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Nike (NYSE: NKE) released its fiscal Q3 earnings yesterday and the stock is trading sharply lower in US premarkets today. While the sneaker giant posted better-than-expected earnings in its fiscal third quarter, its guidance for the current quarter fell short of estimates.
Nike reported revenues of $11.27 billion in the quarter that ended in February. While the company’s sales fell 9% YoY, they were ahead of the $11.01 billion that analysts were expecting. While it saw “strong sales” in December, it saw “double digit” declines in January and February. Nike joins the long list of companies in the retail industry that have warned that sales have weakened this year amid a macro slowdown.
Nike Reported Better-Than-Expected Earnings in Fiscal Q3
Nike’s gross margins contracted 330 basis points to 41.5% in the quarter. Its adjusted EPS fell to $0.54 but easily surpassed the $0.29 that analysts were expecting. Meanwhile, while Nike’s earnings were better than expected, the company’s fiscal Q4 guidance spooked investors. The company expects its sales to fall at the “low end” of the “mid-teens range” which is worse than the 11.4% fall that analysts were expecting.
During the earnings call, CFO Matt Friend said that Q4 will have the “largest impact from our Win Now actions” which are the steps that the company is taking to turn around its sagging business. Friend however said “that the headwinds to revenue and gross margin will begin to moderate from there.”
According to Friend, “We are also navigating through several external factors that create uncertainty in the current operating environment, including geopolitical dynamics, new tariffs, volatile foreign exchange rates and tax regulations, as well as the impact of this uncertainty and other macro factors on consumer confidence.”
Nike Direct Sales Fell More Than Wholesale Sales
Nike Direct sales fell 12% YoY to $4.7 billion in fiscal Q3. The company’s Wholesale sales fared relatively better and fell 7% to $6.2 billion. Notably, Nike’s previous CEO John Donahoe revamped its sales and distribution strategy to focus on the Direct channel – which includes both its stores and online sales through its website. In the process, the company cut down on wholesalers which are an important distribution channel.
The strategy paid off well during the COVID-19 pandemic when many people pivoted to ecommerce and Nike’s online sales soared. However, by cutting back on wholesalers, Nike opened the gate for competition to occupy its shelf space. While direct sales are invariably high margin as compared to channel sales, the strategy backfired as people returned back to stores – many of which did not either have Nike products or had limited stock.
Last year, Nike replaced Donahoe as its CEO and brought back Elliott Hill who worked at the company for 32 years before retiring in 2020. He has been trying to revive Nike’s sagging fortunes and among others has been rebuilding relations with third-party sellers.
Hill Admits to Challenges
During the earnings call, Hill admitted that Nike’s troubles are deeper than what he previously thought. “I spent some time over there in December. I hadn’t been over there in a while. The competition is a bit more aggressive than what I remembered,” said Hill.
He added, “I’ll start by saying I’m proud of the progress we made against the key actions we committed to 90 days ago. While we met the expectations we set, we’re not satisfied with our overall results,” while stressing that “We can and will be better.”
Nike Dobles Down on Wholesale Sales
In response to an analyst question about the wholesale channel, Hill admitted, “We were probably working probably too siloed, direct versus wholesale, and again, I think to really drive the potential of our brand and our revenue and to meet consumers’ needs, it’s got to be integrated.”
He added, “It’s got to be an aligned approach to both direct and wholesale digital and physical, it all has to work together in a consistent ecosystem. And so, I’m really driving hard this idea of an integrated consumer-led marketplace, let the consumer decide where they want to choose to shop.”
Nike Would be Impacted by Trump’s Tariffs on China
While Nike works with suppliers across the globe, roughly a quarter of these are in China. President Trump has slapped additional tariffs of 20% on China which will increase Nike’s costs for the company.
While Nike did not provide granularity on the topic including whether it would absorb the additional costs or pass them on to customers, it said that its gross margin guidance includes the impact of the tariffs.
Friend added, that the company is “navigating through several external factors that create uncertainty in the current operating environment, including geopolitical dynamics, new tariffs, volatile for rates and tax regulations as well as the impact of this uncertainty and other macro factors on consumer confidence.”
Billionaire Bill Ackman Has Raised His Position in NKE
Pershing Square’s Bill Ackman initiated a position in Nike in the second quarter of 2024 and has raised his bets in subsequent 2 quarters. Notably, Nike shares have underperformed terribly amid the company’s woes but some fund managers see the fall as an opportunity to accumulate shares.
Meanwhile, Nike shares have been sliding after peaking in late 2021. The stock is in the red in 2025 also and looks set to increase its drawdown further after it failed to impress with its earnings and guidance.
