FIFA scandal threatens to pull Nike down

Seemingly the biggest corporate casualty from the FIFA scandal so far, Nike could have questions to answer when both the IRS and investors come calling.

Nike store
Source: Bloomberg

The early morning raid of a FIFA delegation in a five-star hotel in Switzerland was the beginning of a very public accusation levied at the International Football Association, centered on a bulk of work that has been done behind closed doors at the US Department of Justice. The accusations did not surprise many, with FIFA having weathered scandal after scandal owing to its position at the top of the food chain, providing zero enforcement of accountability, transparency or good governance. However, the involvement of the IRS and DoJ means that any affairs within or associated with the US fall under the jurisdiction of this investigation.

One firm which many believe will be impacted by this is Nike Inc, which is not only based within the US but has always had a long association with the sport given its products and sponsorships. The recent documentation accompanying allegations by the DoJ included reference to ‘a multinational sportswear company headquartered in the United States’ which signed a sponsorship deal with Brazil’s national team in 1996; the same year the documentation mentions the indictment took place. Thus there is reason to believe we could see more to run from this story should any clarity be provided of any wrongdoings and consequences.

Any such investigation or prosecution would not only have a likely financial impact, but by tying a firm into the behavior and corruption rather than just the brand of FIFA, it has perhaps more significant implications for the company’s reputation should such allegations prove true.

As a result, we have seen Nike’s share price suffer considerably more than any of the primary FIFA sponsors which have been largely unaffected by the allegations that have come to light this week.

With the share price currently 3.5% off yesterday’s opening high, there is clearly an impact to current proceedings for investor mindset and I expect it to continue for the time being. However, a look at the long-term picture portrays a company which has managed to weather trying times, each time growing the share price further.

The year 2015 so far has seen over 5.5% gains and despite a likely short-term extension of the losses seen this week, I expect to see support around $99.75 and $90.50 provide the backstop to any such move. The long-term trend remains bullish and I believe the loyalty of Nike customers means that any sort of possible damage to its reputation wouldn’t necessarily translate into a massive shock to sales, which ultimately is the most important thing. With that in mind, $110 is my target for the end of Q3.

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