News

Nike (NYSE: NKE) stock finished up 5% on Tuesday even as there was no company-specific news out on the stock.

Instead, the main driver of the gains came from a surprising source. Starbucks stock soared 25% after it named a new CEO to drive a turnaround in the company after the business had faltered under CEO Laxman Narasimhan.

A 25% jump on a new CEO might be unprecedented, especially for a company the size of Starbucks, and it seems to have Nike investors thinking that a similar move could benefit them.

What's good for Starbucks is good for Nike?

While it's a stretch to bid Nike shares up based on news of a company in an entirely different industry, Nike and Starbucks have a number of things in common, including their current challenges inflicted by poor strategy and execution.

Both companies are U.S.-based dominant global consumer brands and the two companies are even 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 Starbucks' early days when it was just a retailer. Both companies even have aging founders who are involved in the company as chairmen emeriti, Phil Knight at Nike, and Howard Schultz at Starbucks.

And Nike's current challenges have a lot in common with Starbucks. Like the coffee chain, Nike brought in a CEO in 2020, John Donahoe, who did not have experience in consumer products. Instead, Donahoe's previous job was as CEO of ServiceNow , the global enterprise cloud software company, which seems to have prepared him poorly to run 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 declines in the stock price, and both companies are now seeing revenue decline as they lose market share to competitors.

Donahoe's mistakes

Donahoe's overarching strategy as CEO of Nike has been to reorient the business around the direct-to-consumer channel, moving it away from its traditional wholesaling business.

He also reorganized the business and issued two rounds of layoffs, losing valuable talent, and moving the company away from a focus on specific sports to generic categories like men, women, and kids. Along with the shift to DTC over wholesaling came a focus on performance over brand marketing, where Nike had long distinguished itself with memorable campaigns.

The upshot of those moves is that the business has ceded valuable shelf space at key retail partners like Foot Locker , and made room for competitors like On Holding , Deckers ' Hoka, and New Balance to gain market share. It's fallen back in running, a massive sneaker category it used to lead.

It also seems to be losing relevance in core categories like streetwear, perhaps due to a lack of brand marketing and underinvesting in product. It also embarrassed itself when its MLB uniforms earlier this year revealed sweat stains and were widely maligned by both fans and players.

After those setbacks, Donahoe and company are starting to reverse course, leaning back in on wholesaling. But recapturing that market share at the retail level might not be so easy, now that it's given competitors the opportunity to grab 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 severely challenged and potential for C-level regime change adds further uncertainty."

Undoing the poor decisions under Donahoe might be easier with somebody else in charge, but there's an important difference between Donahoe and Narasimhan. Nike Founder Phil Knight has expressed support for Donahoe, saying, "I am optimistic in Nike's future and John Donahoe has my unwavering confidence and full support." Howard Schultz, on the other hand, had been critical of Narasimhan.

That's no guarantee that Donahoe will remain in the top spot, but something has to change at Nike. If the company does announce a new CEO, investors could get rewarded with a stock pop similar to the one Starbucks got on Tuesday. From there, there's still a lot of upside for Nike if it can get back to growth.

Before you buy stock in Nike, consider this: