NIKE (NKE, Financial) exceeded expectations in its 4Q25 results, despite a challenging year marked by a 34% stock decline. The company confirmed that Q4 bore the brunt of its "Win Now" turnaround strategy, with CFO Matthew Friend indicating that headwinds should ease. NIKE's 1Q26 revenue forecast, predicting a mid-single-digit decline, suggests that the worst may be over, fostering cautious optimism among investors.
- Q4 revenues fell 11.9% year-over-year to $11.1 billion, with North America down 11% and Greater China plunging 20% on a currency-neutral basis. Competition from brands like On Running (ONON, Financial) and Hoka, alongside NIKE's focus on flagship products and direct-to-consumer (DTC) channels, contributed to these challenges.
- The DTC strategy initially boosted margins during the pandemic but later led to inventory issues and weakened wholesale relationships, resulting in a 14% decline in NIKE Direct sales and a 9% drop in wholesale revenues in Q4. Consumer demand, especially in China, was softer due to competitive pressures and nationalistic sentiment.
- Tariffs posed a new challenge, with an estimated $1 billion cost impact in FY26. Rising input costs and promotional activities to clear excess inventory pressured profitability, with Q4 gross margin contracting 440 basis points year-over-year to 40.3%. NIKE’s Q1 guidance anticipates further gross margin compression, primarily due to tariff pressures.
- To counter tariff impacts, NIKE is diversifying its manufacturing base, reducing Chinese footwear production to 16% from 29% in 2016, and increasing sourcing from Vietnam and Indonesia. Management is confident in offsetting tariff headwinds through price adjustments and supply chain efficiencies, aiming for long-term margin stability.
- Under CEO Elliott Hill’s "Win Now" strategy, NIKE is making strides in innovation with launches like the Pegasus Premium and Vomero 18, enhancing its focus on performance products. A collaboration with Kim Kardashian’s Skims brand has strengthened NIKE’s position in women’s apparel, addressing competition from Lululemon (LULU, Financial) and Alo Yoga.
- NIKE is also rebuilding wholesale partnerships with retailers such as Dick’s Sporting Goods (DKS, Financial), Foot Locker, and Macy’s (M, Financial), moving away from a DTC-heavy approach that previously strained these relationships.
Despite weak Q4 results, NIKE’s Q1 revenue guidance of a mid-single-digit decline—less severe than Q4’s 11.9% drop—indicates a possible turning point. Management’s expectation of moderating headwinds, coupled with progress in innovation and wholesale relationships, has sparked a strong rally in NKE shares, reflecting renewed investor confidence in the company’s recovery path.
