Why Nike’s New CEO’s Lack of Apparel Experience Should Concern Investors

The timing is curious, to say the least. Less than a day after Under Armour (NYSE:UA) (NYSE:UAA) founder Kevin Plank resigned as CEO, the top executive at Nike (NYSE:NKE), Mark Parker, announced he’d be stepping down in January.

Even more curious is his replacement. Whereas Under Armour named apparel veteran and current company president Patrik Frisk as its next CEO, Nike went outside the company, and even outside the industry, selecting ServiceNow CEO John Donahoe for the position. Prior to taking the helm at ServiceNow, Donahoe was the chief of eBay.

It’s not a completely outrageous idea. All companies are to some extent “tech” companies these days, and perhaps Nike more so than most. It’s focusing in a big way on its online-selling efforts and is using technology in innovative ways to streamline inventory management. A tech veteran brings value to the table.

It would be premature to suggest, however, that design and style no longer matter in the industry.

Consumers are fickle about footwear
If you think an athletic apparel company’s sheer size can dictate to consumers what’s hot and what’s not, think again. No amount of marketing firepower or clout — or even availability — ensures sales. And sometimes demand takes shape almost by accident.

One only has to look at one of this summer’s hottest teen footwear trends to see the connection. Crocs shoes were all the rage, not despite their “ugly” look but likely because of it. The brand was ranked as the 13th most popular among teen girls in a Piper Jaffray survey, up from 30th in 2017. Many teens acknowledged the trend caught on simply because everybody was wearing them. Second-quarter earnings of $0.59 per share trounced estimates of $0.46, with CEO Andrew Rees crediting a modern revival of the mania that first thrust the company’s light, clunky foam clogs into the spotlight in the 90’s and early 2000’s.

Also this summer, Nike’s Air Max 270 React became a surprisingly big hit. The athletic shoe is a nod to the company’s past, but doesn’t differ remarkably in looks or performance from other footwear in Nike’s present portfolio. Buyers appear to love the intense color combinations and options more than they love the 270 React’s underlying construction and function; from a design perspective, the company could have made that move at any time.

Meanwhile, despite their connection to basketball star Steph Curry, Under Armour’s Curry 2 and Curry 3 shoes were relative flops despite their functional design. Name-dropping doesn’t always work.

There’s a clear common thread to all the anecdotes: technology was irrelevant. A powerful endorsement was no guarantee of success, and buyers fell in love with the right look even in the absence of a celebrity nod. And it’s not a reality limited to footwear.

Don’t neglect design for technology
That’s not to suggest Donahoe won’t be able to build on the work that Nike has already done.

Though the company has offered direct-to-consumer shopping for years, it escalated its technology efforts in 2017 with a tech overhaul initiative called the Consumer Direct Offense. More recently, it acquired a pair of technology start-ups and turned them into a tool called Nike Fit. The feature is now part of Nike’s mobile app, allowing consumers to scan their feet to ensure they’re buying the perfectly sized shoe — online or in a store. The data is then stored in the customer’s Nike+ profile.

It’s a business model Donahoe understands, with his background in catering to millions of customers, each with a unique history and digital habits. Managing a mountain of data and turning it into something useful is no easy task.

Neither is gaining or keeping a feel for the ever-changing pulse of the shoe-buying marketplace, though, and that matters just as much. Just ask Under Armour, which is learning the cost of neglecting design the hard way. As B. Riley FBR analyst Susan Anderson told Retail Dive last month, Under Armour is “very performance-focused right now, which is great if you want to go buy performance wear.” She argues that the company is missing out on other trends: “But, the consumer, the whole streetwear trend, more fashion-infused athleticwear, athleisure, the retro ’90s — which Under Armour doesn’t really have any retro ’90s — that’s a problem. All of those things are really just not playing in their favor.”

Nike can’t afford to slip deeper into a technology-focused mindset now the way Under Armour slipped into a performance-focused mindset with Plank at the helm. It’s still ultimately about providing the look that consumers want. Sometimes though, it’s difficult for an executive to shake off old habits… even with a new employer.

Too soon to draw concrete conclusions
Fortunately, Donahoe will be surrounded by plenty of industry veterans, many of whom have been with Nike for a while. He’d be wise to accept their counsel on matters of design, style, and consumer preferences. If he’s headstrong and somewhat controlling, though this may ultimately turn out to be a mismatch.

Only time will really tell how the new corporate chemistry will work out. But if there’s turbulence, odds are good that subtle signs of it will be noticeable before it’s fully revealed in the numbers. Investors will need to keep a close eye.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nike, Under Armour (A Shares), and Under Armour (C Shares). The Motley Fool owns shares of Service Now. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay. The Motley Fool has a disclosure policy.

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Why Stopping Direct Sales on Amazon Makes Sense for Nike
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Author Bio
When Nike (NYSE:NKE) began to sell its products directly on Amazon.com (NASDAQ: AMZN) in 2017, it felt pressure to get on board the exploding online retailer’s bandwagon as unauthorized sellers were doing hefty business there. Nike has a core belief in “brand value,” so this was an important issue for the company. That deal was intended to better control pricing and inventory, and Nike managed to extract an agreement from Amazon to monitor third-party sellers and counterfeit goods more strongly.

Things apparently haven’t panned out as planned, though, and Nike doesn’t feel that it has benefited from the partnership in the way it had envisioned. Today, Nike is one of the most-sold brands on Amazon, but much of the the sales go to unauthorized third-party sellers, often referred to the gray market. Counterfeit items are also are still being sold on the site. And now Nike is now pulling back and won’t be directly selling items on Amazon.com.

Selling on its own
Nike is in a pretty good position to break off from Amazon for a few reasons. Firstly, its own retail operations, including its website, are driving sales, accounting for roughly 32% of total Nike brand revenue in the fiscal year ended May 31, 2019, with a 35% increase from digital channels in the year.

Sales through Amazon are reportedly a small part of Nike revenue, and the company looks in good shape to recoup lost sales through its own channels and other partners.

Nike had called the Amazon deal a pilot test, and had not listed new launches or best-sellers through the site. It’s been saving those for its own website and 1,100 stores. Among its 30,000 global retailers, Nike also has strong relationships with Foot Locker, Nordstrom, and Dick’s Sporting Goods.

Nike’s position as a status brand is more heavily fortified by investing in its own website and apps, or partnering with retailers who can add to that image, and the company is probably better off working on those channels than diverting traffic to Amazon, where there are lots of unauthorized sellers.

A smiling woman sitting outside while putting on sneakers.

Why Amazon doesn’t matter
With third-party sellers reportedly accounting for 60% of Amazon sales, the online retail leader has become a huge, difficult-to-regulate marketplace where it’s not always clear who the seller is, whether its sales are authorized, and even if the merchandise is genuine.

Nike is a high-status brand marketed to customers who are looking for an authentic, technically advanced product. The company positions itself as having brand value, which adds a layer of cost to the consumer. Buyers who are scouting for deals on Amazon are not the ones that Nike is trying to cultivate.

By backing out of Amazon, Nike seems to be making a statement that it’s a leading brand name, and that it’s betting that moving in this direction will elevate both its status and ability to generate sales within the group that’s willing to pay for that.

Looking at the numbers
Total fiscal year 2019 digital sales were $3.8 billion, or close to 10% of total sales. Nike’s digital sales went up 42% in the first quarter of fiscal 2020, which ended in September. The SNKRS app, where customers can see when the newest styles are “dropped,” continues to grow quickly and the Nike app, where customers can purchase products and engage with the Nike community, is generating an increasing number of sales, contributing to the $3.8 billion of digital commerce that the company saw in FY 2019.

According to outgoing CEO Mark Parker, “it’s become the largest and fastest-growing platform in our portfolio, growing almost triple digits this quarter.” China, a market that saw revenue grow 27% for Nike in the most recent quarter, is set to get the app for the holidays.

Rivals are also netting more sales through e-commerce, with Adidas digital sales up 14% this quarter and lululemon athletica digital comp sales growing 31%. As shopping is increasingly moving online, creating customer loyalty through its own company website, app, club program, and the innovative SNKRS app will help Nike long term.

As it invests in its e-commerce efforts, Nike expects to benefit from the further shift to online sales in retail and in athletics in particular. Clearly, the company doesn’t think it needs Amazon to make that happen.

A direct channel strategy
Nike’s plan to focus on its direct channels has several layers. Here is some of what the company is doing:

Creating a community where customers feel connected to the company. Parker said in the company’s September conference call: “We’re bringing real value to our member’s lives consistently. Our teams are accessing different ways to engage with more people completely and have them coming back for more.” He said that over the past three years, the number of active users of Nike apps has doubled, and half of digital sales growth came from within the community in the most recent quarter.
The company is linking digital with in-store, getting almost a million app signups through in-store customer engagements in the recently completed quarter.
Nike offers special services at its stores and soon on its app, where potential buyers can get a digital foot scan to determine the perfect size.
Nike acquired Celtec, a data-analytics platform, to interpret customer data from its stores and use it to make better design and inventory decisions.
So, while Nike may be cutting off a sales source, it’s working on putting itself in a position to keep growing and remain a solid investment.

10 stocks we like better than Nike
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Nike wasn’t one of them! That’s right — they think these 10 stocks are even better buys.