Confessions Of A Sell-Side Analyst
Number 1: Nike & John Donahoe
All content on this substack is free.
EDITORS NOTE: This note was first published using Twitter/X’s Article feature on April 14, 2024 (https://x.com/MattJMcClintock/status/1779682375330353518). Almost a week before the Wall Street Journal published something similar (https://www.wsj.com/business/retail/nike-reverse-innovation-stalls-rivals-gain-c3ed8e63). It marks the first effort by me to publish long form writing since my days as a Sell-Side research analyst. I hope to continue this series over time using Substack and therefore am republishing it to maintain continuity.
I wanted to start this new series off with the note I was most scared to write back in 2019...luckily never did as I would have been super wrong on the stock itself. But amazing how evidence accumulates over time.
I never understood the thought process behind John Donahoe becoming CEO of Nike (NKE).
I (luckily) maintained my buy rating on the stock at the time because there wasn't much he could do to change their innovation pipeline at that point, but I certainly flagged my concerns to investors in our discussions regarding longer term risk/reward.
Also, by 2019 most hedge funds had already been burnt shorting Nike in late 2018 so there was likely never going to be meaningful selling pressure for the foreseeable future. And I didn't have a catalyst to point to. Just my unease with John's background. So with that, let's talk about how John Donahoe tried to blame Nike's lack of innovation on remote working last Friday:
https://www.cnbc.com/2024/04/12/nike-ceo-blames-remote-work-for-innovation-slowdown.html
You know what's interesting? True innovation in this industry typically has a 3-5+ year lead-time. So what you see, right now, today, is the absolute effect of John Donahoe's decisions when he came onboard. I personally think the most impactful decision he made in 2019 was to marginalize COO Eric Sprunk (who left in 2020), thus effectively ending the culture of innovation first at Nike. Funny thing is, that likely was going to happen regardless. The internal decision to make Trevor Edwards the heir apparent to Mark Parker was likely the major turning point in Nike's strategic focus. That was a huge signal that the company prioritized distribution over product/innovation. There was even a major reorganization where all of Trevor's people (from distribution) were put in positions of leadership, likely to effect a seamless transition upon Mark's retirement.
At some point this BOD seems to have thought it was more important to focus on distribution and less important to think about product. I don't blame them. Right now practically every commoditized wholesale brand is trying to go direct and cut out their retail partners. It makes sense when you are a powerful brand, at least in the way accountants think about. Or better yet, current CEO who spent 20 years as a consultant at Bain.
I am sure NKE would argue that they have spent more money than ever on innovation the last several years. And I get how much they are pumping the Paris Olympics, but the reality is that event hasn't really mattered in well over a decade for actual sales performance as Nike simply became much bigger than an "Athletic" brand a long time ago (2012 was probably the last time, when they launched the Flyknit product). But it's not hard to see how deprioritizing product people in the executive ranks could ultimately result in less impactful product.
The problems facing Nike today likely has less to do with remote working and more to do with the fact Donahoe replaced Sprunk, the last veteran innovation/product experienced executive at the company, with...wait for this...the CFO. Andy Campion was promoted to COO, where he effectively was in charge of innovation and product. I am sure a Nike CFO has a better mind towards creativity than most other CFO's, but I doubt thats anywhere near the creativity it took Mark Parker to invent the Pegasus. Alas, Andy seems to have become the fall guy for Donahoe's mistakes and left the company earlier this year.
Also, guess what? Reducing their footprint at Foot Locker (FL) and others just gave competitors room to succeed. You have to compete to win and Nike has spent the last decade trying to create a mousetrap where they don't even compete. I am reminded by something Target (TGT) once told me: "Brian Cornell (CEO) actually welcomes competition because thats the only way we get better." I seem to remember Nike saying something similar a very long time ago. At least Donahoe admits this now, but I honestly don't think he deserves a pass.
Amazingly, even to this day, and despite Donahoe's recent mea culpa, Nike doesn't have a proven product person in senior leadership. Heidi O'Neill is the closest thing but she came up through the distribution and marketing ranks, not product. Mark Parker is still Chairman, so I guess there is that but I wonder just how much time he is spending on product these days as that is a BOD position. Let's compare that with their primary competitors. Lululemon (LULU) has Sun Choe on their Executive Committee. Under Armour (UAA) has Kevin Plank and just named John Varvatos as Chief Design Officer (not sure if thats an Executive Committee position yet, but come on, it's John Varvatos). The CEO of Adidas, Bjorn Gulden, also has an ample product background.
Mark Parker was the third ever CEO of Nike, and a product person. There was a super brief time of about one year when Bill Perez was the second ever CEO. Bill came from outside the industry. Spent eight years as the CEO of SC Johnson & Son which focused on household cleaning supplies and other consumer chemicals. Sales grew well but profitability was pressured. He didn't mesh well with Phil Knight ultimately. Reminds me a lot of all the people who have tried to succeed Kevin Plank at Under Armour (particularly how Stephanie Linnartz who came from Marriott was just pushed out).
So how did John Donahoe, another outsider, become the CEO of the world's greatest Athletic company?
Mark Parker had been the CEO of Nike for 14 years. He started at Nike in 1979. Everybody on Wall Street knew that he was planning on retiring. Trevor Edwards was clearly the succession plan. Yet in 2018 Trevor resigned from the company following an internal investigation into potential sexual harassment allegations. Mark had to extend his tenure as CEO for an extra year just so Nike could find somebody to take over. At the same time both Under Armour and Lululemon were looking for new leadership, and there certainly were not a lot of options to choose from. John Donahoe had been on the BOD since 2014 and ultimately was chosen as successor. I imagine COO Erik Sprunk had no chance because the company had already shifted its strategic direction to distribution.
Let that sink in. John Donahoe was never expected to succeed Mark Parker. He just was in the right place at the right time.
The narrative that was spun to Wall Street at the time was that John is an expert in "digital" and would turbocharge the company's efforts to expand distribution in that direction. Well it might shock you to know that the average Nike Digital growth rate for the three years pre John Donahoe is approximately the same as the almost five years under his control. And he got the benefit of COVID, where all digital businesses skyrocketed.
So by now you have to wonder if John is actually an expert in "digital". Lets look at his prior experiences. He was the CEO of Bain for several years, which is private, so not much to look at there. But his time as the CEO of eBay (EBAY) is extremely illuminating.
Donahoe became the CEO of eBay in March 2008. Over the course of Donahoe's tenure, which to be clear began at the depths of the Global Financial Crisis (so couldn't have had a better starting point), eBay's stock was up only 148% vs. the 811% increase in AMZN. Nike itself was up 312%. Donahoe was better than the WalMart (WMT) performance of 34% though, but in-line with the Costco (COST) performance of 144%. Yet he was the future of retail at this point, with massive advantages (such as ownership of Paypal and Stubhub) and could still only do what the best in physical brick and mortar (Costco) could do. Not even the best, because TJX Companies (TJX) was up 345%. His actions even encouraged activist Carl Ichan to step in and demand significant change. Amazingly, John got his BOD seat at Nike towards the end of that tenure. Not sure what Phil was thinking at that time. I just remember being a Retail Softline analyst back then and how that was around the same time the entire apparel industry finally began to face intense e-commerce pressure.
OK, maybe Donahoe was dealt a raw hand in his SEVEN YEARS as eBay's CEO. Lets looks at ServiceNow (NOW). The time period of 12/31/16 to 12/31/17, stock was up 75% vs. S&P Systems Software performance of 37%. The idea that Donahoe was responsible for this is preposterous, as he joined in February and likely had no chance to effect change for at least six months. The time period of 12/31/17 to 12/31/18 is likely a better indicator of his management impact. ServiceNow stock was up 37% vs. 16% for the index. The optimist would say, "see, he still doubled the industry result". The pessimist would say "wasn't that already happening before he joined?". It kinda reminds me of his impact on the Nike Digital business. But to be fair, ServiceNow's stock tanked when it was announced he was leaving. However, that only lasted for about a day or so before it entirely retraced the loss and went on to higher highs afterwards.
Nike's stock is now almost at the same stock price as when John Donahoe joined the firm, back in October 2019. At the same time in his eBay tenure, stock was up 40%. Maybe there is some truth to the things I mention about the unique skills it requires to be a large Athletic company CEO?
I feel like John Donahoe seems to understand what valuable emerging growth companies are, but doesn't seem to have any idea how to make a mature organization more valuable. He bought great assets while the CEO of eBay but couldn't seem to make the overall business much better. There is a good reason why "consultants" often have a bad image.
In the history of mankind, there have only been five global Athletic brands that have meaningfully crossed the $5 billion in annual sales mark: Adidas, Nike, Puma, Under Armour, and Lululemon. Every single one of these brands is highly unique in their own way. But EVERY SINGLE ONE OF THEM built their brand on product first. You can't get that kind of experience by reading a book, doing a case study, or working a spreadsheet. You have to be in the mix, every single day, competing your heart out, with actual product and innovation that you never really know will resonate. It certainly makes sense to have product people on your executive committee in this industry. This is basic blocking and tackling that Nike, for some reason, under John Donahoe, decided to ignore.
I hear from investors that John is a nice guy. I barely rubbed shoulders at an event one time before I left the industry. But thats not the point of this conversation. Nike just laid off a ton of people, because internal goals are not being met. John himself is not meeting expectations as well. At what point will he actually be held accountable for his absolute failure to deliver performance? Or better yet, his complete lack of skills for the now "pivot" in strategy that Nike apparently is performing? Its probably too late to bring back Eric Sprunk now; and to build a culture of innovation once again is likely a 3-5 year process.
FIN