Nike's Q4 Results: A Sustainable Turnaround or a False Dawn?

Nike's fiscal 2025 fourth-quarter earnings revealed a company navigating a storm of headwinds, from macroeconomic pressures to competitive disruptions. While management framed the results as progress toward its “turnaround strategy,” investors are left to discern whether the seeds of recovery have been planted or if the brand's struggles are merely papering over deeper issues. Let's dissect the numbers to determine if Nike's stock rebound is justified.

Sales Declines: A Global Reckoning

Nike's top-line struggles are undeniable. Full-year revenue fell 10% to $46.3 billion, with North America and Greater China—its two largest markets—suffering footwear declines of 13% and 21%, respectively. The NIKE Direct channel, once a growth engine, saw digital sales plummet 20% annually, reflecting overreliance on discounts and shifting consumer preferences.

The wholesale segment fared slightly better, but even that respite is fragile. Competitors like On and Hoka are eroding market share in running and performance categories, while consumers in China and North America grow cautious amid inflation and spending shifts.

Margin Pressures: The Cost of Survival

Gross margins collapsed by 440 basis points in Q4 to 40.3%, the sharpest contraction in years. The pain stemmed from three factors: discounting, inventory markdowns, and tariffs. Management admitted that clearance initiatives and channel mix shifts (e.g., shifting sales to lower-margin wholesale) exacerbated margin erosion. Meanwhile, tariffs—particularly the 30% U.S. duty on Chinese imports—added a persistent drag.

The “Win Now” cost-cutting measures, which reduced operating expenses by 7% annually, provided some relief. However, these savings are a one-time fix. As CFO Matthew Friend noted, the fourth quarter marked the peak financial impact of these actions, implying minimal further benefit in fiscal 2026.

Inventory: A Fragile Stabilization

After years of overstocked warehouses, Nike's $7.5 billion inventory balance is flat year-over-year—a sign of progress, not victory. Management highlighted improvements in North America and EMEA, where markdown rates fell and full-price sales rose. Greater China's 11% inventory decline also signaled aggressive cleanup.

But risks linger. While excess stock is no longer growing, the company still holds $7.5 billion in goods at a time when demand remains uncertain. If consumers don't return, markdowns could resurface, further squeezing margins.

Strategic Shifts: Can “Sport Offense” Save the Day?

Nike's new “Sport Offense” strategy aims to reposition the brand by focusing on core sports categories (running, basketball) and storytelling. Initiatives like the Vomero 18 and the NikeSKIMS collaboration with Kim Kardashian are meant to reignite product excitement. Management also emphasized geographic diversification, with Vietnam and Indonesia emerging as growth hubs.

However, execution is critical. The SKIMS line's delayed launch in China—a market where local competitors like Anta and Li-Ning are gaining traction—could hinder progress. Meanwhile, in North America, Nike must prove it can defend its turf against upstart rivals.

Investor Considerations: The Bulls and Bears

Bull Case:
- Valuation Discount: At 15x forward cash flow, Nike trades below peers like Adidas (17x) and Under Armour (16x), suggesting a margin of safety.
- Margin Recovery: Tariffs on Mexican imports are set to expire in fiscal 2026, and inventory normalization could add 200–300 basis points to margins.
- Catalysts: Successful product launches and stabilization in China could reaccelerate sales.

Bear Case:
- Structural Declines: Footwear sales in key markets are dropping due to both overstock and shifting preferences.
- Tariff Lingering: U.S. duties on Chinese imports remain a profit drag with no clear resolution.
- Competitive Erosion: Brands like On and Hoka are capturing premium segments, leaving Nike in a price war.

Investment Thesis: Wait for Confirmation

Nike's stock has rallied 14% year-to-date on inventory optimism, but the path to sustained growth is narrow. Investors should monitor two key metrics:
1. Gross Margin Recovery: Track Q1 2026 results for signs of stabilization.
2. China Turnaround: Watch for sales growth in Greater China, where Nike's inventory cleanup has been most aggressive.

For now, the stock's valuation offers upside potential, but patience is warranted. Nike's turnaround hinges on executing its strategy flawlessly—a high bar in a choppy retail landscape. Until sales growth resumes and margins rebound, this remains a “hold” with a cautious “buy” if catalysts materialize.

Final Take: Nike's Q4 results are neither a clear victory nor a terminal loss. The brand has stabilized its inventory and cut costs, but its future depends on reawakening demand in its core markets. Investors should treat this as a “wait-and-see” story until the fog of macro uncertainty lifts.