NIKE, Inc. (NKE) Q2 2026 Earnings Call Transcript

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Overview

The earnings call reveals several concerning factors: declining revenues in key regions, significant EBIT declines, and gross margin pressures due to tariffs. The Q&A highlights uncertainties, especially in China, and management's reluctance to provide clear timelines or targets. The positive aspects, such as growth in North America and certain product lines, are overshadowed by broader challenges. Without a market cap, the stock's reaction is uncertain, but the overall sentiment suggests a negative outlook for the next two weeks.

Key Financial Performance

Revenue Revenues were up 1% on a reported basis and flat on a currency-neutral basis. NIKE Direct was down 9%, with NIKE Digital declining 14% and NIKE stores down 3%. Wholesale grew 8%. This included a top line headwind of approximately $550 million from the reduction of our Classics franchises, down over 20% versus the prior year. This means our currency-neutral revenue grew 6%, excluding the impact of this headwind.

Gross Margins Gross margins declined 300 basis points to 40.6% on a reported basis, primarily due to increased product costs due to higher tariffs in North America as well as inventory obsolescence in Greater China that was not contemplated 90 days ago.

SG&A SG&A was up 1% on a reported basis year-over-year, driven by higher brand marketing expense, partially offset by lower operating overhead. Relative to expectations, SG&A was lower due to operating overhead savings, reflecting the team's continued focus on disciplined cost management.

Effective Tax Rate Our effective tax rate was 20.7% compared to 17.9% for the same period last year, primarily due to changes in earnings mix.

Earnings Per Share (EPS) Earnings per share was $0.53.

Inventory Inventory decreased 3% versus the prior year, with units down high single digits. In North America and EMEA, which represent almost 3/4 of our business, we have returned to a healthy marketplace. We still have work to do in Greater China, parts of APLA and Converse.

North America Revenue In North America, Q2 revenue grew 9%. NIKE Direct declined 10%, with NIKE Digital down 16%. NIKE stores were down 2%, wholesale grew 24% and EBIT declined 8% on a reported basis.

EMEA Revenue In EMEA, Q2 revenue was down 1%. NIKE Direct declined 3%, with NIKE Digital down 2% and NIKE stores down 5%. Wholesale was flat. EBIT declined 12% on a reported basis.

Greater China Revenue In Greater China, Q2 revenue declined 16%. NIKE Direct declined 18%, with NIKE Digital down 36% and NIKE stores down 5%. Wholesale declined 15%. EBIT declined 49% on a reported basis.

APLA Revenue In APLA, Q2 revenue was down 4%. NIKE Direct declined 5% with NIKE Digital down 10% and NIKE stores up 1%. Wholesale was down 3%. EBIT declined 15% on a reported basis.

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Operating Highlights

New Footwear Platform: Nike Mind, a new footwear platform, will debut in January to help athletes prepare for performance and competition.

Running Growth: Running grew by over 20% for the second quarter in a row, with double-digit growth across all channels.

Innovative Products: Introduction of the Therma-FIT Air Milano jacket, which inflates for warmth, and Aero-FIT apparel platform for enhanced air flow.

NikeSKIMS Collection: The collection will launch internationally in EMEA and APLA following a successful rollout in North America.

North America Growth: North America achieved over 20% wholesale growth, driven by reconnecting with partners and strategic marketing campaigns.

China Challenges: China's revenue declined 16%, with efforts underway to adapt to its unique digital-first marketplace and monobrand footprint.

EMEA and APLA: EMEA activated its sport offense and is rehiring revenue-generating roles, while APLA showed mixed results with growth in Latin America offset by Asia-Pacific challenges.

Leadership Changes: All geographies now report directly to the CEO to accelerate decision-making and strategy execution.

Operational Efficiencies: Focus on integrating technology across operations to improve efficiency and profitability under the new COO.

Margin Expansion: Efforts to return to double-digit EBIT margins include a diverse product portfolio and operational improvements.

Win Now Actions: Focused on rightsizing Classics business, diversifying product portfolio, and strengthening consumer and partner relationships.

Sport Offense Strategy: Athlete-centered innovation and sport-focused growth strategy to drive global expansion and product scaling.

China Market Reset: Plans to elevate brand distinction and adapt to China's digital-first marketplace for long-term growth.

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Risk or Challenges

China Market Challenges: The company is facing a longer road to a healthier business in China, with challenges including declining store traffic, softer in-season sell-through rates, higher levels of aged inventory, and a higher mix of off-price sales. These issues have significantly impacted profitability in the region.

Tariff-Related Cost Pressures: Higher U.S. tariffs have added $1.5 billion in annualized incremental product costs, representing a gross headwind of approximately 320 basis points to gross margin in fiscal '26. This is a significant factor impacting near-term EBIT margins.

Inventory Management Issues: The company is dealing with inventory obsolescence in Greater China and pockets of excess inventory in other regions, which have required markdowns, higher sales-related returns, and wholesale discounts.

Digital Sales Decline: NIKE Digital declined 14% globally, with significant drops in key regions like Greater China (down 36%) and North America (down 16%). This decline is impacting overall revenue and profitability.

Promotional Activity Impact: Promotional activity has been heavier than expected in regions like EMEA, which has affected gross margins and profitability.

Geographic Performance Variability: The company's progress is uneven across geographies, with North America showing strong growth while Greater China and parts of APLA continue to face significant headwinds.

Margin Pressures: Near-term investments to clean up and elevate the marketplace, along with shifts in product and channel mix, have put real pressures on margins.

Leadership and Operational Changes: The company is undergoing significant leadership and operational changes to address inefficiencies and improve decision-making, which may take time to yield results.

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Guidance & Outlook

Revenue Projections: Q3 revenues are expected to be down low single digits, with modest growth in North America and similar performance in Greater China and Converse as in Q2. A 3-point benefit from foreign exchange is anticipated.

Gross Margin Outlook: Q3 gross margins are expected to decline approximately 175 to 225 basis points. Excluding the 315 basis point impact of higher gross product costs related to new tariffs, gross margin expansion would be positive.

SG&A Expenses: Q3 SG&A dollars are expected to increase by low single digits due to higher demand creation and investments in the sport offense.

China Market Strategy: The company plans to adapt its approach to fit China's unique monobrand footprint and digital-first marketplace. This includes scaling initial store pilot momentum, elevating brands across digital platforms, and cleaning up excess inventory.

Product Innovation and Launches: Upcoming launches include the Structure Plus running shoe in January, Nike Mind footwear platform, and Aero-FIT apparel platform debuting in March. The Therma-FIT Air Milano jacket will debut at the Winter Olympics in February.

World Cup Investments: Significant investments are planned to inspire football fans globally, with over 100 NIKE Direct and 1,400 partner doors being refreshed. Booking units for NIKE Football products are nearly 40% higher than World Cup '22.

Margin Expansion Plans: The company aims to return to double-digit EBIT margins through a diverse product portfolio, operational efficiency, and leveraging technology across the company.

Operational Efficiency: A new Chief Operating Officer has been appointed to ensure technology integration across operations, aiming for more efficient and profitable core operations.

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Shareholder Return Plan

The selected topic was not discussed during the call.

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Key Q&A

Q:Could you elaborate on where you've scored runs so far versus where you have opportunities remaining in the turnaround, and your overall confidence in winning the game?

A:Elliott Hill explained that the path to sustainable profitable growth is through 'Win Now' actions and the sport offense. He highlighted progress in areas like North America (9% growth), Running (over 20% growth), and wholesale. However, challenges remain in diversifying the product portfolio, especially in sportswear, and in geographies like China, which has the longest road ahead.

Q:Can you elaborate on the components of gross margin cited, including underlying expansion excluding tariffs for the third quarter and the progression moving forward?

A:Matthew Friend noted that North America's gross margins were down 330 basis points due to 500 basis points of headwinds from new tariffs. For Q3, margins are expected to be down 175-225 basis points, including 315 basis points from tariffs. He highlighted progress in North America and healthy inventory in Europe but noted mixed results in APLA and challenges in Greater China and Converse.

Q:When do you believe the recovery will no longer require the caveat of being non-linear, and when will there be better visibility for investors?

A:Elliott Hill stated that each brand and geography is at different stages of diversification and implementation of the sport offense. He emphasized confidence in the strategy but noted the complexity of operating across 3 brands, multiple sports, and 190 countries. Matthew Friend added that they are taking a 90-day approach to maintain flexibility.

Q:What is the timeline for returning to double-digit EBIT margins, and how deep is the reset needed in China?

A:Elliott Hill emphasized improving margins as a top priority and noted that margins are under pressure due to 'Win Now' actions and tariffs. He stated there is a path back to double-digit EBIT margins but did not provide a specific timeline. Regarding China, he acknowledged the need for a structural reset, including better retail investments and storytelling, and emphasized the long-term opportunity in the market.

Q:How do you see the phasing of growth across verticals, and are there areas with the same level of conviction as Running?

A:Elliott Hill highlighted strong growth in Running, global football, training, SKIMS, and basketball. He noted innovation in products like Vomero Premium and Structure 26 in Running, and Mercurial and Tiempo in global football. He also mentioned a strong pipeline of innovation across Nike, Jordan, and Converse.

Q:Are you happy with the mix of partners in North America, or is there a goal to ramp up new distribution points?

A:Matthew Friend expressed satisfaction with the current mix of partners and noted balanced growth between new and existing partners. He emphasized the consumer-based marketplace strategy and the success of 3-year visions by account.

Q:Is the North America experience a reasonable timeline or playbook for China, and why not provide longer-term targets for double-digit margins?

A:Elliott Hill stated that while actions in China are underway, the timeline is uncertain due to the need for a fresh approach and new capabilities. Matthew Friend emphasized the complexity of the turnaround and the need for flexibility, stating that longer-term targets will be shared as confidence grows.

Q:What product is driving North America revenue growth, and how does wholesale penetration impact operating overhead?

A:Elliott Hill cited growth in Running, global football, training, SKIMS, basketball, and Jordan. He highlighted successful product launches like AJ4 Black Cat and G.T. Future. Matthew Friend noted that wholesale growth creates leverage on the cost structure, particularly in supply chain costs, and emphasized disciplined cost management while prioritizing demand creation investments.

Q:Review of Unclear Management Responses

A:Management avoided providing specific timelines for returning to double-digit EBIT margins and for the recovery in China. They also did not offer long-term targets, citing the complexity of the turnaround and the need for flexibility.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call reveals several challenges: declining revenues in key regions, margin pressures, and digital traffic headwinds. While there are positive aspects like growth in North America and strategic initiatives, the overall sentiment is dampened by significant headwinds in Greater China and digital channels. The Q&A section highlights management's confidence but also reveals uncertainties, especially in China. The lack of clear guidance and the impact of tariffs further contribute to a negative outlook. Given these factors, a negative stock price reaction is expected over the next two weeks.

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NIKE, Inc. (NKE) Q2 2026 Earnings Call Transcript