Story Stocks^®

NIKE's (NKE) 4Q25 results surpassed rock-bottom expectations and that low bar to hurdle was reflected by the stock's 34% year-to-date decline prior to today's gains. NKE reiterated that Q4 absorbed the largest financial impact from its "Win Now" turnaround strategy, as previously forecasted, with CFO Matthew Friend emphasizing that headwinds are expected to moderate moving forward. The company’s 1Q26 revenue guidance, projecting a mid-single-digit decline (versus a 7% drop expected by analysts), suggests that the worst of the financial strain is now behind NKE, fostering cautious optimism among investors.

• The Q4 results underscored a predictably challenging period, with revenues declining 11.9% yr/yr to $11.1 bln, driven by an 11% drop in North America and a 20% plunge in Greater China on a currency-neutral basis. Key headwinds include intensified competition from innovative brands like On Running (ONON) and Hoka, which have captured market share in performance footwear with fresh designs, and NKE’s prior over-reliance on flagship products like Air Force 1s and Dunks, coupled with an aggressive push into direct-to-consumer channels (DTC) under former CEO John Donahoe.
• This DTC focus, while initially boosting margins during the pandemic, led to inventory overhangs and weakened wholesale relationships, contributing to a 14% decline in NIKE Direct sales (including a 26% drop in NIKE Digital) and a 9% drop in wholesale revenues in Q4. Softer consumer demand, particularly in China due to competitive pressures and nationalistic sentiment, further exacerbated the downturn.
• Tariffs emerged as a significant new challenge, with NKE estimating a $1 bln cost impact in FY26 before price increases and supply chain adjustments. Rising input costs, compounded by heavy promotional activities to clear excess inventory, severely pressured profitability, with Q4 gross margin contracting 440 bps yr/yr to 40.3%. NKE’s Q1 guidance projects further gross margin compression of 350-425 bps, including approximately 100 bps directly attributable to tariff-related pressures, reflecting the company’s vulnerability to trade policy changes given its reliance on Asian manufacturing.
• To mitigate tariff impacts, NKE has been proactively diversifying its manufacturing base, reducing its footwear production in China to 16% last year from 29% in 2016, with increased sourcing from countries like Vietnam and Indonesia. Management’s confidence in fully offsetting tariff headwinds through price adjustments and supply chain efficiencies signals a long-term commitment to restoring margin stability, though near-term pressures will likely persist.
• On the innovation front, NKE is showing signs of progress under CEO Elliott Hill’s "Win Now" strategy, with recent launches like the Pegasus Premium and Vomero 18 gaining traction among runners and signaling a renewed focus on performance-oriented products. A high-profile collaboration with Kim Kardashian’s Skims brand has also bolstered NKE’s appeal in the women’s apparel segment, addressing competitive pressure from brands like Lululemon (LULU) and Alo Yoga.
• Additionally, NKE is rebuilding wholesale partnerships with key retailers like Dick’s Sporting Goods (DKS), Foot Locker (recently acquired by Dick’s), and Macy’s (M), reversing the prior DTC-heavy approach that strained these relationships.

NKE’s Q4 results were undeniably weak, aligning with expectations of significant pressure from its turnaround efforts, but the Q1 revenue guidance of a mid-single-digit decline -- less severe than Q4’s 11.9% drop -- signals a potential inflection point. Management’s reiterated outlook that headwinds will moderate, coupled with early progress in innovation and wholesale relationships, has driven a strong rally in NKE shares, reflecting renewed investor confidence in the company’s recovery trajectory.