past 12 months they also signed Hannover 96, the current #6 in the German Bundesliga, and Deportivo Toluca, ten time winner of Mexico’s La Liga.
Unlike Nike, Under Armour has been trading at a hefty premium with a P/E that typically hovers between the high 40's and mid 50's. To justify that valuation they cannot continue to only rely on its domestic market--they must expand globally. The best way to do that is to take market share in the almost $12 billion soccer-related goods market. In comparison, Under Armour generates about $1.5 billion annually.
The revenue Under Armour generates from soccer today is negligible, as is their overall international business (just about 6% of total revenue). Soccer will address both. With a market this big, chipping away a couple of points of market share from Adidas and Nike will have a huge impact on its future growth. To illustrate how much of an impact the soccer-related goods market can have on Under Armour’s business, consider this: for every 1% increase in market share, Under Armour will boost its total annual revenue by 8%. How do you like soccer now?
Just like it took Nike time to build its soccer-related business, it will take Under Armour a few years to expand their portfolio and market position. They will have to sign up more teams as their contracts with Adidas and Nike expire, get UA boots on top players’ feet, secure a number of national teams, establish a foothold in the very lucrative soccer ball market, and establish an increasingly visible presence in the next big tournaments – the 2014 and 2018 World Cups, the 2016 and 2020 Euros, and the 2015 and 2019 Copa Americas. With established brand recognition in Latin America and Europe, it took Nike 5 years to turn soccer into a real business. Given Under Armour's lack of brand power abroad, it will take at least as long to establish that beachhead.
I am pleased to see that Under Armour understands that must take the necessary steps now. Together with an expected top line growth of over 20% per year, which I believe only includes very conservative estimates on its expansion in soccer goods, I think that Under Armour is a screaming buy since the recent pull back.
BEF1973 has no positions in the stocks mentioned above. The Motley Fool owns shares of Nike and Under Armour. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.