NKE Drops Despite Earnings Beat: China, Tariffs Weigh
Nike Beats Earnings Estimates Despite China Woes and Tariff Pressures
Nike, the major U.S. apparel powerhouse trading as NYSE: NKE, has faced a challenging three-year stretch. By the close of trading on December 18, its shares had declined by roughly 34 percent. Over this timeframe, the company’s sales figures, profit margins, and overall earnings have all experienced substantial decreases.
Several strategic errors have played a role in this downturn. Notably, product innovation has lagged behind rising competitors such as ON, listed on NYSE: ONON. Furthermore, Nike’s aggressive shift toward direct-to-consumer (DTC) sales channels created unexpected drawbacks. By prioritizing its proprietary platforms, Nike inadvertently allowed rivals to capture prime shelf space at major retailers like Foot Locker, forcing those outlets to stock competing brands.
Compounding these issues, excess stockpiles and mounting tariff pressures have further eroded profitability. Nevertheless, analyst projections continue to point toward considerable growth potential for Nike’s stock price. In the following analysis, we examine the details of the company’s December 18 earnings announcement to assess its prospects for turnaround.
Nike Surpasses Revenue and Earnings Forecasts
For the most recent quarter, Nike announced revenues reaching $12.4 billion. This marked a 1 percent increase year-over-year, or essentially flat when adjusted for currency fluctuations. The figure exceeded analyst consensus estimates, which hovered just below $12.2 billion.
Diluted earnings per share (EPS) stood at 53 cents, representing a 32 percent drop from the previous year. However, this outcome significantly outperformed expectations of 38 cents, which had anticipated a nearly 53 percent decline.
Looking ahead to the next quarter, management projects a low single-digit revenue decline. Gross margins are also forecasted to contract by approximately 200 basis points at the midpoint, primarily driven by substantial tariff-related challenges.
Diverse Performance Metrics Reveal Key Strengths and Vulnerabilities
The gross margin contracted by 300 basis points to 40.6 percent, predominantly due to tariff pressures. Nike expects these tariffs to persist as a major headwind, although proactive steps are being implemented to limit the gross margin erosion to around 120 basis points throughout fiscal 2026.
North American revenues expanded robustly by 9 percent, emerging as a key highlight in the report. In contrast, sales across all other regions declined when adjusted for currency effects. Greater China stood out as the weakest performer, with a sharp 16 percent drop.
Wholesale channels demonstrated resilience, growing by 8 percent and signaling progress in Nike’s partnerships with distributors. Conversely, the Nike Direct Digital platform, central to its DTC e-commerce efforts, suffered a 14 percent sales decrease. Alarmingly, revenue from Chinese Nike Direct Digital plummeted by 36 percent.
CEO Elliott Hill acknowledged that consumers in China predominantly favor e-commerce for purchases. This makes the dismal performance in this segment especially concerning. Nike plans to overhaul its China market strategy as part of a comprehensive recovery initiative.
On a brighter note, the running category achieved 20 percent sales growth for the second consecutive quarter, with strong double-digit gains in both wholesale and DTC segments. This momentum provides encouraging validation for Nike’s Sport Offense initiative.
Under Sport Offense, Nike is restructuring into specialized teams focused on individual sports. The approach aims to deliver tailored products that better connect with targeted audiences. As a versatile multi-sport brand, this could restore Nike’s edge in consumer engagement, though the rollout remains in nascent phases.
Investor Reaction: Shares Plunge Despite Earnings Wins
Even with beats on both revenue and EPS, the market response was negative. Following the December 18 earnings release, Nike’s shares tumbled nearly 10 percent in after-hours trading. The forward guidance indicating contraction, coupled with persistent operational concerns, overshadowed the positive surprises and eroded investor optimism.
Hovering around $59 in after-hours activity, Nike’s valuation continues to demand sustained improvements in free cash flow over the long haul. While leadership is dedicated to strategic investments, the tempo of recovery appears too gradual for impatient markets.
Nike retains its status as one of the world’s premier sports apparel brands, offering a formidable platform for resurgence. Successfully addressing sluggish Chinese demand, navigating tariff hurdles, and bolstering DTC performance could propel a remarkable stock rebound in the future.
