Nike’s Endorsement Deal with Johnny Manziel a Calculated Risk

Nike (NYSE: NKE  ) just made Johnny Football its newest pitchman with high hopes that the college phenom/loose cannon becomes its next big rainmaker.

Nike has built its ubiquitous sportswear empire around some of the biggest names in the sporting world. Michael Jordan, who actually preferred Adidas  (NASDAQOTH: ADDYY  ) at the time, was Nike's first big catch. He's glad he got caught. Today, he still earns $60 million a year from Nike in royalties, according to Forbes. Nike's other high-paid pitchmen include golfers Rory McIlroy ($20 million-$25 million) and Tiger Woods ($20 million), as well as Rafael Nadal, Derek Jeter, LeBron James, and Roger Federer ($10 million).

Johnny Manziel's dollars were not disclosed, but ESPN sources said it'll be the highest payout among NFL rookies from this year's class, even though the jury is still out on whether the quarterback will be a boom or bust in the NFL.

Marketing juggernaut, meet Mr. Football
However, one thing is certain. Manziel knows how to market his brand. 

Enter Nike, a company that knows how to market its brands. The driver of its success has always been its bold and sometimes controversial marketing campaigns featuring the world's elite athletes riffing on some variation of the "Just Do It" theme -- a slogan that still stands strong after 25 years.

In fiscal year 2013 (ending in May 2013), the marketing juggernaut spent $2.75 billion on "demand creation" and generated $25.3 billion in revenues, an 8% increase over FY 2012 -- 11% excluding currency changes. Adidas, Nike's biggest competitor, saw sales rise 3% on a currency-neutral basis, but drop 2.6% with currency issues factored in. Adidas reports its earnings in euros. 

Now Nike has someone who craves the spotlight, and is likely to be as cocky, controversial, and audacious as any Nike pitchman from the past.

Speaking of questionable decisions
Yes, we all know that Manziel's had a few (or more) youthful indiscretions and made a couple (or more) bad decisions in his two years at College Station.

It didn't take long for him to create some controversy in the NFL as well. Not one for mincing words, Manziel recently said that if the Houston Texans, owners of the first overall draft pick, didn't take him, "it would be the worst decision they've ever made." To be fair, he did say it with a smile and acknowledged "he was a kid who made some goofball decisions," in the same interview with the Houston Chronicle.

Even if Manziel turns out to be the biggest bust since Ryan Leaf or JaMarcus Russell, it won't do much, if any, damage to Nike or its brand. However, if he lives up to the expectations of some experts and his own ego, playing with a Dorito (his words, not mine) on his shoulder, he could turn out to be a helluva pitchman. Call him the anti-Russell Wilson. Wilson is also under contract with Nike. 

If there's one thing Manziel is not, it's boring. Interesting gets attention, builds brands, and in this case could sell more shoes and sports apparel.

Getting it done
Nike doesn't need Manziel, but he's a risk worth taking. That's something Nike has always been really good at. After all these years, Nike is still relevant, fresh, and hip. That perception means a lot in the world of shoes and sportswear. Marketing builds your brand awareness, but strong products keep you growing. Nike has backed up its attention-grabbing ads with quality products.  

Nike is still growing at a spectacular clip considering how long it's been around. During the last three years, its sales have increased an average of 10.6% per year. The first two quarters of FY 2014, the growth continued with a 7.8% gain in sales compared to Q1 and Q2 of 2013.

The only big concern it faces is currency woes, which just caused Adidas to downgrade its 2014 earnings expectations by 17%. Adidas makes half of its sales in emerging markets, including Russia, where currencies have been weakening. We'll know soon if this is an issue for Nike when it reports its most-recent earnings on March 20.

Nike leads the global market share battle with Adidas. According to Euromonitor, Nike had 14.6% of the sportswear market to 11.4% for Adidas in 2012. Nike also made inroads in Western Europe, an Adidas stronghold, increasing its market share to 12.4% compared to 13.2% for Adidas. 

The Foolish five
Five years is a key metric for Foolish investors. When you buy, you want a company you can count on to stand the test of time.

In five years, we'll know whether or not Nike's freshest face, Johnny Football, elevated his game to the next level or if he joined the ranks of great college QBs -- think Tim Tebow, Matt Leinart, and Vince Young -- who lacked either the physical or mental tools for the pro game.

As for Nike, it's much more of a sure thing, no matter who is pitching its products. Elite athletes come and go, but the swoosh logo and Nike brand, which has outperformed the S&P 500 (44% to 21%) during the last year, continues to build momentum as it ages -- and appears to have many more good years in front of it. 

Like the difference between Nike and, say, Skechers, there’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.


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