Table of Contents
Company Overview & Strategic Position
Nike, Inc. (NYSE:NKE) is the world's leading designer, marketer, and distributor of athletic footwear, apparel, and equipment with a market cap of ~$87 billion post-earnings. The company generates roughly $46 billion in annual revenue, with footwear representing 65% of sales, apparel 32%, and equipment 3%.
Geographic Breakdown: North America (45%), EMEA (27%), Greater China (11%), Asia Pacific & Latin America (13%), and Converse (2%). The company sells through both wholesale partners and its own Nike Direct channel (stores + digital).
The Business Model: Nike's competitive advantage has historically rested on three pillars: (1) athlete endorsements and cultural relevance, (2) product innovation in performance categories, and (3) premium brand positioning that commands pricing power.
The Turnaround Challenge: New CEO Elliott Hill (returned October 2024 after 32 years at the company) is executing a "Win Now" strategy to fix several self-inflicted wounds:
Classics oversaturation: Over-reliance on Air Force 1, Dunk, Air Jordan 1 franchises
Damaged wholesale relationships: Aggressive DTC push alienated retail partners
Declining innovation: Pipeline stagnated under previous leadership
Hill has reorganized the company into a "Sport Offense" structure organized by sport rather than gender categories.
The $1.5 Billion Tariff Problem: Adding to turnaround complexity, Nike now faces $1.5 billion in annualized incremental costs from higher U.S. tariffs on goods from China, Vietnam, and Indonesia - up 50% from $1 billion estimated just 90 days ago. This creates a 320 basis point gross headwind in FY26, which Nike is working to reduce to ~120 bps net through pricing, cost negotiations, and supply chain adjustments.
Revenue & Growth Analysis
Q2 FY26 vs Estimates:
Metric | Q2 FY26 Actual | Consensus | Variance | Result |
|---|---|---|---|---|
Revenue | $12.43B | $12.22B | +$210M (+1.7%) | ✅ BEAT |
EPS | $0.53 | $0.63 | -$0.10 (-16%) | ❌ MISS |
Gross Margin | 40.6% | ~42% | -140 bps | ❌ MISS |
Quarterly Financial Trend (Last 4 Quarters):
Metric | Q3 FY25 | Q4 FY25 | Q1 FY26 | Q2 FY26 | QoQ | YoY | Trend |
|---|---|---|---|---|---|---|---|
Revenue | $11.27B | $11.10B | $11.72B | $12.43B | +6% | +1% | ✅ ↗ Growth returns |
Gross Margin | 44.5% | 43.6% | 42.2% | 40.6% | -160 bps | -300 bps | ❌ ↘↘ Tariffs crushing |
Net Income | $794M | $211M | $727M | $792M | +9% | -32% | ❌ ↘ Still declining YoY |
Diluted EPS | $0.54 | $0.14 | $0.49 | $0.53 | +8% | -32% | ❌ ↘ Missed $0.63 est. |
Revenue by Geography (Last 4 Quarters):
Region | Q3 FY25 | Q4 FY25 | Q1 FY26 | Q2 FY26 | QoQ | YoY | Trend |
|---|---|---|---|---|---|---|---|
North America | $4.97B | $4.81B | $5.02B | $5.63B | +12% | +9% | ✅ ↗↗ Strong acceleration |
EMEA | $2.99B | $3.16B | $3.33B | $3.39B | +2% | +3% | ✅ ↗ Steady growth |
Greater China | $1.67B | $1.54B | $1.51B | $1.42B | -6% | -17% | ❌ ↘↘ Accelerating decline |
APLA | $1.47B | $1.41B | $1.49B | $1.67B | +12% | -4% | ⚠️ → Mixed signals |
Converse | $0.40B | $0.35B | $0.37B | $0.30B | -19% | -30% | ❌ ↘↘ Crisis deepening |
Revenue by Channel (Last 4 Quarters):
Channel | Q3 FY25 | Q4 FY25 | Q1 FY26 | Q2 FY26 | QoQ | YoY | Trend |
|---|---|---|---|---|---|---|---|
Wholesale | $6.1B | $5.9B | $6.4B | $7.5B | +17% | +8% | ✅ ↗↗ Strong recovery |
Nike Direct | $4.6B | $4.6B | $4.7B | $4.6B | -2% | -8% | ❌ ↘ Intentional pullback |
— Nike Digital | -- | -- | -- | -- | -- | -14% | ❌ ↘↘ Traffic collapse |
— Nike Stores | -- | -- | -- | -- | -- | -3% | ⚠️ → Weak traffic |
✅ BRIGHT SPOT: Excluding $550M headwind from classics franchise reduction (-20% YoY), currency-neutral revenue grew 6%. Running category up 20%+ for second straight quarter, with momentum extending to Basketball and Training in North America.
Profitability & The $1.5B Tariff Bomb
🚨 CRITICAL HEADWIND - TARIFFS: Nike now estimates $1.5 billion in annualized incremental product costs from higher U.S. tariffs, up 50% from the $1 billion estimated just 90 days ago. This represents a gross headwind of 320 basis points to FY26 gross margin. Through pricing, cost negotiations, and supply chain adjustments, Nike is working to reduce the net impact to approximately 120 basis points - but this is structural, not transitory.
Profitability Trend (Last 4 Quarters):
Metric | Q3 FY25 | Q4 FY25 | Q1 FY26 | Q2 FY26 | QoQ | YoY | Trend |
|---|---|---|---|---|---|---|---|
Gross Margin | 44.5% | 43.6% | 42.2% | 40.6% | -160 bps | -300 bps | ❌ ↘↘ Tariffs crushing |
Operating Income | $1.18B | $0.49B | $0.97B | $1.01B | +4% | -27% | ❌ ↘ EBIT margin 8.0% |
Net Income | $794M | $211M | $727M | $792M | +9% | -32% | ❌ ↘ Still declining YoY |
Diluted EPS | $0.54 | $0.14 | $0.49 | $0.53 | +8% | -32% | ❌ ↘ Missed $0.63 est. |
Effective Tax Rate | 17.5% | 31.5% | 18.1% | 20.7% | +260 bps | +280 bps | ⚠️ → Earnings mix shift |
What's Destroying Margins:
Factor | Impact (bps) | Nature |
|---|---|---|
Higher tariffs in North America | ❌ -520 bps (NA only) | Structural |
China inventory obsolescence write-offs | ❌ Significant | One-time |
Higher wholesale discounts | ❌ Negative | Transitory |
Channel mix (more wholesale) | ❌ Negative | Transitory |
⚠️ KEY INSIGHT: North America gross margin only declined 330 bps despite 520 bps tariff impact. This means the underlying business (excluding tariffs) is actually recovering. Management sees a "path back to double-digit EBIT margins" - but timing unclear.
Financial Position & Cash Generation
Balance Sheet (Nov 30, 2025) | Amount | YoY Change |
|---|---|---|
Cash & Equivalents | $6.97B | ❌ -13% |
Short-term Investments | $1.37B | ❌ -23% |
Total Liquidity | $8.35B | ❌ -15% |
Inventories | $7.73B | ✅ -3% |
Current Portion of LT Debt | $999M | 0% |
Long-term Debt | $7.02B | ✅ -12% |
Total Debt | $8.02B | ✅ -10% |
Shareholders' Equity | $14.09B | 0% |
Capital Allocation:
Dividends: $598M returned in Q2 (+7% YoY), 24 consecutive years of increases
Quarterly Dividend: $0.41/share (recently raised 3%)
Dividend Yield: ~2.8% at current price
Share Repurchases: Minimal in quarter, preserving cash
Inventory Health:
Overall inventory -3% YoY, units down high-single digits
North America & EMEA: Healthy, clean position
Greater China: Still needs work - took write-offs this quarter
APLA & Converse: Excess inventory being worked through
⚠️ MOODY'S DOWNGRADE: On November 13, 2025, Moody's downgraded Nike's senior unsecured rating from A1 to A2, citing slower-than-anticipated market share and profit margin recovery, plus ongoing tariff pressures. The stable outlook suggests no further near-term downgrades expected.