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Nike Earnings: Positive Signs Amid a Frustratingly Slow Turnaround; Shares Attractive
Nike's recent performance has been characterized by flat sales in fiscal 2026's third quarter, with 3% growth in North America largely offset by significant challenges in Greater China and Europe, the Middle East, and Africa. Gross margins declined by 130 basis points to 40.2% due to higher tariffs, and operating margins fell to 4.9% from 7% primarily due to layoff-related severance costs. This follows a period of sales declines in fiscal 2025, driven by excess inventory, lackluster product development, and soft sportswear demand, particularly in Greater China where sales plummeted 17% in Q3 2025 and are expected to be down 20% in Q4 2026.
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Morningstar Report
Summary of Recent Performance and Outlook
Nike's recent performance has been characterized by flat sales in fiscal 2026's third quarter, with 3% growth in North America largely offset by significant challenges in Greater China and Europe, the Middle East, and Africa. Gross margins declined by 130 basis points to 40.2% due to higher tariffs, and operating margins fell to 4.9% from 7% primarily due to layoff-related severance costs. This follows a period of sales declines in fiscal 2025, driven by excess inventory, lackluster product development, and soft sportswear demand, particularly in Greater China where sales plummeted 17% in Q3 2025 and are expected to be down 20% in Q4 2026.
Despite these near-term headwinds, the company is actively implementing CEO Elliott Hill's "Win Now" plan, focusing on operational efficiency, inventory cleanup, product innovation, and strengthening relationships with wholesale partners and the global sports community. While the turnaround is progressing slower than anticipated, with sales declines expected to continue in fiscal 2026, particularly in the first half, Morningstar forecasts a return to mid-single-digit sales growth and double-digit operating margins by fiscal 2028. The fair value estimate has been slightly reduced to $102 from $104 due to the dim near-term outlook, but the shares are currently considered significantly undervalued.
Positive Investment Signals
Significant Undervaluation: Nike's shares are currently trading at $44.62, representing a 0.45 Price/Fair Value ratio against our fair value estimate of $90-$110. This indicates a substantial discount, suggesting a high likelihood of appreciation beyond a fair risk-adjusted return over a multiyear timeframe.
Expected Long-Term Margin Recovery: Despite current pressures from tariffs and inventory, Nike's gross margins are projected to recover significantly, reaching 46% by fiscal 2028 and gradually rising to 48% over the next 10 years. Similarly, EBIT margins are forecast to increase from a low of 6.2% in fiscal 2026 to 17% over the next decade, driven by improved inventory management, a shift to direct-to-consumer sales, product mix changes, and price increases.
Strategic Turnaround and Market Position: CEO Elliott Hill's "Win Now" plan, which includes aggressive channel cleanup, new product releases, and rebuilding wholesale relationships, is showing positive signs, particularly with 3% sales growth in North America in Q3 2026. The company's strong brand and market leadership position it to benefit from an eventual recovery in global sportswear demand, especially in developing markets like China where long-term compound average growth of 8% is expected.
Negative Investment Signals
Persistent Regional Weakness and Tariff Impact: Nike continues to face significant sales declines in key international markets, with Greater China sales down 10% constant-currency in Q3 2026 and expected to be down 20% in Q4 2026. Higher US tariffs are projected to result in $1.5 billion in new annualized expenses in fiscal 2026, reducing gross margins by an estimated 120 basis points and contributing to a forecast full-year EBIT margin of 6.2% for fiscal 2026.
Slow Turnaround and Increased Competition: The turnaround process is described as "frustratingly slow" and "not imminent”, with sales declines anticipated to persist through fiscal 2026. Nike's market dominance, particularly in running shoes, is being challenged by innovative newcomers like Hoka and On, highlighting a need for more compelling product development to regain lost market share.
Near-Term Profitability Erosion: The company's profitability has been negatively impacted by layoff-related severance costs, which contributed to a drop in operating margin to 4.9% in Q3 2026. The full impact of turnaround initiatives is not expected until fiscal years 2027 and 2028, implying continued near-term pressure on earnings per share, which is forecast to decline to $1.59 in fiscal 2026.
Metric FY 2026 FY 2028 Long-Term
Gross Margin 40.7% 46% 48%
EBIT Margin 6.2% 3.2% 17%
Nike possesses a wide economic moat, primarily derived from its powerful intangible brand asset, which enables premium pricing and is expected to generate economic profits for at least two decades. As the world's largest athletic footwear and apparel brand, it maintains a leading market share across major categories and geographies, shipping products to over 190 countries. The company consistently invests over $500 million annually in research and development, fostering a culture of technical innovation that underpins its product quality and performance. Its extensive network of sponsorships with elite athletes and major sports leagues, coupled with the enduring success of sub-brands like Jordan, provides unparalleled global visibility and credibility. Strategically, Nike has been expanding its direct-to-consumer channels, with DTC sales accounting for 42% of Nike brand revenue in fiscal 2025, a move aimed at enhancing brand control and full-price selling. The company also demonstrates exemplary capital allocation, consistently generating adjusted returns on invested capital well above its cost of capital and returning significant cash to shareholders through dividends and share repurchases.
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