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UPDATE: Nike CEO change signals focus on growing digital business, analysts say

Nike Inc.'s leadership change signals the company's increasing focus on strengthening its digital business and the push to connect directly with consumers, analysts said.

"It's a clear signal that they intend to make the digital business even more important than it already is and that they see that as the future of the company," David Swartz, an equity analyst at Morningstar said in an interview.

Nike said Oct. 22 that Mark Parker, president and CEO since 2006, will resign in January and be replaced by ServiceNow Inc. CEO John Donahoe, previously the CEO of eBay Inc. Parker will remain on the company's board and become the executive chairman.

"Adding [Donahoe's] expertise in technology and global strategy in 2020 to an already highly successful team will allow Nike to accelerate its strategic transformation and extend our digital advantage," a Nike spokesperson said in a statement late Oct. 23 to S&P Global Market Intelligence.

The leadership change comes as the company continues to transform its digital business through initiatives including an app feature called Nike Fit, which scans a customer's foot to provide the shoe size. Nike's focus on digital services has helped to more than double the active users across all of its apps over the last three years, Parker said during a Sept. 24 call discussing the company's first-quarter earnings report. The company reported more than 170 million online members in June, executives said.

Nike is also reportedly cutting back on its partnerships with retailers in order to fully terminate its supply agreement with retailers by 2021 and sell directly to consumers through its own stores and online. Analysts said Donahoe's tech background and experience would bolster the company's growing digital business.

Although the sportswear company reported continued growth in gross profit and revenue during Parker's term, it also faced multiple scandals. These included allegations of workplace misconduct and violations of anti-doping rules. However, a Nike spokesperson said Parker's resignation had "absolutely nothing to do with the Oregon Project." Nike's Oregon Project is a now-defunct running training team whose head coach Alberto Salazar was accused of conducting doping experiments.

"[Parker] has been working with the board for many months to ensure we deliver a thoughtful transition to accelerate our growth. This does not happen in a matter of weeks," the spokesperson said.

Parker's tenure marked by growth, controversies

Markets reacted negatively to the news of Parker's departure. The footwear company's shares closed 3.4% lower to $92.32 on Oct. 23, a day after the company announced the leadership change.

During Parker's tenure, Nike's stock grew more than 1,500% from Dec. 30, 2005, through Oct. 22, according to Market Intelligence.

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Under Parker's leadership, Nike's gross profit nearly tripled, from $6.59 billion in fiscal 2006 to $17.47 billion in fiscal 2019. Revenue grew at about the same pace, reaching $39.12 billion in fiscal 2019.

Nike's digital business has also reported significant growth, with the latest growth rate at 42% during the company's first quarter of fiscal 2020, Parker said during the Sept. 24 earnings call.

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The controversies during Parker's tenure led to the resignation of at least two Nike executives in 2018. The company also faced allegations and a lawsuit centered on charges of discriminating against female employees.

More recently, Nike faced allegations that Parker was aware of doping experiments allegedly conducted by a company-backed coach and doctor.

Although the timing of Parker's resignation surprised analysts, they said the scandals likely had little to do with the company's decision.

"There's been a clear method for Nike to have successions in its key leadership position, and this just seems in line with that," UBS analyst Jay Sole said in an interview. "I don't think the [controversies] had an impact on what happened."

Morningstar's Swartz agreed, adding that the announcement probably came earlier than expected because Nike found the right candidate quickly.

"Once they identified the best candidate, they'd want to move quickly, which they did, so I think that's probably more the reason," Swartz said.

The 'best' candidate for the job

Donahoe brings a valuable skill set to a company growing its digital business, analysts said. His background spans across the technology world, including chairing the PayPal Inc. board of directors since 2015.

"Though the timing is unexpected, we view Donahoe as an exceptional candidate for the job given his extensive digital background, which is particularly relevant as [Nike] strategically pivots towards digital initiatives," Morgan Stanley analysts wrote in an Oct. 23 note.

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Although Donahoe did not rise through the management ranks at Nike, his role on the board of directors since 2014 has exposed him to the company's business, and the transition process will fill the lack of experience with the day-to-day operations, Sole said.

"He's not at all unfamiliar with the company, and he does bring a unique skill set that maybe was sort of hard to find internally," Sole said.

Trevor Edwards, one of at least two executives to resign in 2018, once was seen has Parker's potential successor, according to Swartz.

"It is a bit surprising that they would choose somebody outside. I think that could be partly because of the misconduct scandal ... but I think the main reason is that they wanted somebody who is familiar with Nike ... and also has a tech background as [Donahoe] does," Swartz said.

Donahoe's tech background is a valuable asset, but the new CEO will still face obstacles. These include managing the impact of the ongoing trade war with China and remaining competitive with other sportswear companies increasing their focus on China, an important market for Nike. Another challenge is the competition the company faces in the U.S. with Under Armour Inc. and adidas AG, Swartz said.

Swartz added that Nike co-founder Phil Knight and Parker will remain involved as Donahoe takes charge.

"They're going to be looking over his shoulder, so he's going to have to deal with these challenges very quickly," Swartz said.

Product innovation has been a key differentiator for Nike under Parker's leadership, and Sole doesn't expect a change under the new leadership.

"I would guess that one reason that [Parker] is going to continue to be involved is that he's going to make sure that the product engine at Nike continues to be best in class and sort of help manage that transition to make sure the product always stays top of the line," Sole said.