Nike Comeback Bid Is Threatened By Inventory Reset, Tariffs

Nike Inc.'s turnaround effort is hitting snags as the company tries to clear out old inventory while feeling the effects of a growing trade war.

Shares fell in pre-market trading Friday as the sportswear maker signalled further declines in revenue and profitability from an ongoing merchandise reset that the company says is necessary to renew growth. Nike also expects gross margin to decline sharply in the current quarter from a year earlier, in part due to US tariffs on products from China and Mexico.

Chief Executive Officer Elliott Hill, a longtime Nike executive who came out of retirement to take the top role in October, is looking to guide the company back to growth after a difficult year of falling sales and corporate layoffs. He's reshaping Nike by refocusing on sports and mending relationships with its retail partners.

The shares fell about 7% at the open of trading in New York. The stock had declined 5% this year through Thursday's close, a slightly steeper drop than the S&P 500 Index.

“New management's initiatives are on the right track,” Morgan Stanley analyst Alex Straton wrote in a research note. But the company's comeback will be “long” and “volatile,” making it difficult for investors to “underwrite this turnaround story” in the near term, she said. 

Nike is in the midst of clearing out stale merchandise through heavy discounting as demand fades for some of its biggest sneaker franchises, including Air Force 1s and Dunks. Inventory fell 2% in the period but Chief Financial Officer Matt Friend said those levels remain “elevated across all categories.” 

The company is trying to turn things around against a backdrop of weak consumer spending and fallout from President Donald Trump's escalating trade war. China also remained a weak spot, with sales missing analyst expectations amid a prolonged consumer slump in the market. But performance in North America and the region that includes Europe, Africa and the Middle East came in better than expected. 

In the company's call with analysts, Friend said “geopolitical dynamics, new tariffs, volatile foreign exchange rates and tax regulations” are among factors creating uncertainty. 

In fiscal 2024, China produced 18% of Nike-branded footwear, according to company reports. A company website shows Nike has 117 manufacturing locations in China and eight in Mexico. 

Friend added that Nike will see a double-digit drop in digital traffic in the company's next fiscal year as the company transitions to a new mix of products. 

Revenue fell 9% to $11.3 billion for the fiscal third quarter ended Feb. 28, better than the 11% drop that Wall Street predicted.

The performance shows that “a turnaround is beginning to unfold,” said Poonam Goyal, an analyst at Bloomberg Intelligence. “But the company still has a lot of work to do to reduce inventories.”

Reorganisation

In December, Hill outlined a plan to invigorate Nike by reorganizing around departments that focus on sports such as running, basketball and soccer. The company is also reallocating marketing funds from clicky digital ads to more anthemic sports campaigns. It spent 8% more on marketing in the latest quarter.  

“It's been a tough couple of years,” Hill said during the call. “But what's encouraging is that in the 150 days since I've been back, we've reclaimed our identity.”

Jefferies analyst Randal Konik said the results showed Nike is having “a good start to a two-year journey.” He cited positive signs for new products, the clearance of inventory and the rebuilding of relationships with wholesalers. 

In February, Nike announced a new line called NikeSkims, a partnership with Kim Kardashian's underwear brand. It also aired its first Super Bowl commercial in nearly three decades.

Hill has reshuffled his senior management ranks as well, naming new heads of several departments including human resources, legal and sports marketing. Nike's top strategy and communications executives are exiting, the company told employees in a memo this week.