Turnaround in Motion: Is It Time to Buy Nike?
Nike (NYSE: NKE) stock has climbed more than 20% in the last five days, but the stock remains down 5% year-to-date, lagging the S&P 500’s 4% gain. The company reported better-than-expected fourth-quarter earnings – revenue declined 12% to $11.1 billion, topping analyst expectations. Net income plunged 86% to $211 million, or $0.14 per share, from $1.5 billion ($0.99 per share) a year ago—but still came in ahead of forecasts. Investors are cautiously optimistic that the worst may be behind the sportswear giant as it pushes through a difficult turnaround.
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A Tough Year in the Rearview
For fiscal 2025, Nike reported total revenue of $46.3 billion, down 10%, and net income of $3.2 billion, a 44% decline from the prior year. Nike Brand revenue dropped 9% to $44.7 billion, with declines across all geographies. Digital sales were hit especially hard, plunging 20% as Nike worked to rebalance its direct-to-consumer strategy. Meanwhile, wholesale revenue fell 9%, though Nike-owned physical stores held steady. Nike’s margins took a hit as it turned to discounting and clearance to offload excess inventory. That, combined with a shift back to lower-margin wholesale channels, pressured profitability.
The Road Ahead: A Strategic Reset
Nike didn’t offer full-year guidance for fiscal 2026 but outlined plans to realign its business around key sports categories, streamline its supply chain, and reinvigorate product storytelling. The tariffs will increase costs by an estimated $1 billion this year — a burden Nike aims to offset through pricing, sourcing adjustments, and operational efficiencies. Notably, the company plans to reduce its China-based supply chain exposure from 16% to the high single digits by year-end.
Short term, Nike expects Q1 sales to decline by a mid-single-digit percentage, with gross margin compression between 3.5 to 4.25 percentage points, including a 1-point hit from tariffs. The revenue in the current first quarter is expected to decline by a mid-single-digit percentage, a marked improvement from recent double-digit drops.
Valuation: Opportunity or Value Trap?
At approximately $72 per share, Nike trades at about 41x projected 2026 earnings — a notable premium to its three-year average of 28x. Consensus forecasts anticipate a 1% revenue decline in FY 2026, followed by a potential rebound with 5% growth in FY 2027.
The investment case now depends squarely on the success of Nike’s turnaround efforts. If management fails to stabilize margins and reignite top-line growth, the current valuation could prove unsustainable.
Downturn Risk: Not a Defensive Play
Nike has shown clear vulnerability in past market downturns. In 2020, shares dropped nearly 40% within a few quarters, and during the 2022 inflation-driven selloff, the stock suffered a 53% peak-to-trough decline — significantly worse than the S&P 500. If macro conditions weaken again, Nike could be at risk for further downside. A 50% decline from current levels would bring the stock to around $35 — a plausible outcome for a company with elevated volatility and cyclical earnings.
Bottom Line
Nike is at a crossroads. It’s showing early signs of stabilization but still faces margin pressure, macro risks, and valuation questions. While its brand remains strong and its long-term strategy is promising, execution will be critical. As with any investment, it’s essential to weigh the pros and cons carefully and consider diversified options to minimize risk. The Trefis High-Quality portfolio, with a collection of 30 stocks, has a track record of comfortably outperforming the S&P 500 over the last 4-year period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
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