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Online Extra: A Jog with Nike's Numbers Man


Nike is a tough place for outsiders to join. The culture of marketing and sneaker design rules supreme behind the berm at Nike's Beaverton (Ore.) headquarters. It's even more challenging for a bean-counting accounting geek with no athletic achievements to show on his résumé.

That's the case with Chief Financial Officer Don Blair, who isn't your typical testosterone-filled, sports-playing Nike (NKE) acolyte. For starters, he didn't begin his career at the citadel of sportsdom as most senior Nike execs do. He came from the pedestrian PepsiCo (PEP). But he's one of the few outsiders to thrive inside Nike's competitive and insular world.

Joining the sneaker giant in 1999, Blair helped stop the financial hemorrhaging and restored Nike's financial credibility -- particularly among investors frustrated by the perpetual boom-bust business model. He's the architect of Nike's new financial approach -- one that has brought discipline, steady growth, and higher profits to the spend-happy company.

SWEET SPOTS. It may be a stretch to say Blair has made "finance" and "operations" sexy words among Nike's bastion of designers and marketers, but he has certainly earned their respect. That's because Blair understands Nike is nothing without its designers and its marketers. His job is to find the sweet spot between the creative and the financial sides.

Says star Nike designer Tinker Hatfield, creator of the Air Jordan sneakers: "The business group -- people like Don Blair -- have in their DNA the respect and desire to support and nurture the creative process. That's not very common at that level."

But it doesn't mean Blair has had an easy ride. Far from it. "The rebel gets celebrated around here," the CFO says. "From a financial standpoint it's not something you want to take to Wall Street. But the thing we try do is try to put people in a framework that lets them be creative without falling off the tracks. I won't tell you we have it entirely figured out. We just got to keep working it." Blair recently spoke with BusinessWeek Seattle Correspondent Stanley Holmes about how Nike is growing up. Edited excerpts follow:

Q: In the late 1990s, Nike's revenues jumped, but its profits tumbled. What happened?

A: It started in 1997. It was the year we hit the financial wall. We've hit walls and plateaus two or three times in our history. But 19997 was a fairly good hit. From 1997 to 2000, we were really coming to grips with that and trying to work through [an inventory overhang].

Phil [Knight, Nike co-founder] had indicated that the company had outgrown its management. It was more of a commentary on systems and structures. We've always operated in a fairly informal, entrepreneurial way. We had in many ways become a large organism that didn't have enough focus on the consumer.

From a management standpoint, we had always been great in product and marketing. Some of things that had been hurting us were things like operations, supply-chain management, and financial discipline.

Q: How did you fix the problems?

A: From financial standpoint, we were able to lay out a financial model in fall 2000. We designed it around lower-octane revenue growth. During the 1990s, Nike averaged 15% revenue growth. But it was up 40%, down 5%.

We decided to engineer the company to generate more consistency, because one of the things that held us back from a valuation standpoint is our ability to generate bottom-line growth, returns on capital, and being inconsistent. We had a high beta [a measure of stock-price volatility]. That was hurting our valuation.

So, we went in and engineered the model around high single-digit revenue growth. We hope we can do better. But it really was the way we wanted to engineer the rest of the balance sheet. We wanted to really focus on improving margins, and I think we've done a terrific job of that over the last three or four years.

Q: What elements of the new business model have shown the most improvement?

A: We have a gross-margin equation that I think has been beneficial. Supply-chain improvements have been beneficial. One of the biggest stories about Nike, which I also think is part of our evolution as a company, is just the strength of our cash flow and the strength of our balance sheet. And that comes from better working capital management and also from leveraging our asset base.

We're putting more products through the existing distribution centers. We're trying to get a little better at retail investments. Our return on invested capital was about 14% in 2001. But this year it's 22%, and we've got $1.2 billion in cash. We raised our dividend last fall over 40%. We bought $420 million of stock last year. We're really generating a tremendous amount of cash flow.

Q: How do you want investors to view Nike's new business model? How is it different than the old Nike?

A: The historical pattern for Nike is a bit of a boom-bust. What we're trying to get to is more of a consumer, noncyclical valuation or model. That doesn't mean we're ever going to be Colgate (CL) or Procter & Gamble (PG). We're not selling toothpaste or toilet paper or anything that's really a noncyclical.

We're not ever going to look exactly like General Mills (GIS), which is growing at 8% or 9%. We're aiming for mid-teens. General Mills might have a beta of 0.6 -- they're very steady. We're never going to be quite that steady.

We're in a business involved in brand heat, and it's got more fashion elements to it, although I think our portfolio helps us stamp that out. So, [we're aiming for] a higher growth rate, a little higher volatility, but enough steadiness to give people confidence that we can continue to generate these results. Ultimately, people start to see us a more like a more established blue chip, and we get value that way. That's really where we're trying to get to.

Q: Nike as an established blue chip? Who would have figured?

A: Nobody. It's countercultural [laughs]. I'll have to market it that way internally. But I don't think we ever want to be a company that's like Toyota (TM) or General Motors (GM) -- companies that are more rigid -- because if we do, we'll wreck what works here.

We all know that, so the key is trying to find the right balance of discipline, innovation, creativity, and structure. It's about getting the right things tighter and the right things looser. That's the endless cultural challenge here. Once you lose your edge for innovation and creativity, that's hard to get back.

Q: When and if Phil Knight decides to retire, do you believe an outsider could run Nike?

A: It would a challenge. What it will take is very strong support from the current leadership, but it will also take someone able to not only do the harder-edge business elements and have the right set of judgments, but someone who also understands and relates to people in a way that makes sense for this culture. I definitely think it can be done.

With that said, I don't know if Phil is ever going to totally disengage from this place. He's the founder, chairman of the board, he's the largest shareholder, and he's the CEO. He's certainly got formal and legal titles as well as cultural, psychological, and ceremonials titles. He's the soul of the place.


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