Nike's Turnaround Tale: Why the Bottoming-Out Phase Presents a Rare Buying Opportunity

Nike (NYSE: NKE) has spent years navigating a perfect storm of tariff headwinds, overstocked inventories, and shifting consumer preferences. But after a brutal fiscal 2025, the athleticwear giant is now showing signs of stabilization—and possibly even a bottoming-out phase. The company's aggressive inventory cleanup, supply chain diversification, and wholesale recovery efforts are laying the groundwork for a margin rebound. Combined with a stock trading at a discount to its historical multiples, Nike presents a compelling value proposition for investors willing to bet on its long-term resilience.

The Inventory Cleanup: A Necessary Evil That's Paying Off

Nike's $7.5 billion inventory backlog—once a glaring weakness—has become a strategic advantage. By slashing reliance on legacy styles like the Air Force 1 and prioritizing high-margin performance footwear (e.g., the Pegasus and Vomero), Nike has reduced overstocked inventory by 5% year-over-year. Gross margins, which dipped to 40.3% in Q4 fiscal 2025, are now stabilizing near 42-43%, thanks to this product rebalancing.

This shift isn't just about cutting costs. It's about focusing on what drives profit: premium, performance-oriented products that command higher prices. The A1 sneaker, co-designed with WNBA star A'ja Wilson, sold out in three minutes and generated $1 billion in sales, proving that Nike can still innovate its way to premium demand.

Supply Chain Diversification: Mitigating Tariffs, Not Just Risks

Nike's “China+1” strategy isn't just about avoiding U.S. tariffs—it's a full-blown overhaul of its manufacturing footprint. Vietnam now accounts for 46% of footwear production, up from 16% in China, while Indonesia and the Philippines handle the rest. This shift has two key benefits:

1. Tariff Mitigation: Reducing exposure to punitive U.S. tariffs (up to 62% on Vietnamese goods) by shifting production to lower-cost regions.
2. Automation Gains: Factories in Vietnam and Indonesia are adopting robotics and AI to offset rising labor costs (up 35% in key hubs). Nike's investments here—like $500 million to build supplier networks in the Philippines—are positioning it for long-term cost discipline.

While geopolitical risks remain (e.g., U.S.-Vietnam trade tensions), Nike's progress in reducing China's share to “high single digits” by 2026 suggests it's on track.

Wholesale Recovery: The Underappreciated Catalyst

Nike's Direct-to-Consumer (DTC) segment has long been the star, but wholesale recovery is the quiet hero of this turnaround. After a 9% revenue decline in Q4 fiscal 2025, management is re-engaging partners through:
- Premium Product Focus: Jordan Brand and running footwear now account for 40% of revenue, attracting retailers hungry for high-margin items.
- Strategic Partnerships: Relaunching on Amazon and expanding women's-focused shops (e.g., Artizia) are opening new channels to consumers, indirectly boosting wholesale demand.

CEO Elliott Hill's “sport offense” strategy—prioritizing innovation in key sports categories—has already borne fruit. Women's footwear sales rose 15% in fiscal 2025, a sign that Nike's brand repositioning is resonating.

Valuation: A Discounted Champion

Nike's stock trades at an EV/EBITDA multiple of 18x—well below its five-year average of 22x—and a P/E ratio of 20x, compared to 25x for peers like Adidas. This discount reflects lingering concerns over China sales (down 15% in Q4) and macroeconomic uncertainty. But the fundamentals suggest it's overdone:

• Margin Stability: Analysts project gross margins to stabilize at 43% by 2026, a 100-basis-point improvement from current levels.
• Free Cash Flow: A $10.3 billion cash pile and $1.2 billion in share buybacks this year give management flexibility to weather near-term dips.

Near-Term Catalysts to Watch

1. Holiday Sales (Q4 Fiscal 2026): Nike's performance during the critical holiday quarter will test whether demand for its premium products holds up. A strong showing here could lift valuation multiples.
2. Tariff Mitigation Progress: Look for updates on Vietnam's trade negotiations with the U.S. and further reductions in China manufacturing exposure.
3. Inventory Turnover: A $7.5 billion inventory pile is still a hurdle, but management aims to clear the backlog by Q3 2026—watch for progress here.

Risks: Don't Ignore the Headwinds

• Geopolitical Volatility: U.S.-China tensions and potential new tariffs could disrupt supply chains.
• Consumer Spending: Inflation-sensitive discretionary buyers may delay purchases, though Nike's brand loyalty offers some insulation.

Final Take: Buy the Dip, but Mind the Timeline

Nike isn't a “set it and forget it” stock. Investors should expect volatility as macro risks (e.g., China's slowdown) linger. But the company's margin stabilization, inventory discipline, and brand rejuvenation make it a compelling contrarian bet. At current valuations, even a return to its historical 22x EV/EBITDA multiple would imply a 22% upside.

Historically, buying NKE on earnings release dates has delivered an average 2.5% gain over 30 days, though the strategy's total return of 2.51% between 2020–2025 underscores its limitations. While the June 2025 earnings beat exemplifies potential upside, the strategy's maximum drawdown of -34.94% and negative excess return highlight the risks of holding through market fluctuations.

The key question: Is Nike's “bottom” already in place? The inventory cleanup, margin stabilization, and wholesale progress suggest yes. For investors with a 12-18 month horizon, this could be a rare opportunity to buy a $30 billion brand at a discount.

Investment Recommendation: Accumulate on dips below $65. Set a price target of $75 (22x EV/EBITDA) with a 12-month horizon. Avoid if macro risks (e.g., recession) accelerate.