Nike Shares Slide as Margin Pressure, China Woes Eclipse Profit Beat
The sneaker giant's direct-to-consumer sales fell 8% and gross margins narrowed sharply, signaling strategic headwinds that overshadowed better-than-expected earnings.
Nike Inc. (NKE) shares fell in after-hours trading Thursday after the company reported mixed fiscal second-quarter results that revealed significant strain on profitability and key growth initiatives, undercutting a better-than-expected profit figure.
Investors looked past an earnings-per-share beat, focusing instead on a sharp contraction in gross margins, a notable decline in the high-margin direct-to-consumer (DTC) business, and a steep sales plunge in Greater China. The reaction sends a clear signal that Wall Street is increasingly concerned about the fundamental health of Nike's growth algorithm.
The Beaverton, Oregon-based company posted diluted earnings of $0.53 per share for the quarter ending November 30, surpassing analyst expectations. Overall revenue grew a modest 1% year-over-year to $12.4 billion. However, the top-line stability masked significant underlying challenges. Gross margin fell by 300 basis points to 40.6%, a pressure point that the company attributed in part to higher tariffs and inventory-related costs. The squeeze on profitability resulted in net income falling 32% to $0.8 billion.
Perhaps most concerning for investors was an 8% decline in NIKE Direct revenues, which totaled $4.6 billion. The DTC channel has been the cornerstone of Nike's strategy over the past several years, aimed at boosting margins and owning the customer relationship. The decline suggests this pivotal strategy is facing significant headwinds. In contrast, the company's traditional wholesale business, which supplies retailers, saw revenues climb 8% to $7.5 billion, indicating a potential shift in sales mix back towards lower-margin channels.
Geographic performance also revealed stark divergences. While the North American market remained a source of strength with a 9% revenue increase, sales in Greater China plummeted by 17%. The sharp downturn in this critical growth market, coupled with ongoing economic uncertainty in the region, presents a major obstacle to Nike's global performance. Further weighing on the results was a 30% collapse in sales for the Converse brand, a significant drag on the overall portfolio.
The market's cautious reaction reflects the tension between Nike's headline beats and its operational weaknesses. As Bloomberg noted after the release, the revenue figure was a surprise, but the details have given investors pause. Coming into the report, analysts held a consensus price target of over $83, but the after-hours dip suggests the margin and China issues will be the primary focus for Wall Street in the coming days.