Nike's Latest Earnings Miss Sparks Selloff: A Closer Look at What Went Wrong

The China Factor: A Growing Concern

Nike’s recent quarterly results exposed a troubling trend that’s becoming increasingly difficult to ignore. Greater China sales contracted by 17% year-over-year in the latest quarter, marking a significant deterioration from the prior period’s 9% decline. This represents a sharp reversal for a market that once served as a growth engine for the athletic apparel maker. Competitors like Lululemon are meanwhile gaining traction in the same geography, highlighting Nike’s competitive challenges. The market clearly took notice—shares declined sharply following the earnings announcement on Thursday.

Revenue Growth Masks Deeper Profitability Issues

On the surface, Nike’s fiscal 2026 second-quarter update contained a silver lining. The company reported a 1% year-over-year revenue increase to $12.4 billion, marking the second consecutive quarter of top-line expansion. This represented a meaningful turnaround compared to the 10% revenue decline experienced throughout fiscal 2025.

However, the bottom-line story tells a far different tale. Earnings per share tumbled 32% compared to the prior year, while gross margins compressed by 300 basis points to 40.6%. CEO Elliott Hill characterized the period as part of a “middle innings comeback,” but investors appear skeptical given the margin deterioration. Additionally, the company’s “demand creation” spending—primarily marketing expenses—surged 13% year-over-year, further pressuring profitability.

Direct-to-Consumer Channel Weakness

Another headwind emerged from Nike’s Direct revenue, which declined 8% to $4.6 billion in the quarter. Digital sales proved even weaker, dropping 14%. Since these channels typically generate higher margins by allowing Nike to capture a larger share of each transaction, the shift away from direct sales compounds the profitability squeeze. Management provided no reassuring signals, forecasting a slight revenue decline for the third quarter despite it being a critical holiday season period.

Tariffs and Macroeconomic Pressures Add to the Burden

The earnings commentary highlighted ongoing pressure from tariffs and trade policy uncertainty. Combined with sluggish demand in China and the channel mix shift away from higher-margin direct sales, these forces create a challenging near-term backdrop. Fiscal 2026 is increasingly looking like an extended transition period rather than the beginning of a meaningful earnings rebound.

Is the Valuation Attractive Enough?

Nike currently trades at approximately 30 times earnings. For shares to represent a compelling value opportunity, the company’s turnaround initiatives would need to deliver meaningful results. While a sharp earnings recovery remains possible if management’s strategic actions gain traction, the current price appears to already reflect moderate success in these endeavors.

The question remains whether the recent stock decline has fully priced in the company’s structural challenges or whether additional downside is warranted. At current valuation levels and given the mixed signals from management, a wait-and-see approach may be prudent for prospective investors.