Nike: Is a Turnaround in the Stock Near?

Key Points

• Nike is working to turnaround its business under new CEO Elliott Hill.

• In fiscal Q1, the company saw a nice recovery in its wholesale business, particularly in North America.

• However, the company still has a long way to go to get back on track.

• 10 stocks we like better than Nike ›

Nike (NYSE: NKE) shares rallied after the sneaker and apparel maker's fiscal first-quarter results showed some signs of a potential turnaround. The stock, however, is still down slightly on the year and has fallen by more than 40% over the past five years.

Let's take a closer look at Nike's recent earnings to see if a turnaround is near and if investors should be buying the stock.

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Image source: Getty Images.

Signs of progress

While its overall quarterly results and guidance were nothing to write home about, Nike did make some good progress in key areas. Its two largest regions, North America and EMEA (Europe, Middle East, and Africa), have been a drag on the company, with North America seeing a 9% decline in revenue last fiscal year and EMEA a 10% decrease. However, both regions posted positive sales in fiscal Q1.

North America revenue rose 4% in the quarter to $5 billion, with apparel sales climbing 11% and footwear revenue flat. EMEA sales jumped 6%, although they were up just 1% in constant currencies, with apparel sales up 11% and footwear revenue rising 4%. The company said in North America that it saw double-digit growth in running, training, and basketball, but that was largely offset by a 30% decline in its classic footwear franchises. EMEA saw some similar trends with double-digit growth in running but a decline in classic footwear.

One of CEO Elliott Hill's goals since taking over has been working to improve wholesale relationships, and that appeared to pay off in the quarter. Overall, wholesale revenue grew 5%, and climbed 11% in North America and 4% in EMEA.

Nike Direct sales, however, were lower in both regions. In North America, Nike Direct sales fell 3%, with Nike Digital revenue falling 10% and flat sales at its stores. EMEA was a similar story, with Nike Direct revenue down 6%. Digital sales sank 13%, while store revenue edged up 1%. Nike stated that its EMEA region is closest to achieving a full-price business model for Nike Direct, while North America is leading the transformation efforts for future growth.

While North America and EMEA saw solid sales growth, China remained a drag, with revenue falling 9%. The company said both store traffic and sell-through were headwinds. Nike Direct sales dropped 12%, with digital sales plunging 27%, while wholesale revenue sank 9%. Asia Pacific and Latin America sales, meanwhile, rose by 2%.

Nike continues to discount to clear inventory, which, together with tariffs, is weighing on its gross margins and profits. Gross margins fell 320 basis points to 42.2%, while its earnings per share (EPS) sank 30% in the quarter to $0.49.

Looking ahead, Nike issued cautious guidance. It said tariffs would be a significant cost headwind, upping its original projection from a $1 billion impact to $1.5 billion. As a result, it now expects the impact to hurt gross margins by 120 basis points, up from an earlier outlook of 75 basis points.

For fiscal Q2, Nike is looking for revenue to decline by low single digits, with a gross margin decline of between 300 basis points and 375 basis points. Tariffs will be a 175 basis point headwind in the quarter.

Is it time to buy Nike stock?

Nike showed some solid progress this quarter, particularly in North America, as its wholesale business posted a nice improvement. However, this quarter also showed how far the company needs to go to really get back on track.

Nike Direct remains a drag, and the company does not expect it to return to growth this year. It's working to make its stores and digital platform premium destinations, but it still has a lot of work to do to achieve this transition. Meanwhile, tariffs continue to be a headwind, and its classic footwear business and China remain a drag. These are multiple issues the company is trying to remedy.

As Nike's earnings power has faded, it's left the stock with a pretty high valuation. The stock now trades at a forward price-to-earnings (P/E) ratio of around 44 times analysts' fiscal 2026 estimates. The company needs to get back to selling more full-price merchandise to lift sales and gross margins, which will drive earnings. However, that will take time, and tariffs add another obstacle to its recovery.

I wouldn't chase the stock here but would be more interested at a lower price.

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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool has a disclosure policy.