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

By James Brumley - Oct 29, 2019 at 5:52AM

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Footwear and athletic apparel may look like easy businesses from the outside, but consumer preferences are tricky to pin down.

The timing is curious, to say the least. Less than a day after Under Armour (UA -5.11%) (UAA -5.53%) founder Kevin Plank resigned as CEO, the top executive at Nike (NKE -2.00%), 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.

Woman lacing up running shoes

Image source: Getty Images.

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.

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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