10-Q: NIKE Q1 FY26 Earnings: Revenue Up, Profit Down Amid Discounts

NIKE, Inc. reported a 1% increase in revenues to $11.7 billion for the first quarter of fiscal 2026, but net income declined 31% to $727 million, primarily due to higher discounts and product costs.

Summary

• Revenues for the first quarter of fiscal 2026 increased 1% to $11.720 billion compared to $11.589 billion in the prior year, though currency-neutral revenues decreased 1%.
• Net income decreased 31% to $727 million, down from $1.051 billion in the first quarter of fiscal 2025.
• Diluted earnings per common share fell 30% to $0.49 from $0.70 in the comparable prior-year period.
• Gross margin contracted by 320 basis points to 42.2%, primarily due to higher discounts with wholesale partners, increased discounts in NIKE Brand factory stores, higher product costs (including new tariffs), and changes in channel mix.
• Inventories as of August 31, 2025, were $8.114 billion, an 8% increase compared to May 31, 2025, driven by product mix and an increase in units.
• NIKE Direct revenues decreased 4% on a reported basis (5% currency-neutral) to $4.514 billion, mainly due to a 12% decline in NIKE Brand Digital sales and a 1% decline in NIKE stores sales.
• NIKE Brand wholesale revenues increased 7% on a reported basis (5% currency-neutral) to $6.839 billion, driven by an increase in units, partially offset by increased discounts.
• The company returned approximately $0.7 billion to shareholders through dividends and share repurchases during the quarter.
• Strategic actions include reducing the supply of certain footwear, repositioning NIKE Brand Digital as a full-price platform, reinvesting in wholesale distribution, and increasing investment in demand creation.

Sentiment

Score: 3

Explanation: Despite a slight revenue increase, the substantial decline in net income and gross margin, coupled with underperformance in the NIKE Direct segment and Converse, indicates significant operational headwinds. The strategic repositioning, while aimed at long-term value, is currently impacting profitability negatively. The cessation of share repurchases due to lower operating cash flows further underscores the challenges.

Positives

• Overall revenues increased 1% to $11.720 billion.
• NIKE Brand wholesale revenues grew 7% on a reported basis (5% currency-neutral) to $6.839 billion, driven by higher unit sales.
• North America revenues increased 4% on a currency-neutral basis, with wholesale revenues up 11%.
• Europe, Middle East & Africa (EMEA) revenues increased 1% on a currency-neutral basis, with wholesale revenues up 4%.
• Asia Pacific & Latin America (APLA) revenues increased 1% on a currency-neutral basis, with wholesale revenues up 6%.
• Lower warehousing and logistics costs contributed approximately 50 basis points to gross margin.
• Favorable changes in net foreign currency exchange rates, including hedges, increased gross margin by approximately 30 basis points.
• Approximately $0.7 billion was returned to shareholders through dividends and share repurchases.
• Maintains a strong liquidity position with $8.6 billion in Cash and equivalents and Short-term investments as of August 31, 2025.

Negatives

• Net income decreased 31% to $727 million.
• Diluted earnings per common share decreased 30% to $0.49.
• Gross margin declined by 320 basis points to 42.2%.
• Lower NIKE Brand average selling price (ASP) reduced gross margin by approximately 250 basis points, primarily due to higher discounts and channel mix.
• Higher NIKE Brand product costs, including new tariffs in North America, decreased gross margin by approximately 100 basis points.
• Converse's gross margin contracted by approximately 30 basis points.
• NIKE Direct revenues decreased 5% on a currency-neutral basis, with NIKE Brand Digital sales down 12% and NIKE stores sales down 1%.
• Greater China revenues decreased 10% on a currency-neutral basis, with digital sales down 27% and store sales down 4%.
• Converse revenues decreased 28% on a currency-neutral basis across all territories.
• Cash provided by operations decreased $172 million to $222 million.
• Inventories increased 8% to $8.114 billion from May 31, 2025.
• Share repurchases were moderated and ultimately stopped during the quarter due to lower operating cash flows.

Risks

• Geopolitical dynamics, tax regulation, fluctuating foreign currency exchange rates, and evolving tariff policies create uncertainty and volatility in the operating environment.
• New tariffs are expected to result in a gross incremental cost of approximately $1.5 billion on an annualized basis, with a negative impact on gross margin for fiscal 2026.
• An adverse resolution of the Belgian Customs claim for alleged underpaid duties could have a material adverse effect on results of operations, financial position, and cash flows.
• Intense competition among designers, marketers, distributors, and sellers of athletic or leisure footwear, apparel, and equipment.
• Difficulties in anticipating or forecasting, and responding to changes in consumer preferences, consumer demand, channel mix, and various market factors.
• General risks associated with operating a global business, including exchange rate fluctuations, inflation, import duties, quotas, sanctions, political and economic instability, conflicts, and terrorism.
• The potential impact of new and existing laws, regulations, or policies, including those relating to tariffs, import/export, trade, taxes, wages, labor, and immigration.
• Difficulties in implementing, operating, and maintaining increasingly complex information technology systems and controls.
• Fluctuations and difficulty in forecasting operating results, including that advance orders may not be indicative of future revenues.
• The ability to sustain, manage, or forecast growth and inventories.
• Increases in the cost of materials, labor, and energy used to manufacture products.
• Adverse publicity and an inability to maintain reputation and brand image.
• The loss of significant customers or suppliers.
• Increases in borrowing costs due to any decline in debt ratings.

Future Outlook

Expect a negative impact on gross margin for fiscal 2026 due to new tariffs, with an estimated gross incremental cost of approximately $1.5 billion on an annualized basis. Strategic actions, including reducing footwear supply, repositioning NIKE Brand Digital, reinvesting in wholesale, liquidating inventory, and increasing demand creation, are expected to negatively impact revenues and profitability in the short term. However, these actions are believed to reignite brand momentum and reposition the business for long-term shareholder value. The timing of financial impacts from these actions will vary by segment. The company will continue to evaluate the impact of new accounting pronouncements (ASU 2023-09 and ASU 2024-03) on its disclosures. It is reasonably possible that total gross unrecognized tax benefits could decrease by up to $228 million within the next 12 months due to expected resolution with the IRS. Existing cash, short-term investments, and operating cash flows, along with access to external funds, are believed to be sufficient to meet capital needs for the next twelve months and beyond.

Management Comments

• "We are navigating through several external factors that create uncertainty and volatility in the operating environment, including, but not limited to, geopolitical dynamics, tax regulation, fluctuating foreign currency exchange rates and evolving tariff policies."
• "As a result of new tariffs, we expect a gross incremental cost of approximately $1.5 billion on an annualized basis."
• "We are taking actions to mitigate the impact of new tariffs; however for fiscal 2026, we expect a negative impact on gross margin."
• "We are focused on driving distinction within key sports, building a complete product portfolio, creating stories to inspire and emotionally connect with consumers, and elevating and growing the entire marketplace."
• "We believe these actions will reignite brand momentum and reposition our business to drive long-term shareholder value."
• "During the first three months of fiscal 2026, we continued to moderate and ultimately stopped repurchases under our existing share repurchase program due to lower operating cash flows in the current year."
• "The existing program remains authorized by the Board of Directors and we may resume share repurchases in the future at any time, depending upon market conditions, our liquidity and capital needs and other factors."
• "We continue to expect funding of share repurchases will come from operating cash flows and excess cash."
• "In the opinion of management, based on its current knowledge and after consultation with counsel, the Company does not believe any currently pending legal matters will have a material adverse impact on the Company's results of operations, financial position or cash flows, except as described below [Belgian Customs Claim]."

Industry Context

The filing highlights a challenging global operating environment, citing geopolitical dynamics, tax regulation, foreign currency fluctuations, and evolving tariff policies, which are common headwinds for multinational consumer goods companies. NIKE's strategic shift to reposition NIKE Brand Digital as a full-price platform and reinvest in wholesale distribution suggests an adaptation to market dynamics, potentially balancing the growth of direct-to-consumer channels with the importance of traditional retail partnerships. The increased markdowns and discounts to liquidate inventory and create capacity for new products indicate a competitive market and potential oversupply, a trend observed across various retail sectors. The emphasis on innovative, 'must-have' products and deep consumer connections aligns with broader industry efforts to differentiate brands and build loyalty in a crowded and rapidly changing consumer landscape.

Legal Proceedings

• Belgian Customs Claim: The company has received claims for alleged underpaid duties related to products imported beginning in fiscal 2018. The company disputes these claims and is engaged in the appellate process, having issued bank guarantees. The company is unable to estimate the range of loss, but an adverse resolution could have a material adverse effect on results, financial position, and cash flows.
• European Commission Investigation: In January 2019, the European Commission opened a formal investigation to examine whether the Netherlands breached State Aid rules when granting certain tax rulings to the company. The company believes the investigation is without merit, but an adverse resolution could lead to increased income taxes for prior periods in the Netherlands.

Stakeholder Impact

• Shareholders: Experienced a significant decline in net income and diluted EPS. Share repurchases were moderated and stopped due to lower operating cash flows, potentially impacting shareholder returns. Dividends of $0.40 per common share were paid.
• Employees: Higher wage-related expenses contributed to operating overhead. Stock-based compensation expense was recognized.
• Customers: Benefited from higher discounts and markdowns, particularly in factory stores and through wholesale partners. Repositioning NIKE Brand Digital as a full-price platform may alter the digital shopping experience.
• Suppliers: The company has $1,314 million in outstanding supplier obligations confirmed as valid under voluntary supplier finance programs.
• Wholesale Partners: Experienced increased discounts and sales returns, alongside the company's stated intent to reinvest in wholesale distribution.
• Regulatory Authorities: The company is subject to ongoing audits by the U.S. Internal Revenue Service (IRS) and an investigation by the European Commission regarding tax matters.

Next Steps

• Continue to evaluate the impact of new tax law changes (ASU 2023-09 and ASU 2024-03) on disclosures.
• Monitor changes to import and export policies of the U.S. and other countries.
• Continue actions to mitigate the impact of new tariffs.
• Drive distinction within key sports, build a complete product portfolio, create inspiring stories, and elevate the marketplace.
• Reduce the supply of certain footwear products and rebalance the footwear portfolio.
• Reposition NIKE Brand Digital as a full-price platform and reinvest in wholesale distribution.
• Liquidate inventory through increased markdowns and higher sales returns/discounts with wholesale partners.
• Make investments to elevate the presentation of brands in physical retail.
• Increase investment in demand creation (brand marketing and sports marketing).
• Potentially resume share repurchases in the future, depending on market conditions, liquidity, and capital needs.
• Continue the appellate process for the Belgian Customs claim.

Key Dates

Recommendation

While the Q1 FY26 results show significant declines in profitability and gross margin, driven by strategic repositioning and external headwinds like tariffs, the company is actively addressing these issues. The moderation of share repurchases due to lower operating cash flows is a concern, but the company maintains a strong liquidity position and is investing in long-term brand momentum. The strategic shift towards rebalancing channel mix and managing product supply could yield positive results in the future, but the short-term outlook remains challenging. A 'Hold' recommendation reflects the current headwinds and the uncertainty surrounding the timing and effectiveness of the strategic initiatives, suggesting investors monitor progress rather than buying into current weakness or selling off long-term potential.

Keywords

NIKE, NKE, athletic footwear, apparel, sportswear, SEC filing, 10-Q, earnings, financial results, gross margin, inventory, direct-to-consumer, wholesale, tariffs, Greater China, Converse, North America, EMEA, APLA, shareholder returns, stock repurchase, dividends, risk management, foreign currency, supply chain