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A few months ago, I noted that Nike (NYSE: NKE) was still the undisputed leader in the sports apparel market. However, things have changed a bit since then.
There’s a lot of speculation that Nike could be under the microscope going forward. Nike could face some scrutiny over the FIFA corruption scandal, due to its 1996 sponsorship deal with Brazil’s soccer federation.
It’s not clear that Nike is the company named in the U.S. Justice Department’s indictment of several current and former FIFA officials on corruption charges. But there is a “sportswear company” that allegedly bribed a FIFA and Brazilian soccer official for a sponsorship.
According to The Wall Street Journal, “A person familiar with the matter has said the company is Nike.” And Nike would seem to fit the mold for the deal in question. Nike signed a deal with the Brazilian soccer federation in 1996 and during the same year inked a 10-year deal with Brazil to be the exclusive retailer of Brazilian teamwear.
Nike hasn’t been specifically named in the indictment. And even if they are ultimately implicated in the scandal, the fallout could be just a slap on the wrist. After all, it was close to 20 years ago.
However, it’s interesting to think that the deal that really put Nike on the soccer map could have been “dirty.” Nike’s revenues from soccer are up nearly 60-fold in the last two decades.
Nike’s fundamentals are unlikely to take a hit from the FIFA saga, but in terms of brand perception it might have some work to do going forward. And the potential for more negative news could well keep Nike shares under pressure.
In the meantime, there might be an opportunity for other companies to close the gap on Nike’s leading market share position.
Finding Opportunities Amidst the FIFA Fallout
Under Armour (NYSE: UA) is still just a fifth the size of Nike, and it doesn’t have the margins and returns on invested capital that Nike is generating. The valuation is also a bit richer, with Under Armour trading well north of 5 times sales, while Nike is under 3 times sales. However, Under Armour still has some of the best growth opportunities in the business.
Over the next half decade, Wall Street expects Under Armour to grow earnings at an annualized rate that’s close to double Nike’s. Only about 10% of Under Armour’s sales are from outside North America, so it still has the opportunity to diffuse into international markets.
Under Armour has really created its own niche in performance apparel, footwear and accessories. Plus, it’s expanding into digital fitness, meshing technology with sportswear. It’s also been upping its products for women and kids. In terms of soccer exposure, Under Armour has some deals with soccer teams and recently launched a line of soccer cleats.
Adidas (OTC: ADDYY) is another interesting story, given it is the leading soccer apparel and footwear brand. The real beauty is its entrenchment in fast-growing emerging markets. Adidas, along with its Reebok brand, is a leader in the major soccer markets – including Russia, Latin America and Europe. Adidas has locked up sponsors of the FIFA World Cup through 2030.
At the end of the day, it’s all about growth, and Under Armour still has plenty of that. It might be a better play over the interim and could gain some ground on Nike in the U.S.
Then there’s the value play, Adidas, which could gain market share on Nike in the soccer world and in emerging markets.
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