Weekly Consumer Products Notes: Nike, Under Armour

According to USA Today, Oklahoma Thunder star and NBA MVP Kevin Durant has signed a 10-year agreement worth as much as $300 million, including a $50 million retirement package, with Nike (NYSE:NKE). Durant’s current 7-year, $60 million deal with Nike is about to expire and there were rumors that the NBA star would depart to rival company Under Armour (NYSE:UA) for a new deal. The Baltimore-based Under Armour is said to have offered Durant a deal between $265 million and $285 million, including an equity stake in the company and a community center built in his mother’s name. According to ESPN’s Darren Rovel, Durant was heavily impressed by Under Armour’s presentation and spent an entire day training in the company’s footwear. Under Armour had a lot to gain from a potential deal:

• the company only holds about 1% share in basketball shoes in the U.S., compared to Nike’s whopping 96%.
• UA’s footwear division only brings in revenues of around $250 million each year, compared to $16 billion for Nike.
• Durant’s Nike signature shoe sales had jumped 400% between 2012 and 2013 to reach $175 million. A deal with Durant could have helped UA double the revenues of its footwear division.

Losing out on the deal isn’t entirely terrible news for Under Armour. The company was prepared to spend as much as 10% of its marketing expense on Durant alone, making the deal a very risky proposition. Besides, Under Armour bounced straight back and announced a new deal with supermodel Gisele Bundchen. While Bundchen won’t help the company sell any more of its basketball shoes that it currently sells, she can certainly help advance Under Armour’s popularity with women. UA is highly focused on its women’s business and wants to grow the business to be as large as its men’s business one day.

Nike’s stock traded between $80 and $82 last week. Our valuation of ~$69 (market cap of $62 billion) for the company is about 12.5% lower than the current market price (market cap of $71 billion). We expect Nike to report revenue of around $31 billion and non-GAAP diluted EPS of $3.50, which is in line with the market consensus of $3.39 (Financial Times).

Under Armour’s stock traded between $70 and $73 last week. Our valuation of ~$74 (market cap of $15.8 billion) for the company is about 6% lower than the current market price (market cap of ~$15 billion). We expect Under Armour to report revenue of around $3 billion and non-GAAP diluted EPS of $1.15, which is higher than the market consensus of $0.94 (Financial Times).

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