Kevin Durant is fantastic at playing basketball—better, in fact, than almost everyone else right now. Nike is, well, Nike (NKE). It’s no surprise that the company worked out a new 10-year deal with the star, who has been on its sponsorship team for seven years.
Excited and humbled to sign back with the swoosh!
— Kevin Durant (@KDTrey5) September 1, 2014
At a cost of about $275 million over the next decade, Durant’s sneaker-selling skills don’t come cheap. Nike is going to have to sell a lot more “KD” shoes than it does now for the contract to make strict financial sense. How many more? A little more than double, according to a back-of-the-envelope calculation. Here’s roughly how the math breaks down in Nike’s financial models:
Nike spends 11 percent of its sales on what it calls “demand creation,” a category that includes payments to athletes as well as great ads such as this one. When it comes to the “KD” line of shoes and apparel, Durant’s payments alone will come to about $27.5 million per year. To keep that sum at 11 percent of sales for his line of apparel, Nike will have to book about $250 million in “KD” revenue. Last year, however, the company sold just $175 million of Durant-related gear, according to Matt Powell, an analyst for SportsOneSource.
Here’s the tricky thing: Some 80 percent of Nike’s business is wholesale, which affords a much slimmer margin than its direct-to-consumer sales. When a shopper buys a $150 pair of KD7 sneakers at Foot Locker (FL), Nike pockets about $82.50, according to Powell.
So that $175 million of KD commerce in 2013 is only $112 million to Nike—a far cry from the $250 million it needs to square the math on the new Durant sponsorship deal.
What does that all of this mean in shoes? Adult versions of KD shoes run from $130 to $200. Assuming an average price of $165, last year’s Durant haul from Nike would be about 1.1 million pairs of sneakers. The $250 million goal suggested by the new contract would be worth about 2.4 million pairs of shoes. Durant better get hustling.
For Nike, there’s a separate part of the equation that’s hard to put a value on. If it didn’t re-sign Durant, Under Armour (UA) probably would. The burgeoning Baltimore-based apparel brand is trying to sharpen its shoe game and offered Durant a huge package, slightly larger than Nike’s winning bid.
There are a lot of stars Nike wouldn’t mind missing out on. Stephen Curry, for example, is an exciting player that has probably been a great investment for Under Armour’s marketing team. He is not, however, the best in basketball at the moment. That title belongs to Durant or fellow Nike star LeBron James. If Durant had gone to Under Armour, a huge swath of customers would at least consider its shoes for the first time.
So Nike may lose some money by keeping Durant—but might have lost even more if it had let him go to its scrappy new competitor.
Under Armour, meanwhile, is probably relieved this week. Winning its Durant bid would have taxed its income statement. And it needs to focus on selling workout gear to women as much or more than on moving sneakers. That’s why it just signed supermodel Gisele Bundchen for an undisclosed sum. Call it a really expensive value play.