Nike: Why the 'Buy the Dip' Strategy May Backfire Now

Nike (NKE) has long been the gold standard of athletic wear, but its recent struggles in China, persistent inventory overhang, and margin erosion are testing the limits of its "buy the dip" appeal. While CEO Elliott Hill's strategic overhaul aims to revive the brand's core strengths, investors must weigh whether the near-term risks—driven by macro headwinds and operational challenges—outweigh the long-term potential.

The Near-Term Risks: China's Decline and Inventory Overhang

Nike's Q4 fiscal 2025 results underscore a stark reality: the company's China revenue is projected to drop 20.4% year-over-year, hitting $1.48 billion. This decline reflects weakening consumer demand, exacerbated by lingering effects of pandemic-related restrictions and increased competition from rivals like Hoka and On Running. Analysts warn that inventory cleanup—particularly for classic franchises like the Air Force 1 and Jordan 1—may not conclude until September 2025, with headwinds persisting into fiscal 2026.

The inventory overhang has already taken a toll on margins. In Q3 fiscal 2025, gross margins contracted by 330 basis points to 41.5%, driven by discounts, markdowns, and channel mix shifts. Nike forecasts a further decline of 400–500 basis points in Q4, as tariffs and clearance efforts intensify. These pressures are compounded by foreign exchange volatility and weak demand in key regions like EMEA and Greater China.

Hill's Turnaround Play: Potential for Long-Term Gains?

Hill's "Win Now" strategy focuses on three pillars:
1. Product Innovation: Shifting away from over-reliant classic franchises to performance-driven categories like running and basketball.
2. Wholesale Partnerships: Rebuilding trust with retailers like Foot Locker and JD Sports to balance DTC and wholesale channels.
3. Brand Revival: Reconnecting with athletes and communities through localized campaigns and premium storytelling.

Early signs of progress include stabilizing revenue above expectations in Q2 and a renewed NFL contract. However, execution remains critical. Analysts note that Nike's running category—where it has lost ground to Hoka—requires aggressive innovation to regain share. Meanwhile, the shift from discounts to full-price sales risks further short-term sales declines, as seen in North America's 12% drop in NIKE Digital sales.

Valuation and Investment Considerations

Nike's stock trades at 15.8x forward earnings, a discount to its five-year average of 23.5x. While this suggests some value, the near-term risks may not yet be fully priced in. Key concerns:
- China's Uncertainty: A recovery in sales and margins hinges on navigating geopolitical tensions and shifting consumer preferences.
- Margin Recovery Timeline: Gross margins are unlikely to stabilize before fiscal 2026, with cost cuts and new product cycles needed to offset declines.
- Competitive Pressures: Rivals' faster growth in performance categories leaves little room for error in execution.

Why 'Buy the Dip' Might Backfire

Investors betting on a rebound risk overlooking two critical factors:
1. Inventory Cleanup Duration: Analysts estimate the overhang will persist through 2025, with clearance sales continuing to depress margins.
2. Brand Equity Risks: Over-reliance on discounts to clear inventory could further dilute Nike's premium positioning, harming long-term pricing power.

The Bottom Line

Nike's story remains compelling for those with a multi-year horizon, but the near-term path is fraught with execution risks. While Hill's strategy addresses core weaknesses, the stock's valuation—though lower—does not yet compensate for the uncertainties of China's recovery, inventory overhang, and margin pressures.

Investment Advice: Avoid aggressive "buy the dip" positions until clearer signs of stabilization emerge, such as improved inventory turnover or margin resilience. Consider a wait-and-see approach, with a focus on fiscal 2026 earnings for confirmation of a turnaround. For now, the risks may outweigh the rewards for all but the most patient investors.