Under Armor’s efforts to quash costly sponsorship deal suggest bigger problems

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Last weekend a sportswear company Under protection (NYSE: UA) (NYSE: UAA) informed college sports center UCLA that it wished to forgo the $ 280 million, 15-year sponsorship agreement it signed in 2016. This agreement put the brand in the spotlight by putting its logo on the school sports uniforms. But, as the Under Armor statement explains, “[W]We paid for marketing benefits that we haven’t received in a long time. “

Under Armor did not say whether the “extended period” in question was solely due to coronavirus-related cancellations or if it had more to do with UCLA’s somewhat diminished reputation of late as a sports powerhouse. Either way, it doesn’t cost the clothing maker anything to at least try to get out of an unsuccessful arrangement.

However, it wouldn’t be naive for investors to question whether the proposed end of the largest college athletics sponsorship deal on record actually points to a much bigger tax problem for the company.

Certain clothing emblazoned with UCLA sold by Under Armor. Image source: Under Armor.

Par for the course

Massive deals between sports brands and colleges are nothing new. Nike (NYSE: NKE) signed an agreement with Ohio State University in 2016 worth $ 252 million. Adidas (OTC: ADDD.F) is willing to pay the University of Kansas $ 14 million per year for the next 14 years to become the brand associated with the school’s athletic programs.

It’s not just schools either. Nike has named NBA star Lebron James a life partner in a deal that is ultimately worth more than $ 1 billion for the basketball phenomenon. Football star Lionel Messi has a long-term contract with Adidas that earns him at least $ 10 million a year.

It is Under Armor, however, that is arguably the least discriminated against and the most generous in paying celebrity endorsements. Basketball player Steph Curry, NFL Tom Brady, professional golf player Jordan Spieth and even wrestler turned actor Dwayne The Rock Johnson have all been or are still part of the Under Armor team of superstars, to name a few. Eight-digit chords are common, while nine-digit chords are not unusual.

The problem: Under Armor associations with a growing number of sports superstars and top college programs do not pay for themselves like before. The decision to cancel the deal with UCLA could in some ways be a sign of what’s to come, including fewer and smaller deals.

It all adds up

It is difficult to determine exactly what the company owes schools and athletes at any given time. Tom Brady’s contract, for example, would have an equity component. Jordan Spieth’s deal likely comes with performance requirements to fully receive his full potential compensation.

Yet between the sheer number of deals that Under Armor has made in addition to the bare minimum guaranteed to each of these schools and professional athletes, the company is poised to secure at least $ 679 million in future sponsorships and approvals. marketing. payments, according to its 2019 annual report. That’s down from the minimum commitment of nearly $ 735 million a year ago, but still a big change for a low-margin company making only about $ 5 billion in revenue per year.

And again, this is only a minimum. Payments to individuals and colleges could amount to much more.

In the meantime, it does indeed appear that Under Armor is sending more and more checks to schools and sports superstars. It’s a jerky increase when you just look at the quarterback comparisons. However, when you step back and look at back-to-back quarterly data for the past several years, the general trend is clear – even before the disastrous first quarter, selling and administrative costs as a percentage of sales have increased. regularly.

The graph showing Under Armor spend as a percentage of sales has been steadily growing.

Data source: Thomson Reuters / Refinitiv. Chart by author. All dollar figures are in millions.

Note that the addition of scale also did not help reduce the cost of goods sold by the company as a percentage of sales. One would have expected at least a minimum of progress on this front for the relatively young society.

Big changes are brewing

To its credit, Under Armor appears to be trying to get control over college approval and exclusivity spending. In 2016, its minimum marketing commitments exceeded more than $ 1.3 billion, which is a big part of why sales, general and administrative expenses have grown so rapidly since then.

The change Under Armor seems to be working on is no small feat, however. Much of its historic growth has relied on using celebrity affiliations at all costs to excite consumers. It remains to be seen whether he can be successful in the future without paying the big bucks these sports stars and universities have been trained to expect.

And that’s what makes the timing of this public showdown with UCLA so curious. On the surface, this could be attributed to more fallout from the coronavirus pandemic. The ripple effect of COVID-19, however, may have simply accelerated Under Armor’s inevitable collision with its spending. Highlighting this perspective is the $ 325 million in operating expenses CFO Dave Bergman is looking to eliminate the budget this year alone.

Against this backdrop, investors shouldn’t be surprised if the effort to break the deal with UCLA marks the start of a larger and more savings-conscious trend.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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