1 move that could send Nike stock higher

NIKE (NKE 0.89%) shares rose 5% on Tuesday, even though there was no company-specific news on the stock.

Instead, the main driver of earnings came from a surprising source. Starbucks Shares surged 25 percent after it appointed a new CEO to spark a turnaround in the company after the business faltered under CEO Laxman Narasimhan.

A 25% jump on a new CEO could be unprecedented, especially for a company the size of Starbucks, and Nike investors apparently think a similar move could benefit them.

Image source: Getty Images.

What’s good for Starbucks is good for Nike?

While it’s difficult to bid on Nike stock based on news about a company in a completely different industry, Nike and Starbucks have a number of things in common, including their current challenges caused by poor strategy and execution.

Both companies are dominant global consumer brands in the US and the two companies are based in the same region of the country, the Pacific Northwest. The companies are also close to the same age, at least if you include the early days of Starbucks, when it was just a retailer. Both companies even have older founders who are involved in the company as chairmen emeritus, Phil Knight at Nike and Howard Schultz at Starbucks.

And Nike’s current challenges have much in common with Starbucks. Like the coffee chain, Nike brought in a CEO in 2020, John Donahoe, who had no experience in consumer products. Instead, Donahoe’s previous job was as CEO of Service Nowthe global cloud software company, who seems ill-prepared to lead the sportswear giant.

Similarly, Narasimhan spent most of his career as a consultant with McKinsey and had never run a restaurant before. Both CEOs have presided over long stock price declines, and both companies are now seeing revenue decline as they lose market share to competitors.

Donahoe’s Mistakes

Donahoe’s overall strategy as CEO of Nike was to reorient the business around the direct-to-consumer channel, away from its traditional wholesale business.

It also reorganized the business and issued two rounds of layoffs, shedding valuable talent and shifting the company from a focus on specific sports to generic categories such as men’s, women’s and children’s. With the move to DTC over wholesale came a focus on performance over brand marketing, where Nike had long distinguished itself through memorable campaigns.

The result of these moves is that the business has ceded valuable shelf space to key retail partners such as Foot Lockerand made way for competitors such as On Holding, DeckersHoka and New Balance will gain market share. He fell back into running, a massive sneaker category he used to lead.

It also seems to be losing relevance in core categories such as streetwear, perhaps due to a lack of brand marketing and underinvestment in products. He was also embarrassed when his MLB uniforms earlier this year revealed sweat stains and was widely criticized by fans and players alike.

After those setbacks, Donahoe and company begin to reverse course, leaning back on wholesale. But regaining that market share at the retail level may not be so easy now that it’s giving competitors the opportunity to gain shelf space and market share.

Will Donahoe be ousted?

Wall Street is starting to clamor for a change in the C-suite. A note from Stifel analyst Jim Duffy said: “Management credibility is seriously at risk and the potential for C-level regime change adds further uncertainty.”

Reversing bad decisions under Donahoe might be easier with someone else in charge, but there’s an important difference between Donahoe and Narasimhan. Nike founder Phil Knight expressed his support for Donahoe, saying, “I am optimistic about the future of Nike and John Donahoe has my unwavering confidence and full support.” Howard Schultz, on the other hand, was critical of Narasimhan.

That’s no guarantee that Donahoe will stay in the top spot, but something needs to change at Nike. If the company announces a new CEO, investors could be rewarded with a pop similar to the one Starbucks received on Tuesday. From there, there’s still plenty of upside for Nike if it can return to growth.