Nike's Turnaround Gains Momentum: Is the Bottom In?

The athletic apparel giant Nike (NKE) has faced a brutal stretch of declining sales and margin pressures, but recent quarters have revealed signs of stabilization. With inventory overhangs easing, strategic shifts under new leadership, and a reinvigorated product pipeline, the company is positioning itself to recover from a prolonged slump. For investors, the question is whether these developments mark the start of a sustainable turnaround—or just a temporary pause in a deeper decline.

The Path to Stabilization
Nike's fiscal Q1 2025 results (August 2024) signaled a critical inflection point. Revenue declined 10% year-over-year, but the rate of contraction slowed from prior quarters, while gross margins improved 120 basis points to 45.4%. More importantly, inventories dropped 5% to $8.3 billion, reflecting progress in clearing legacy styles like the Air Force 1 and rebalancing toward performance-driven categories. This "WinNow" strategy—prioritizing core sports like Running and Basketball—has begun to bear fruit.

"text2img>A vibrant image of Nike's latest Running and Basketball footwear, displayed in a modern retail environment

The company's wholesale partnerships also warrant attention. Expanding distribution through Amazon and Dick's Sporting Goods has improved sell-through rates, while NIKE Direct stores showed modest growth (+2% in Q1). These moves address a key weakness: the 26% year-over-year plunge in digital sales, which remains a hurdle.

Margin Headwinds and the Road to Normalization
Despite these positives, margin pressures persist. Tariffs and input cost inflation have cost Nike an estimated $1 billion annually, squeezing gross margins to 43.6% in Q2 (November 2024). The company has offset some of this through pricing power and cost discipline—operating expenses fell 2% in Q1—but the path to normalization remains uneven.

The critical question is whether margins can stabilize as sales decline decelerates. CFO Matthew Friend's guidance suggests headwinds will moderate, with FY2026 poised for recovery. If NIKE can stabilize gross margins near 45% while slowing revenue declines to low single digits, the stock's valuation (currently trading at 20x forward earnings) becomes compelling.

Defending Market Share Against Rivals
Nike's ability to hold its position against competitors like Hoka—a high-margin brand owned by Deckers—remains pivotal. Hoka's focus on cushioned running shoes has siphoned market share, but Nike's reinvigorated Running pipeline (e.g., the Next% series) aims to reclaim dominance. Meanwhile, its "sport offense" strategy—organizing teams by sport rather than demographics—could sharpen innovation and consumer engagement.

The company's digital repositioning is another test. While online sales remain weak, partnerships with Urban Outfitters and localized marketing campaigns (e.g., LA's "After Dark Run Series") signal a shift toward experiential retail. Success here could reverse the NIKE Direct segment's 13% revenue decline in Q2.

Investment Implications
Nike's stock rallied 8% post-its November earnings report, reflecting discounted near-term risks. The shares now trade at a 30% discount to their 52-week high, with a dividend yield of 1.1%. For investors, the key catalysts are:
1. Q1 FY2026 guidance: If revenue declines narrow further (to <5%) and gross margins hold above 44%, the stock could re-rate.
2. Inventory turnover: A sustained decline in inventories (now at $7.5 billion) would reduce discounting pressure.
3. Competitor dynamics: A slowdown in Hoka's growth or new product missteps by Nike could shift momentum.

The Bottom Line
Nike's turnaround hinges on executing its "WinNow" strategy while navigating macroeconomic headwinds. The current valuation reflects substantial pessimism, but the path to recovery—slowing sales declines, margin stabilization, and share defense—is plausible. For investors willing to bet on a multi-quarter stabilization, the stock offers asymmetric risk-reward: limited downside if guidance holds, with upside potential if margins rebound.

The next six months will test whether Nike's strategic pivot is a flash in the pan or the start of a sustained revival. The answer could determine whether this iconic brand regains its footing—or cedes more ground to rivals.

Investment recommendation: Consider a modest position in NKE ahead of FY2026 guidance, with a focus on near-term catalysts and a long-term view on sport-driven innovation.