Nike's Strategic Turnaround: A Valuation Crossroads Amid Structural Gains

Nike's fiscal 2025 fourth-quarter earnings report, released on June 26, underscored a painful but intentional reset. Revenue fell 12% to $11.1 billion, net income plummeted 86%, and shares initially dropped—only to rebound 10% during management's reassurance that the worst of its “Win Now” restructuring had passed. The stock's post-earnings bounce signals a critical inflection point: can Nike's inventory cleanup, margin stabilization, and supply chain diversification justify its depressed valuation?

Inventory Crisis to Controlled Recovery

Nike's inventory levels have stabilized at $7.5 billion, down slightly from $7.8 billion in 2023. While this is a hard-won milestone—the company slashed excess stock through aggressive discounts and clearance sales—the process eroded gross margins to 42.7% for the year, a 190 basis point decline. Yet, management's pivot to premium, sport-centric collections (e.g., running and training footwear) is bearing fruit: North American sales of these categories grew mid-single digits, offsetting broader declines.

The “sport offense” strategy—realigning teams to prioritize athletic performance over lifestyle branding—is a deliberate bet on Nike's core competence. This focus, paired with a $2 billion cost-cutting plan targeting fiscal 2027, could stabilize operating margins around 10% by 2026, up from 8% in late 2024.

Supply Chain Diversification: A Necessity, Not a Cost Drain

Nike's reliance on China for manufacturing has dropped from 16% to the “high single digits,” with Vietnam and Indonesia now key partners. While tariffs on Chinese imports will add $1 billion annually to costs in fiscal 2026, management has outlined mitigants: price increases, supplier partnerships (e.g., Aritzia, Urban Outfitters), and automation. The $1 billion tariff hit is already priced into the stock, with gross margins projected to fall an additional 0.75% in 2026.

Crucially, the shift reduces geopolitical risk. Nike's return to Amazon for direct-to-consumer sales—a move abandoned in 2019—and collaborations like the A'ja Wilson basketball collection demonstrate agility in channel diversification.

Valuation: A Discounted Powerhouse

Nike's stock trades at a price-to-sales (P/S) ratio of 2.5x, near its 10-year low of 2.16x and below its historical average of 3.36x. The forward P/E of 28.5x also lags its five-year average of 33x. This compression reflects skepticism about near-term execution, but it also creates a compelling entry point if management's 2026 stabilization targets are met.

Russell 3000E Dynamics: Exclusion or Opportunity?

Contrary to speculation, Nike was not excluded from the Russell 3000E index during its June 2025 rebalance. Its $136 billion market cap ensures continued inclusion, but the broader Russell reconstitution—driving $220 billion in trades—highlighted a critical truth: Nike's valuation is now a function of intrinsic turnaround execution, not passive fund flows.

While Russell membership avoids tracking-related selling pressure, the stock's recent performance reflects renewed investor faith in its strategic pivot. The post-earnings rebound, fueled by optimism around margin stabilization and China recovery, suggests a buy-the-dip mentality is taking hold.

Risks and Catalysts

• Near-Term Risks: Greater China revenue fell 20% in Q4, and competition from brands like Lululemon remains fierce. Tariffs and supply chain hiccups could delay margin improvements.
• Catalysts: The “sport offense” strategy's results in fiscal 2026 Q1 (reporting in late 2025), inventory turnover metrics, and gross margin resilience will be key metrics. A stabilization in digital sales (down 26% in Q4) would further validate the turnaround.

Investment Thesis: A Bottom in Sight

Nike's stock is pricing in a worst-case scenario: perpetual margin contraction and China stagnation. Yet the structural improvements—inventory control, premium product focus, and diversified supply chains—position it to rebound.

Buy for patient investors: With a 12-month price target of $85–$90 (implying a P/S of 2.8–3.0x), the stock offers a 30–40% upside if fiscal 2026 sales declines narrow to mid-single digits. Avoid short-term traders; this is a 12–18-month play on execution.

In a market obsessed with growth, Nike's reset—painful but purposeful—could be the catalyst for a valuation renaissance. The question isn't whether Nike can recover, but whether investors will bet on its return to the top of the podium.