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Investor's Business Daily
Under Armour's nearly $300 million bid to steal Kevin Durant's endorsement from Nike could mean an entry into the big leagues and may be less costly than it appears.
The offer, if accepted, would reportedly be Under Armour's biggest-ever endorsement deal and eat up around 10% of its annual marketing budget.
"It would mean that they're really in the game," Sterne Agee analyst Sam Poser told IBD, adding that the contract would likely be paid out in a mix of cash and stock. "It would probably be very good for Under Armour and the overall athletic category."
Under Armour is reportedly offering the Oklahoma City Thunder forward $265 million-$285 million, according to ESPN, but if Nike asserts its right to match that bid, Durant will not be free to pick Under Armour.
News of the mega-bid comes weeks after Under Armour CEO Kevin Plank, who sees his company eventually generating $10 billion in annual revenue, predicted that this year will mark a major turning point.
"We will look back on 2014 as the year we transitioned from a company learning how to make great shoes into a truly disruptive voice in the global footwear market," he said in an earnings conference call last month.
A Durant deal would be a significant chunk of change for Under Armour, whose expected full-year revenue of $3 billion pales in comparison to Nike, which brought in $27.8 billion in the fiscal year that ended in May.
"A lot of people are fixated on how much money this is," Macquarie analyst Laurent Vasilescu said in an interview. "But (Under Armour) is in a hypergrowth stage. If you look just two years out to 2016, (the money) would be 5% of the marketing expense."
Low Risk Vs. Big Reward
Under Armour's sales could reach $4.8 billion in 2016, Vasilescu says. And if the company's marketing cost-sales ratio remains around 11%, Durant's annual take of about $25 million would constitute just roughly 5% of the athletic-wear maker's marketing budget.
"The real potential of basketball is that it's becoming a global sport," said Vasilescu.
While basketball currently accounts for a meager 1% or so of Under Armour's revenue, the segment's growth potential is enormous.
At rival Nike, for example, basketball and running segment revenues have been growing in the high teens, says Vasilescu, compared to single-digit growth in sales of football and baseball, which are much more American-centric sports.
According to the NBA, the 2013-14 season started with 92 international players on opening-night rosters. If basketball continues its upward trajectory both as an activewear segment and an international sport, stealing Durant could turn into a major score for Under Armour.
While the company is smaller than Nike now, "Kevin Durant can move the needle not just because of who he is and what he's become, but because the NBA is much more of an international league," said David Carter, executive director of the USC Marshall Sports Business Institute.
And when it comes to being a face of the sport to the world, Durant is "one of the wholesome beacons of the league."
"If you were to bet on a sport, bet on a player to help you -- he would be the guy," said Carter. "He wouldn't bring disfavor to your brand, and (he would) represent the league well as it continues global outreach."
It's All About The Shoes
Should there be concern about Under Armour's bet on Durant, it might be better focused on what kind of product the company will roll out, regardless of how much money it spends.
Macquarie's Vasilescu sees Durant-branded basketball shoes debuting within six to 12 months of a deal. But Under Armour can't use Nike's "KD" brand, Sterne Agee's Poser noted.
"It's going to come down to how good the shoes are, to a large degree," he said. "If the product isn't any good, then it won't matter what they do. But if the reports that I've read are true, Kevin Durant liked what he saw."