Twitter, Olympic Games Make Nike A Must-Have Before Earnings

Jun.26.12 | About: Nike Inc. (NKE)

LeBron James and the Miami Heat beat Kevin Durant and the Oklahoma City Thunder in five games in the 2012 NBA Finals. The series showcased the league's two best players, James and Durant, and the stirred excitement among fans of the league. Nike, Inc. (NYSE:NKE) sponsors both James and Durant, with both players receiving compensation believed to be over $10 million annually from their shoe contracts. Nike plays a massive role in sponsoring not only basketball stars, but athletes across all sports- including soccer, football, and popular Olympic sports such as track and swimming.

Nike, of course, is the best athlete-branding company in the athletic apparel industry by some distance. The Company's dominance began in the 1990's with Michael Jordan, turning the basketball star into a global icon. More importantly for Nike, Air Jordans are still among the Company's most popular brands, and Jordan, whose last championship was over a decade ago, is still a cash cow for the Company.

The Company (and the athletic apparel industry) has shown resiliency, with Nike outperforming the S&P 500 by over 17% in the past year as of the time of writing. Intuitively, consumers would cut back on discretionary spending (including athletic apparel) amidst a sluggish economy, but people can't seem to get enough of Nike products. The company's releases of footwear, including Air Jordans, Air Forces, Foamposites, and Hyperdunks, have generated an Apple-esque following among not only athletes, but the general public as well. The Company's popularity was reflected in Nike's last earnings report with $5.8 billion of revenue (15% growth), with 17% of sales coming from footwear. Nike's margins, which decreased in Q3, are the primary challenge I foresee for the company going forward. That said, I feel that social media, specifically Twitter, will enable Nike to better market its products and increased demand will relieve margin pressures and make Nike a must-own for the foreseeable future.

The popularity of Twitter among professional athletes has allowed unprecedented, unfettered access between players and fans because tweets flow freely in both directions between public accounts. As a result, I believe that the landscape of athletic branding has changed forever. An athlete's off-field maintenance of his/her social media presence will be almost as important as on-field success in boosting product sales.

Nike is best positioned to take advantage of this changing landscape. The Company has the highest-profile athletes in every sport under contract, including the aforementioned James and Durant for basketball, Tim Tebow and Michael Vick for football, Cristiano Ronaldo and Sergio Ramos for soccer, and Albert Pujols and Derek Jeter for baseball. The importance of these athletes to their fans gives Nike a powerful marketing tool: the athletes themselves. An athlete imploring his/her fans to buy shoes or other apparel seems more genuine than a company doing so. I believe that the ever-increasing popularity of Twitter will lead to increased sales globally as a result of more effective marketing. The onus will be on Nike to increase margins as their sales increase.

The mutual effect that sporting events and Twitter have on each other is highly beneficial. Live sporting events are very conducive to short commentary, as a fan wants to get thoughts and predictions out during the game without wasting too much time. As a person tweets, he/she increases awareness of the event for all of his/her followers. Live sporting events provide topics for Twitter, and Twitter returns the favor as the event is talked about globally. Additionally, sporting events are one of the last things a person truly needs to see live to appreciate. Other television programming has negatively suffered from the proliferation of content online, as no one feels the need to watch a program on someone else's schedule anymore.

The phenomenon is well-illustrated by the NBA playoffs. Viewership for the Eastern Conference finals between Miami and Boston were the highest-ever rated for ESPN. Despite two small markets playing in the finals, the Oklahoma City vs. Miami match-up drew the highest ratings for a finals since 2004. Frequently throughout the series, over half of the trending topics worldwide on Twitter would center around the basketball games. As people would check their phones and see worldwide trends, they watched the game themselves, leading to record high ratings. The more public conversation about a sporting event, the higher-rated it will likely be, making it no surprise that Twitter has helped the NBA achieve record-high ratings throughout the playoffs despite alienating fans this off-season with an extended lockout. The Euro 2012 soccer tournament has seen similarly strong ratings, with global ratings seeing a significant spike from 2008.

As sporting events continue to see ratings increases, Nike stands to benefit. They have the biggest stars in their stable, and the Company will almost always have at least one prominent athlete who will be competing for championships year-round. As Twitter grows, Nike will benefit from athletes' expanding reach worldwide. Nike has the largest presence of any American athletic apparel making in several key expanding markets, including China ($700 million sales in Q3), where the NBA is especially popular, and Brazil.

Nike sponsors the entire US Olympic team. The London Olympic Games could be the most talked-about event ever on Twitter, as the Games span a month and involve nearly every country in the world. Nike more than doubled the performance of the S&P during the last six Olympic games, and I believe will rise even more this time. Unprecedented visibility for the games means unprecedented exposure for all of the athletes in the game. I believe many of the athletes, most of whom do not compete in high-profile professional leagues, will be especially engaging toward their fans on Twitter. Talking with the fans will lead to phenomenal branding for Nike. The Company will be at the tip of the tongue of some of the most talked-about people in the world for a month. In today's era of connectivity, Nike will stand to benefit more than it ever has from the Olympic Games.

Nike reports earnings on June 28th. I believe the NBA playoffs in particular will boost Nike's sales more than analysts' expectations, and I think the Company will deliver an earnings beat. The unprecedented branding opportunities that Twitter offers Nike leads me to think that the company is poised for record growth for the rest of the year and heading into 2013. Nike has been the best in the business for decades, and Twitter gives them an even bigger edge. Investors should get into Nike as soon as possible and hold at least through the Summer Games, if not longer.

Disclosure: I am Long NKE.