Rumors of FuelBand's Death have been Greatly Exaggerated

Despite a flurry of articles on Nike's decision to axe FuelBand, news that is reminiscent of Barnes & Noble's NOOK issues, evidence suggests that the media has given more credence to the rumors than what is justified.

Apr 24, 2014 at 10:00AM


Source: Wikimedia Commons

After news broke on April 18 that Nike (NYSE:NKE) was allegedly shuttering its FuelBand hardware operations, news feeds lit up to report the development. According to sources, the company was laying off between 70% and 80% of its team of engineers that is dedicated to making the products. An announcement from Nike suggests that reports have been overblown, however. According to the athletic apparel giant, there would be a "small" number of layoffs in the division but that investment would continue in the software side of operations and the idea of hardware sales being closed is not set in stone.

These conflicting announcements conjure up memories of news that Barnes & Noble (NYSE:BKS) was stepping out of the technology ring by getting rid of its NOOK segment. Since inception, Barnes & Noble's NOOK segment has logged significant losses and has led some market participants to conclude that typical consumer goods companies aren't able to compete with technology companies at their own game. While speculation surrounding Nike could serve to reinforce this ideology, data points out that the company's performance thus far is nowhere near as disastrous as Barnes & Noble's has been.

Nike is altering its approach, but doesn't seem to be shutting operations down
Most of the rumors circulating about Nike's FuelBand operations suggest that the company is engaging in large layoffs because of difficulty growing product sales and because higher costs are hindering the company's profitability. While Nike does not provide any revenue data for FuelBand, evidence does not indicate that the company is being negatively affected by the product's costs.

  2013 2012 2011
Demand Creation as a Percent of Sales 10.8% 11.2% 11.6%

Source: Nike

Between 2011 and 2013, it is true that the cost of demand creation expense rose, in aggregate, 17% from $2.3 billion to $2.7 billion. It's also true that one of the main contributors to that higher cost has been the company's FuelBand operations. However, looking at the data from a percent of revenue perspective seems to indicate that the rise in costs resulting from the product are either being offset by declines in other demand creation expense sources or is being made up for through accelerated revenue growth.

In a nutshell, even if analysts are right about the higher expenses and lower margins associated with the development of FuelBand, the costs do not appear to be material to Nike's business.

Nike is no Barnes & Noble
Unfortunately, the same cannot be said for Barnes & Noble. Despite being the largest bookstore company in the U.S., the company has been suffering. This is mostly because of the poor performance of its NOOK segment. Between 2011 and 2013, management reported that revenue fell 3% from $7 billion to $6.8 billion, while net income turned from -$68.8 million to -$157.8 million.

(millions) 2013 2012 2011
NOOK Revenue $780.4 $933.5 $695.2
NOOK Operating Income -$511.8 -$286.3 -$229.7
Barnes & Noble's Total Net Income -$157.8 -$64.8 -$68.8

Source: Barnes & Noble

Essentially, all of this trouble has stemmed from the NOOK, which saw its operating income drop from -$229.7 million to -$511.8 million over the three-year timeframe. Despite enjoying a 34% jump in revenue from $695.2 million in 2011 to $933.5 million in 2012, the segment's revenue declined 16% to $780.4 million in 2013 as increased competition has left the company's products being hurt by lackluster demand.

To make the situation even worse, it was revealed on April 17 that Leonard Riggio, the Chairman of Barnes & Noble, had sold 3.7 million shares of the book retailer for "long-term financial and estate planning" purposes. Following the sale, Riggio still maintains a 20% ownership in the business. His decision to divest himself of his stake has made investors feel even less sure about the future of the business, however.

Foolish takeaway
Based on the data provided, it's hard to tell how Nike's FuelBand business is performing, but investors shouldn't be overly concerned about the operations harming Nike in the same way that the NOOK has hurt Barnes & Noble. While this does not mean that Nike will push full steam ahead with the product's development, it does imply that reports of the product's death are probably being over exaggerated.

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Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Barnes & Noble and Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

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