Nike warns of deeper margin pressure as turnaround weighs on profits

Footwear retail giant Nike Inc. posted second-quarter results that beat revenue expectations but underscored the rising cost of its turnaround, as shrinking margins, weak China demand, and higher tariffs sent shares tumbling following the release of its financial performance on December 18.

The world’s largest sportswear company reported revenue of $12.4 billion for the quarter ending November 30, up 1% year on year and above analysts’ estimates of $12.22 billion. However, net income fell 32% to $800 million, while diluted earnings per share dropped to $0.53.

Gross margin declined 300 basis points to 40.6%, marking the second consecutive quarterly slide and highlighting persistent pressure on profitability.

Margin pressure

Nike said margins will remain under strain, forecasting another 175 to 225 basis-point decline in the current quarter, which includes the crucial holiday shopping season. Shares fell sharply as investors reacted to the outlook and lingering uncertainty around the company’s recovery timeline.

Sales in Greater China plunged 17%, extending a losing streak to six straight quarters. While Nike has long warned that recovery in China would lag North America, the prolonged slump is testing investor patience. “It is a concern that the China results continue to be so poor,” said Morningstar analyst David Swartz.

CEO Elliott Hill, who took over in 2024, said the results were “slightly better” than they anticipated 90 days prior but “nowhere near our potential,” describing Nike as being in the “middle innings” of its comeback.

Hill has pivoted the company back toward core sports such as running and football, rebuilt ties with wholesale partners like Dick’s Sporting Goods, and shifted focus from legacy sneaker lines to newer products.

That strategy has come at a cost. Wholesale sales rose 8% to $7.5 billion, but Nike Direct revenue fell 8% to $4.6 billion as digital sales slumped and the company leaned on promotions to clear old inventory. Third-party retail typically delivers lower margins than direct-to-consumer sales, adding to near-term pressure.

Tariffs remain a major headwind. CFO Matthew Friend reiterated that steep US tariffs on Southeast Asian manufacturing hubs are expected to cost Nike about $1.5 billion this year, contributing significantly to margin erosion.

Analyst’s comment

“Just as it would be unreasonable to expect a record finish time from a marathon runner who is still recuperating from the flu, so it is unreasonable to expect Nike to be producing robust numbers when it is mid-way through its recovery program,” Neil Saunders, managing director of research firm GlobalData, said in a note to Business and Technology News Today.

“In this context, today’s numbers are fair, and they show some signs of progress,” he stated, adding that this is especially so in North America, where revenue grew by a solid 8.8%. “Here, some better traction in the running category helped to fuel the numbers, which is pleasing since this is an area where Nike has made a lot more effort in innovation and storytelling.”

Muted outlook

The quarter also exposed uneven brand performance. While the core Nike brand and new initiatives such as NikeSKIMS showed resilience, Converse revenue tumbled 30% amid a broader reset, and the Jordan brand has room to improve, Hill said.

Nike expects third-quarter revenue to fall in the low single digits, compared with market expectations of a 1.5% decline, reinforcing investor concerns that the recovery will be gradual rather than swift, according to a Reuters report.

“The challenge for Nike is to replicate this success across other sporting divisions, which is something the group is working on, and we believe will start to deliver towards the end of this fiscal year,” Saunders said.

The GlobalData analyst added that a lot more work is also needed in carving out a more distinct position for Nike in the casual and fashion arena, where other brands continue to take the lead in terms of marketing and visibility in retail channels.

“Although this is on Nike’s radar, we believe it is an area where the company remains behind the curve,” he said.

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