Nike's Q4 Earnings: Can Margin Pressures and Inventory Woes Be Turned Around?

Nike's fiscal Q4 2025 earnings painted a stark picture of a company grappling with declining margins and inventory challenges. Revenues fell 12% to $11.1 billion, while net income plummeted 86% to $211 million. Yet, beneath the headline figures lie critical questions: Are these pressures temporary, or do they signal deeper structural issues? And can Nike's turnaround strategy—centered on cost discipline and product innovation—rescue its profit margins and fuel future growth?

Margin Pressures: A Temporary Squeeze or Long-Term Concern?

Gross margin collapsed by 440 basis points to 40.3% in Q4, the lowest in years, driven by aggressive discounting and shifts toward lower-margin wholesale and clearance sales. Full-year gross margin also dipped 190 basis points to 42.7%, with inventory obsolescence reserves adding to the pain. The immediate culprit? A perfect storm of delayed product launches (e.g., the Skims collaboration), rising tariffs (now at 30% on Chinese imports), and weak demand in key markets like Greater China.

But management insists this is the “peak impact” of its restructuring—dubbed the “Win Now” strategy—aimed at cutting costs and streamlining operations. CFO Matthew Friend noted headwinds would moderate, and CEO Elliott Hill emphasized confidence in the “sport offense” reorganization, which prioritizes high-demand categories like running and basketball.

The key question: Can these moves stabilize margins? Analysts project a 200–300 basis point rebound in gross margins by fiscal 2026 as tariffs ease and inventory overhangs clear. However, Nike's reliance on discounts to clear stock raises a red flag. If this becomes常态化, it could permanently compress margins. For now, the flat year-over-year inventory level ($7.5 billion) suggests progress in managing excess stock, but sustained full-price sales will be critical to avoid further markdowns.

Inventory Management: Progress, but Challenges Remain

While inventories stayed flat at $7.5 billion, this stability was hard-won. Nike slashed digital sales by 26% in Q4 to focus on clearance channels, and wholesale partners reduced orders. Yet, inventory turnover—the rate at which stock is sold—remains under pressure. Nike's direct-to-consumer segment, once a growth engine, now struggles: NIKE-owned stores grew only 2%, while digital sales cratered.

The silver lining? Nike is doubling down on high-margin direct sales. Its “sport offense” strategy aims to drive demand for premium, story-driven products (e.g., Air VaporMax, collaborations like NikeSKIMS). If successful, this could reduce reliance on wholesale and discounts. Meanwhile, the company's $9.2 billion cash pile provides a cushion to weather the storm.

Strategic Shifts: Can the “Sport Offense” Reinvigorate Growth?

Nike's turnaround hinges on two pillars:
1. Product Innovation: Prioritizing high-demand sports like running, basketball, and training. The Vomero 18 and Air Max 2025 exemplify this focus.
2. Brand Relevance: Rebuilding consumer connection through storytelling and digital engagement.

Early signs are mixed. North American sales dropped 13%, but owned stores stabilized. Greater China, once a growth powerhouse, saw a 21% revenue decline—a worrying sign given its 20% contribution to global sales. However, Nike's 30% digital sales penetration in China (vs. 19% globally) hints at untapped potential in e-commerce.

The bigger risk? Competitors like Lululemon and Adidas are nipping at Nike's heels with faster innovation cycles and localized strategies. To reclaim momentum, Nike must execute flawlessly on its “sport offense” while navigating macroeconomic headwinds.

Investment Implications: Buy the Dip, or Wait for Proof?

Nike's stock trades at 15x forward cash flow—a discount to peers like Lululemon (29x) and Under Armour (17x). This valuation reflects skepticism about its ability to recover margins and grow. However, three factors make it worth watching:

1. Margin Recovery Potential: Analysts anticipate a gross margin rebound to ~45% by fiscal 2026. If achieved, EPS could rebound sharply.
2. Shareholder Returns: Despite earnings pain, Nike maintained dividends (+6%) and repurchased $3 billion in shares in 2025. A $18 billion buyback program (with $6 billion remaining) could support the stock.
3. Long-Term Catalysts: Emerging markets (e.g., Vietnam, Indonesia) and digital expansion in China offer growth opportunities.

The Bottom Line: Nike's near-term struggles are real, but its structural issues—inventory management and margin pressure—are addressable. Investors should wait for two signs of progress:
- Sustained stabilization in gross margins (above 42%) by early 2026.
- A rebound in Greater China sales, which could unlock a key growth lever.

Until then, Nike remains a “hold” with upside potential if the turnaround takes hold. For the bold, the current valuation offers a speculative entry point—but patience is key.

Data as of June 26, 2025. Past performance does not guarantee future results.