Nike May Get Pickier but Full Spending Ahead on Athlete Endorsements

Troubled athletes are unlikely to slow Nike's spending on "demand creation."

Nike Inc., despite severing relationships with two disgraced NFL athletes this month, is spending more on such endorsements and says it has no plans to pull back anytime soon.

The company’s advertising expenses, what it calls "demand creation," increased 23 percent in the three months ending Aug. 31, according to first-quarter earnings announced today.

That's $897 million compared with $731 million in the same period last year.

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During its last fiscal year, Nike spent a whopping $3 billion on "demand creation." The company is famous for its loyalty to its athletes, including golfer Tiger Woods, though it has cut ties to U.S. cyclist Lance Armstrong and South African sprinter Oscar Pistorius.

In a conference call about its business, the company today said some advertising expenses, which were lower than expected, are delayed for launches later this year.

"Obviously, some issues are serious concerns to us," one Nike executive said during a conference call today, in response to an analyst's question about athletes' publicity issues. "On the other hand, we have great opportunities."

Nike finds "the athletes and teams that can inspire consumers," one executive said, and, "We remain singularly focused on that."

The corporation said in its earnings announcement that this past advertising increase was “mainly driven by marketing investments in the World Cup.” Nike wasn't an official sponsor at FIFA World Cup but it sponsored megastars like Brazil's Neymar da Silva Santos Jr. and Portugal's Ronaldo Cristiano.

Despite the string of negative athlete issues in the past few years, the “vast majority” of athletes whom Nike sponsors create an “enormous positive brand image” for the business and other athletic companies, Morningstar equity analyst Paul Swinand said.

“A great part of the athletic companies' brand value is also the cultural history that athletes have created in the past,” he said. “You can't ‘undo’ Michael Jordan, so to speak.”

For superstars, Nike doesn't hold back in the competitive advertising market. Nike reportedly paid Oklahoma City Thunder forward Kevin Durant $350 million, outbidding Under Armour.

Moving forward, the company will likely continue spending plenty on endorsements, but may be pickier. Earlier this month, Nike announced that it severed its contract with former Baltimore Ravens running back Ray Rice. And last week, the company suspended its deal with Minnesota Vikings running back Adrian Peterson.

Nike's revenue in the three-month period was $798 billion, more than Wall Street analysts’ expectations, while net income was 23 percent higher than the same period last year.