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Why the NBA Apparel Deal Makes Sense for Nike

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Cost comparisons in the NBA apparel deal

Adidas will end its 11-year apparel contract with the NBA (National Basketball Association) in 2017. That deal cost Adidas about $400 million, according to the Portland Business Journal. But Nike (NKE) will pay considerably more for its NBA apparel and uniform sponsorship rights that will begin with the 2017-2018 basketball season. Nike will reportedly pay $1 billion for the eight-year apparel contract, according to a Bloomberg report.

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Nike’s market share

Nike is already the dominant brand in US basketball footwear with a 62% market share. More players sport Nike and Jordan brands footwear than any rival brand.

However, Nike doesn’t enjoy the same dominance in sports apparel. In 1Q15, Nike (NKE) had a 13% share of the US sports apparel market. In comparison, Under Armour (UA), Adidas (ADDYY), and Hanesbrands (HBI) had 6%, 3%, and 3% share, respectively.

Competitive athleisure wear market

The athleisure wear industry is seeing some new entrants that are attracted by higher growth prospects. Premium brands include Lululemon Athletica (LULU). Some mid-market entrants are L Brands (LB) with its Pink brand, The Gap (GPS) with Athleta, and Foot Locker (FL) with its SIX:02 concept.

The NBA deal should boost sales

NBA apparel already has a niche customer base, catering more to men, but now Nike gets product exclusivity through the NBA contract. This, along with the WNBA deal, will likely boost Nike’s apparel revenue for men and women. Apparel accounted for 29.1% of Nike’s total revenue in fiscal 2014, while footwear accounted for 58.3%.

Nike is among the elite 30 stocks in the Dow Jones Industrial Average. The SPDR Dow Jones Industrial Average ETF (DIA) has 3.8% of its assets invested in Nike. Nike is also part of the SPDR S&P 500 ETF (SPY) with a 0.4% weight.

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