Nike Inc.’s shares were down 11 percent in pre-market trading on Wednesday, April 1, as the sportswear giant warned that sales will fall for the rest of the calendar year, with weakness in China and within sportswear categories offsetting a continued recovery expected in North America. Shares continued to fall Wednesday morning after the market opened, stymied further by fresh downgrades from analysts at Bank of America and JP Morgan.

On an analyst call, CFO Matt Friend said sales for its current fiscal fourth quarter ended May 31 are expected to drop between 2 percent and 4 percent, compared with Wall Street estimates of a 1.9 percent increase. The decline largely reflects an expected 20 percent decline in China. For the duration of the calendar year, sales are projected to fall by a low single-digit percentage as growth in North America is largely offset by declines in China.

Nike’s disappointing guidance comes as Nike reported earnings for the fiscal third quarter ended February 28 topped analysts’ consensus targets with sales in line with estimates.

The North America region saw continued improvement as result of payback from its Win Now restructuring efforts and a refocus on a Sport Offense strategy, but weak results continued in the sportswear segment and at Converse. China showed little signs of recovery with EMEA’s performance also eroding sequentially amid a promotional climate.

Friend noted that the company is seeing “real progress” across the business with a boost from the Sports Offense strategy. He said, “Our initial focus on sport was important because it sets a strategic repositioning of our brands. Momentum in running continues to be strong, and we expect football, training, and basketball to return to growth over the next few quarters.”

However, he said weakness in sportswear continues to restrain Nike’s growth, noting that sports dimensions currently represent less than half of Nike’s total portfolio. He added, “Sportswear continues to be a headwind to revenue growth as it declined low double digits in the quarter.”

He also noted that sell-throughs at wholesale are running below targets. He elaborated, “Relationships with our wholesale partners are strong, and our ways of working look very different than they did 12 months ago. Order books are growing, and we are taking back shelf space. However, sell-through trends are not yet where we want them to be.”

Friend added that digital is “still too promotional” despite progress year over year and that’s pressuring margins.

Friend said, “While our comeback is taking longer than we would like, we are confident we are on the right path, and we have a clear set of plans in place to complete our win now actions by the end of the calendar year.”

 CEO Commentary
“While we are not satisfied, I am confident that our progress in the areas we prioritize first through our Win Now actions point to where we are ultimately heading across our portfolio,” added Elliott Hill, president and CEO, Nike, on the call with analysts. “Because of the scale and breadth of the Nike portfolio, that progress will not happen all at once. We have approached this comeback deliberately across brands, sports, geographies, and channels, with some parts of the portfolio moving faster than others.”

Among the signs of progress is running, which saw sales grow over 20 percent in the fiscal third quarter. He said, “Nike Running has created the roadmap for other sports to follow.”

He also talked up high expectations to revive soccer with the help of the upcoming World Cup with the Tiempo cleat launched during the recent quarter, the Mercurial cleat coming in June, and Aero-FIT kits arriving to support Nike’s sponsored teams.

Among promising innovations, Hill said the new Nike Mind 001 sold out in all geographies and production has doubled to meet demand over the next two seasons. Other innovations called out include Nike Air being used for the first time ever as a self-inflated thermal layer in apparel, the Nike Air Liquid Max featuring Air technology infused in a “liquid” cushioning system, and the Aero-FIT apparel cooling platform that increases airflow by 200 percent over regular Dri-FIT.

Hill further called out efforts to “win back market share” at wholesale, particularly in North America, its largest market. North America sales grew 3 percent in the third quarter, its third straight quarter of growth.

Hill said, “These are the dimensions that are furthest along, and each is absolutely essential to turning around this company.”

At the same time, other parts of the portfolio – particulary Greater China, Converse, and Sportswear – “are still earlier in their comebacks” with new leadership in place and reset efforts expected to “continue to create near-term pressure.”

Hill added, “This is complex work, and parts of it are taking longer than I’d like.”

He noted that the teams at Nike Sportswear and Jordan Streetwear “are moving from playing defense to playing offense,” following the intentional reduction of over $4 billion of revenue from peak levels of classic footwear franchises over the last few quarters. The inventory clean-up created a five-point headwind to margins in the latest quarter.

Hill said, “From here, we’re investing in a more sophisticated City Offense, one that incubates new styles through different consumers and channels, account by account.” He cited recent healthy sell-throughs in the reintroduction of the Air Max 95 as an example of a “more thoughtful approach” the sportswear team is embracing.

In China, Hill said Nike has “become clearer on the structural challenges in China and the channel dynamics in the marketplace,” and is confident that embracing a more localized approach built around sport will revive growth. China’s sales were down 10 percent on a currency-neutral (c-n) basis in the third quarter amid inventory clearance efforts. Hill said, “It will take time, but we remain confident that serving 1.4 billion potential athletes in China is one of the most powerful opportunities in sport.”

Hill also indicated that Nike has no plans to sell Converse despite rumors in the marketplace amid poor results. Converse’s sales were down 37 percent on a c-n basis in the latest quarter.

The CEO said, “In Converse, the team took some decisive steps this quarter to bring the brand back to a healthy business. Converse is a beloved brand that serves a distinct consumer through their connection to creative culture, music, and youth. Converse will remain an important part of the Nike, Inc. family, and we are excited about its long-term prospects.”

In his formal comments, Hill also noted that Nike underwent layoffs in supply chain and technology functions as it shifted from a “Nike Direct first offense” under the previous management team back to a “integrated and elevated marketplace and running a key city offense.” He described the moves as a “critical step in our return to double-digit EBIT margins.”

Hill also called out the potential for ACG, which Nike relaunched around the Winter Olympics in Milan and Cortina. The relaunch included elevated presentations at more than 600 doors globally, an ACG store in Beijing, and a train that ran from Milan to the Alps during the Olympics.

Hill said, “The Nike ACG team is committed to serving the outdoor athlete by creating the world’s most innovative footwear, apparel, and accessories, building our presence authentically over time by supporting world-class racers and events, and building long-term partnerships with the retailers who authentically serve outdoor athletes. The outdoors is a tremendous opportunity for Nike as we bring excitement and a fresh perspective to the consumers and the industry.”

Hill said by the end of the current calendar year, Nike will have completed its Win Now actions, including clearing aged inventory in the marketplace and establishing “more locally relevant” marketing teams in key cities globally. With the progress, Nike will be holding an Investor Day later this fall at its headquarters in Beaverton with plans to provide guidance over several years.

Hill said, “Overall, the work is not finished, but the direction is clear. Our teams are moving with focus and urgency, and our foundation is getting even stronger.”

Third-Quarter Results
In the third quarter, revenues were $11.28 billion, basically flat against $11.27 billion a year ago.  Sales were in line with analysts’ consensus estimate of $11.24 billion.

Nike Direct was down 7 percent, with Nike Digital declining 9 percent and Nike stores down 5 percent. Wholesale grew 1 percent.

Earnings declined 34.5 percent to $520 million, or 35 cents a share, but topped analysts’ consensus target of 28 cents. The earnings decline was due to tariff pressures and a charge for layoffs.

Gross margins eroded 130 basis points to 40.2 percent on a reported basis, primarily due to 300 basis points associated with higher tariffs in North America. SG&A expenses were up 2 percent on a reported basis versus the prior year due to employee severance charges incurred in the quarter.

The quarter included a $230 million charge related to layoffs primarily tied to its supply chain and technology functions. Fried noted that Nike accelerated investments in those areas as prior management focused on building its digital and direct business, but those investments “resulted in a higher fixed cost base that weighed significantly on our EBIT margins as revenue came down”

With the steps taken to create a “more balanced and integrated marketplace,” Nike is shifting to make supply chain functions “more of a variable cost versus the higher fixed cost structure we have today.” Nike will also “optimize our workforce, rationalize programs” within technology functions. The charges also include layoffs at Converse.

Friend said, “We continue to evaluate opportunities related to supply chain, which could result in additional financial impacts in future quarters, though we believe the actions taken this quarter will represent the largest financial impact. We expect benefits from these actions to begin in fiscal 2027 and continue to build through fiscal 2028.”

Inventory decreased 1 percent versus the prior year, with units down mid-single digits.

North America Revenues Climb 3 Percent
In North America, Q3 revenue for the Nike Brand grew 3 percent to $5.0 billion.  Nike Direct declined 5 percent with Nike Digital down 7 percent and Nike stores off 1 percent. EBIT declined 11 percent on a reported basis, to $981 million.

Friend said, “North America is leading our comeback and is well positioned to sustain the momentum as we move forward.

Among categories, running and global football grew double digits in North America, with basketball up high-single digits while sportswear declined double digits. Among channels, wholesale grew 11 percent, driven by new distribution and lapping marketplace actions to repair relationships with existing partners in the prior year. Friend said, “While sell-through has been below plan, sell-through improved in February, and we drove positive growth in all channels in the geography for the first time in two years.”

Digital declined but improved sequentially throughout the quarter, driven by strong launch and growth in key sports, as well as continued improvement in average retail discounts.

Inventory dollars in North America grew low single digits, while units were down high single digits with the spread primarily due to tariffs. Friend said, “Closeout units remain low, and the mix is healthy.”

North America gross margins declined 360 basis points versus the prior year, despite nearly 650 basis points of gross impact from new U.S. tariffs. Friend said, “Underlying profitability has now improved over three consecutive quarters, giving us confidence that we can recover the transitory headwinds to margin associated with our Win Now actions. Last, we are increasingly confident we are on track to return to balanced growth in North America across both Nike Direct and wholesale channels in the near term.”

China’s Q3 Sales Decline 10 Percent
In Greater China, Q3 revenue for the Nike Brand declined 10 percent on a c-n basis (-6.8 percent reported), to $1.62 billion. Nike Direct declined 5 percent, with Nike Digital down 21 percent and Nike stores up 1 percent. Wholesale declined 13 percent. EBIT increased 11 percent on a reported basis, to $467 billion.

Among categories, running grew double digits in China and growth was seen in tennis, golf, and ACG. Kids were flat. Sportswear declined double digits, as expected.

Among channels, wholesale sell-in was managed down while seasonal sell-through rates sequentially improved. A Nike store pilot was expanded to 100 doors, including its House of Innovation door in Shanghai, with a focus on enhanced store assortments, storytelling, and replenishment, resulting in improved traffic and comp sales year over year. Adjustments to how Nike’s brand presence is positioned across digital platforms, including pulling key styles off discount, resulting in higher full price realization for those styles. Inventory was down mid-teens versus the prior year, with units down more than 20 percent, and partner inventory declining double digits.

Friend said additional restructuring actions will take place in coming quarters with new leadership in China now in place. He said, “We will continue to reduce near term sell-in to align with full price demand, clean up the digital channel and reduce the amount of aged inventory in the marketplace. We expect these actions will continue throughout fiscal 2027 and remain a headwind to revenue growth, while profitability should bottom sooner as marketplace management makes progress.”

EMEA’s Q3 Revenues Decline 7 Percent
EMEA Q3 sales for the Nike Brand was down 7 percent on a c-n basis (-2.2 percent reported), to $2.87 billion. Nike Direct declined 13 percent, with Nike Digital down 6 percent and Nike stores down 20 percent. Wholesale was down 4 percent. EBIT increased 7 percent on a reported basis to $515 million.

Friend said the EMEA region faced a “highly promotional marketplace” in the quarter. Performance categories “continued to build momentum, led by double-digit growth in running. Sportswear was down double digits with sell-through below sell-in expectations. Promotions across the marketplace were up versus the prior year as wholesale partners managed inventory. Aggressive promotions on Nike Digital resulted in higher markdowns and a higher off-price mix. Inventory grew double digits, with units up mid-single digits. Friend said, “Given the softness in sportswear, traffic patterns and promotions across Europe, as well as recent disruption in the Middle East, we anticipate ending the fourth quarter with elevated inventory.”

APLA Q3 Sales Decline 2 Percent
In the APLA (Asia Pacific & Latin America) region, sales for Nike Brand declined 2 on a c-n basis (+1 percent reported), to $1.49 billion. Sales declined 8 percent at Nike Direct with declines of 12 percent at Nike Digital and 3 percent at Nike stores. Wholesale grew 3 percent. EBIT declined 4 percent on a reported basis to $332 million.

On the positive side, running grew double digits and growth was achieved in training and football while sportswear declined double digits. A “strong launch” was seen by NikeSKIMS in Australia and Korea and cricket footwear launches were made around the T20 Cricket World Cup. Friend said while inventory grew high-single digits year over year, units declined low-single digits due to inventory clearance efforts. Closeout mix still remains elevated and clearance will be a priority in the current quarter. Friend said, “We expect performance across territories in APLA to remain mixed in the near term.”

Outlook
With “Win Now” actions expected to be completed by the end of the calendar year Friend provided some broader guidance than on recent quarterly calls. Friend said, “Over these next nine months, there will continue to be puts and takes across the revenue and gross margin lines of our business. At the same time, we are even more confident in where we are headed.”

Through the end of the current calendar year, Nike expects revenues to be down low-single digits versus the prior year, with gains in North America offset by declines in Greater China, driven by intentional reduced sell-in and inventory clearance efforts. Assuming no significant changes in tariffs, the first quarter of fiscal 1997 (ending August 31) is expected to be the final quarter where higher tariffs continue to be a “material year-over-year headwind” to gross margin. Gross margin expansion is expected to begin in the fiscal second quarter (ending November 30) due to efforts to mitigate tariffs and the move past restructuring expenses tied to Win Now actions.

Earnings are expected to be flattish through the end of the calendar year “with gross margins beginning to inflect and disciplined SG&A management, setting the foundation for earnings recovery from there,” according to Friend.

Friend noted that “disruption in the Middle East, rising oil prices, and other factors” could alter expectations. Friend said, “We are focused on what we can control, and these assumptions reflect the macro environment as it stands today.”

Full-year and long-term guidance is scheduled to be provided at Nike’s Investor Day in the fall.

For the fourth quarter, sales are expected to be down 2 percent to 4 percent due to declines in China and Converse. Modest growth is projected for North America despite tough comparisons against aggressive inventory clearance efforts a year ago. A two-point benefit is expected from foreign exchange.

Sequential improvement is expected in gross margin in the current quarter with a decline of 25 to 75 basis points (down 130 basis points in fiscal Q3), including 250 basis points due to higher tariffs in North America. Q4 SG&A dollars is expected to be flat to down slightly.

Image courtesy Nike