turnaround drags, China sales slump

When Nike Investors announcing fiscal third-quarter earnings on Tuesday night were looking for evidence that the recovery was on track.

Instead, all they learned was that the retailer’s recovery wasn’t over yet, sending shares tumbling more than 14% in midday trading Wednesday.

During a call with analysts, finance chief Matt Friend warned that sales would fall by a low-single-digit percentage by the end of this calendar year as a decline in China is expected to offset rising strength in North America.

The company estimates sales will fall between 2% and 4% this quarter; This rate is worse than analysts’ expectations of 1.9%. China, on the other hand, expects its sales to fall by 20%, even with a two-point advantage in exchange rates. Nike’s efforts to clean up its product lineup and increase full-price sales in China are expected to continue through fiscal 2027, which is scheduled to end next spring, and continue to weigh on revenue growth.

It’s expected to start recovering from the period of impact from higher tariffs in the first quarter of fiscal 2027, planned for this summer, which could make year-over-year profit comparisons easier. Executives think the retailer’s gross margins in the second quarter of fiscal 2027 could start to increase by the end of the year — if it happens at all.

Nike’s gross margin has fallen year-over-year for seven consecutive quarters, and it may now be harder to increase that metric as product input costs may rise due to the war in the Middle East.

“The environment around us has become increasingly dynamic and we may experience unplanned fluctuations due to disruption in the Middle East, rising oil prices and other factors that may affect input costs or consumer behavior,” Friend said. “We focused on what we can control, and those assumptions reflect the state of the macro environment today.”

The delayed turnaround, persistent bad news, and the number of business arms Nike had to fix to stabilize the entire business took a toll on investors. A few pieces of good news, such as better-than-expected sales in China, rising wholesale revenues, and continued growth in North America, were not enough to boost the stock.

On Wednesday morning, three of Wall Street’s biggest banks Goldman Sachs, JP Morgan And Bank of AmericaAll downgraded the stock, citing slowing returns, rising headwinds and diminishing patience.

“We thought improved performance product innovation and Win Now actions would result in a return to growth in the first quarter of 2027; instead management initiated guidance for sales to remain negative in 3Q27,” Bank of America analyst Lorraine Hutchinson said in a note to clients Wednesday. he said. “Strong results in operating and NA were reasons for our patience, but with sales growth nine months away, we see little room for multiple expansions, leading to a downgrade.”

During Nike’s call with analysts on Tuesday, Friend and CEO Elliott Hill predicted a return to sustainable growth but once again remained vague on the timeline.

“We are increasingly confident that we are on track to return to balanced growth in North America in both the NIKE Direct and wholesale channels in the near future,” Friend said.

In his speech, Hill once again said that the recovery was taking longer than he expected.

“This is complex work and some parts are taking longer than I would like, but the direction is clear,” Hill said. “The urgency is real and the foundation is strengthening.”