Over the past week, athletic apparel manufacturer Nike (NYSE:NKE) signed endorsement deals worth approximately $110 million with three teenagers. Yes, teenagers. Yes, $110 million -- not too far off what Nike earned all of last quarter ($124.7 million).
Nike shareholders, meet your new employees.
First up, Freddy Adu, a 13-year-old soccer phenom from Ghana who just signed a $1 million contract. This one is my favorite (in all seriousness). You have to be happy for a kid from Ghana who takes Nike for a cool million while he's barely scraping his teens. I like the family lawyer's rationale for the contract, too: "This deal gives Freddy the ability to financially go through school and not have to sell his playing abilities [to a team] to get from point A to point B in his career. This acts as insurance," he told The Washington Post.
Very nice, Freddy. Stay in school, and read the Fool Investment Guide for Teens.
Then there is Carmelo Anthony, the college freshman who led the Syracuse University to the NCAA National Championship this year before entering the NBA draft, which will be held on June 26. He's expected to be selected second or third. Nike inked him at $3 million per year for six years ($18 million). He just turned 19 this week.
Last, and definitely not least, there is the deal that's off the charts: $90 million over seven years for 18-year-old LeBron James, the most hyped high school player in the history of sport, expected to be selected No. 1 in the draft. Nike outbid both Reebok (NYSE:RBK) and Addidas-Salomon for James' services. Both of those companies are probably relieved at this point.
Signing James was so important to Nike that its founder and chairman, Phil Knight, was brought in to polish off this deal, which will pay James far more than he will make playing professional basketball for his first few years. With the NBA's collective bargaining agreement, he can't make more than $3.851 million in his third year, and a little less in his first two.
One could make a moral argument against the corruption and exploitation of youth. I'm not going to do that. Enjoy it, kids. Your lawyers, agents, and parents have been savvy enough to set you up for life. Who cares what the media says about spoiled millionaire athletes? You can buy your own media and have them write nice things about you all day long. (In fact, I'll do it for a measly $100,000 a year.)
Perhaps this is capitalism at its very best, but does it need to be accompanied by insanity? I'd like to say that I well know the value Michael Jordan (the supreme being of pitch men) and Tiger Woods ($100 million for five years) have brought to Nike's business -- but I don't. It's impossible to quantify, isn't it?
Sure, it's probably safe to say that Nike's relationship with both of these athletes has benefited its business greatly. But if anyone can tell me exactly how much -- within $20 million -- give a shout on the Nike discussion board or email me.
Regardless, the signings of these kids is completely different. Jordan is the greatest basketball player ever to walk the face of the earth, and Woods is the best golfer of our time. Both were signed in their primes when they already were well-known commodities and far lower risks.
The $110 million inked to these three teens is irresponsible. Neither of the basketball players has even set foot on an NBA court yet (James has never even played a college game). Perhaps that makes the $1 million for the 13-year-old soccer star a relative bargain.
But while each of these kids could have tremendous upside, no one knows if they will succeed in their sport at the professional level -- look at recent NBA No. 1 pick Kwame Brown, who after a couple of years in the league has failed to live up to any expectations -- or if they will implode before they mature enough to handle the riches and lifestyles handed them. These investments represent huge gambles, and if I were a Nike shareholder, I would be beside myself.
The athletic shoe market garnered $15.7 billion in retail sales in 2002. If LeBron and Co. help Nike capture an additional 1% of that figure, these deals will be worth it. But tallying those results -- which will be incoming for years, if the company is lucky -- will be next to impossible.
Perhaps there is more art to selling shoes than the bottom line reveals, but think about this, Nike shareholders: Effective July 1, your company is going to begin paying out a $0.14 quarterly dividend.
With some 264 million shares outstanding, that's a $148 million annual payout -- about $21 million more than your company earned in its last reported quarter (ended Feb. 28) and only $15 million more than these new endorsement deals (which, granted, will be paid out over several years). So, if you could have LeBron, Carmelo, and Freddy, or increase your dividend by 75%, which would you choose?
This is all theoretical, of course, but every dime these kids get is less money in your pocket. I hope you'll closely watch your return on investment and keep the company accountable. Personally, I'd take the cash over the potential future sports stars. Or I'd rather see the money invested in something really useful, like engineering a better shoe than Asics, New Balance, or Saucony can.
There's one investing lesson you can take away from this: It is not necessarily the better product that wins -- it's the marketing. That's why Nike owns 39% of the athletic shoe market. And that's why Nike felt it had to ink these outrageous deals in the first place. It needs the glamour to stay on top.
I may be in the minority here in thinking these deals are too high-risk. Nike's stock has been edging up to its 52-week high since they were announced. But check back with me in 2010. If these signings clearly have paid off by then, I will stop whining, and switch my running shoes from Asics to Nike, no matter how much they hurt my feet.
Bob Bobala ran with stress fractures in both legs for nearly a year. He's either really tough or really stupid. The Motley Fool is investors writing for investors .
