After a 13-year tenure as president and CEO of Nike Inc. (NKE, Financial), Mark Parker announced last week that he will be stepping down in January 2020 and moving to an executive chairman position within the company. He will be succeeded by John Donahoe, the former president and CEO of eBay Inc. (EBAY, Financial).
The news came as a surprise to investors, resulting in a 3.4% drop in share prices to $92.32 following the announcement on Oct. 22. Since then, the stock has further dropped to $91.84 as of Oct. 28.
Nike is a U.S.-based sportswear brand that is particularly famous for its athletic footwear. It has a market cap of $140.90 billion and an enterprise value of $144.08 billion.
In its recent report of its first-quarter 2020 results, the company posted $10.7 billion in revenue, up 7% from the previous quarter, and diluted earnings per share of 86 cents, a 28% increase over the previous quarter that the company mainly attributes to revenue growth and gross margin expansion.
Uncertainty among investors
After the announcement, investors and analysts alike expressed uncertainty over Parker stepping down, and over the selection of Donahoe as the person who will be taking his place.
Nike has flourished under Parker’s leadership, achieving a three-year revenue growth rate of 9.2% that beats 72.3% of industry competitors despite the company’s size. His reign as CEO has seen many successful marketing campaigns, including the “Dream Crazy” advertising campaign featuring Colin Kaepernick, which won an Emmy and was credited with increasing share value by $6 billion.
Parker’s success in creating brand loyalty for Nike is perhaps the biggest reason for investor uncertainty over having Donahoe as his successor. In the past, Donahoe has served as the president and CEO of eBay, as well as the CEO and worldwide manager of Bain & Co., a global management consulting firm. He currently works as the CEO and president of ServiceNow. In other words, he has plenty of experience in the online sales and financial services spheres, but little experience in overseeing a company that relies heavily on brand value.
A new direction
Investors may be uncertain, but Nike is confident in the new direction it plans to take under Donahoe’s leadership. He is a veteran when it comes to digital retail space, and in light of the ever-increasing number of consumers shifting to online shopping, Nike plans to overhaul its online offerings.
Donahoe has also been on Nike’s Board since 2014, so although the new CEO is not being promoted from within the company, he does have history with it. Regarding his successor, Parker stated that Donahoe’s “expertise in digital commerce, technology, global strategy and leadership combined with his strong relationship with the brand, make him ideally suited to accelerate our digital transformation and to build on the positive impact of our Consumer Direct Offense.”
After the initial announcement, analysts began gaining confidence that Donahoe is the right choice to lead Nike in this new direction, and that this new direction is what is best for the company’s growth.
"Mr. Donahoe appears to have strong leadership, digital, and NKE experience as Mr. Parker remaining helps ensure a smooth transition," Wedbush analysts Christopher Svezia and Paul Nawalany wrote in response to the announcement.
Company outlook
Nike’s plan to focus on its digital sales has the potential to build off of its strong financial position and the brand value it has diligently built. According to the Peter Lynch chart, the stock is trading closer to its intrinsic value after a period of being severely overpriced. The company’s earnings are catching up to its stock price.
GuruFocus has assigned Nike a financial strength score of 7 out of 10 and a profitability score of 9 out of 10. The company currently has a price-earnings ratio of 33.88, a price-sales ratio of 3.66 and an operating margin of 12.51%. With an interest coverage of 93.98 and an Altman-Z score of 7.62, there is little chance of the company encountering financial trouble.
Nike has paid a quarterly dividend since 1989, and it has a current dividend yield of 0.97% with a three-year dividend growth rate of 11.5%. It also has a three-year average share buyback ratio of 2.6.
Given Nike’s high institutional ownership of 94.88% and consistent growth in revenue, the share price is unlikely to make major moves that are not growth-driven or recession-driven. Thus, the drop in share price associated with the impending CEO baton pass may present an opportunity to buy the stock at a depressed valuation before revenue growth and optimism for the company’s new direction have a chance to set in and drive bullish sentiment.
Disclosure: Author owns no shares in any of the stocks mentioned.
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