Are Under Armour's Expensive Sponsorships Worth the Cost?

By Markets Fool.com


Image source: Under Armour

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Under Armour(NYSE: UA)(NYSE: UA-C)announced a$280 million, 15-year deal with UCLA earlier this year, and while that is the largest college sponsorship deal ever, it's just one of many massive deals the athletic gear maker has taken on lately. However, though getting its logo on such high-visibility teams is certainly impressive, the company's stock is also dropping due to earnings declines that are largely driven by precisely these kinds of high-cost maneuvers.Are these expensive sponsorship deals worth it?

Under Armour's big name deals

Beyond the UCLA deal, set to take effect in July 2017, other big name NCAA sponsorships that Under Armour has announced in the last few years include a $96 million 10-year agreement with the University of Wisconsin and a $90 million 10-year agreement with Notre Dame.

Then there's Under Armour's sponsorship of individual athletes like Steph Curry, star point guard for the NBA's Golden State Warriors, and gold medalist swimmer Michael Phelps. Individual sponsorships can have a big marketing impact, such as when Olympic viewers all over the world saw Phelps dominate the 2016 Summer Games.

On Under Armour's website, there are 50 athletes featured, and there must be more who are not currently being promoted there, such aspro-wrestler and actor Dwayne "The Rock" Johnson. Most of these deals are for undisclosed sums, so we can't calculate their total cost, but the company's growing roster size likely correlates to a growing expense.

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Image source: Under Armour

Then there are Under Armour's efforts with professional leagues. It bid to be the uniform provider of the NBA last year, but it lost out to Nike(NYSE: NKE)which outfits both the NBA and NFL.Adidas(NASDAQOTH: ADDYY)is the official outfitter of the NHL and MLS. However, in late October, Sports Business Dailyreportedthat Under Armour won the rights to be the official uniform provider for Major League Baseball beginning in 2020. This deal could be great for Under Armour in terms of visibility -- there are 2,430 MLB games played each season compared with 1,230 for the NBA and 256 for the NFL -- but that win likely came at a high cost.

Cost vs. benefit

Under Armour has been incredibly successful with some its sponsorships. On his way to winning the NBA's MVP title for the last two seasons, Curry has helped the brand's footwear sales explode. The success of its sponsored athletes seems to be one reasonUnder Armour's international sales rose.As it continues to build new partnerships, its visibility grows, which helps the company maintain its high sales growth rate, expected to grow 25% year over year for thefull yearof 2016 and another 50% through 2018, to $7.5 billion.

Still, as noted previously, Under Armour's high costs are weighing on earnings. For the nine-month period that ended Sept. 30, operating costs rose nearly 25% year over year. Much of this surge seems to be traceable to these big, expensive sponsorship deals.Under Armour stock was hammered after its Q3 earnings when CEO Kevin Plank said that the company probably wouldn't reach its short-term earnings goals because of heavy investments like these sponsorships and other initiatives to drive long-term growth.

"Our growth now gives us opportunities to move up in weight class, and we find ourselves well-positioned at this moment in time to compete for long-term relationships with athletes, teams and league affiliations that we previously could not justify," Plank said during that earnings call. "Now with the flexibility to lock in 10-year to 15-year deals, we can make investments on a global scale that will help drive authenticity, awareness and revenues for our brand."

The bottom line -- don't invest in Under Armour if you are looking for short-term earnings gains. Even though earnings did grow 28% year over year during the quarter, Under Armour is more focused on getting big fast and paving the way for growth in the decades to come than it is in meeting Wall Street's nearer-term expectations. However, if you are looking for a long-term growth play, Under Armour's stock only looks more attractive after its recent dip.

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Seth McNew owns shares of Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.