Sportswear giant Nike reported a sharp drop in second-quarter profit on Friday, overshadowing better-than-expected revenue and earnings and sending its shares down more than 10% in premarket trading, as investors focused on mounting pressure from China and higher costs.
The company posted revenue of $12.43 billion for the quarter ended November 30, up slightly from a year earlier and ahead of analysts’ expectations of $12.21 billion, according to FactSet.
Nike reported net income of $792 million, or 53 cents a share, comfortably beating forecasts of 39 cents.
However, profit was down 32% from $1.16 billion, or 78 cents a share, a year ago.
The steep market reaction reflected concern that Nike’s operational challenges, particularly in China, are proving more persistent than investors had hoped, even as results topped estimates.
China weakness weighs on sentiment
Sales in China fell 17% in the quarter, accelerating from a 9% decline in the first quarter.
The region, which accounts for roughly 15% of Nike’s revenue, remains the company’s most pressing challenge.
Chief executive Elliott Hill said on the post-earnings call that Nike needs to “reset our approach to the China marketplace,” acknowledging that the turnaround is taking longer than expected.
Hill said the company has underinvested in refreshing its store network in China, limiting foot traffic.
He also pointed to structural constraints in the country’s monobrand retail model, which reduces Nike’s ability to replicate the multi-channel dominance it enjoys in the United States.
Digital performance in China was particularly weak, with online sales plunging 36% amid intensifying competition from domestic brands such as Anta and Li-Ning.
Margins squeezed by tariffs and inventory cleanup
Nike’s profitability was also hit by margin pressure. Gross margin fell three percentage points, largely due to higher tariffs in North America.
Direct-to-consumer sales, which typically carry higher margins, declined 8% as traffic softened both online and in stores.
The company also took steps to clear older inventory and refresh its product lineup, further compressing margins in the near term.
Zacks analyst David Bartosiak described the direct-to-consumer segment as a “problem child,” highlighting ongoing execution risks.
Despite the pressure, Hill said Nike’s recovery would be uneven.
“Our comeback continues to move at different speeds,” he told investors.
“It won’t be a straight line, but we’re acting decisively to accelerate the lagging areas, with China at the top of that list.”
Analyst consensus: constructively bullish, with patience
Nike saw healthier demand in other regions.
Revenue in North America rose 9% from a year earlier, while Europe, the Middle East, and Africa posted 3% growth, helping to offset weakness in Asia.
Analysts remain divided on the outlook.
Jefferies, which rates the stock a buy with a price target of $110, said Nike’s efforts to streamline its marketplace and reset its product portfolio are helping rebuild partner confidence and lay the groundwork for long-term growth.
KeyBanc, which has an overweight rating and a $90 price target, said the company’s “Win Now” initiatives should support a more sustainable recovery in revenue and a gradual improvement in margins.
Morningstar, which assigns a fair value of $104, expects Nike to return to growth over time, citing its strong positioning in sports, product innovation, marketing capabilities, and retail partnerships.
BTIG, which rates the stock a buy with a $100 price target, said the decline in gross margins was in line with expectations and should be viewed as a step toward restoring profitability and achieving more durable growth.
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