10-Q: Nike Q2 Earnings Miss, Gross Margin Hit by Tariffs

Nike reports a 32% drop in net income and a 300 basis point decline in gross margin for Q2 FY26, impacted by higher tariffs and strategic marketplace adjustments.

Summary

• Revenues for the second quarter of fiscal 2026 increased 1% to $12.4 billion, but were flat on a currency-neutral basis.
• Net income for the second quarter decreased 32% to $792 million, down from $1.163 billion in the prior year.
• Diluted earnings per common share fell 32% to $0.53 for the quarter, compared to $0.78 in the prior year.
• Gross margin for the second quarter contracted by 300 basis points to 40.6%, primarily due to higher tariffs in North America and lower average selling prices.
• NIKE Brand wholesale revenues increased 8% to $7.5 billion, driven by North America, but partially offset by declines in Greater China and Asia Pacific & Latin America.
• NIKE Direct revenues decreased 8% to $4.6 billion, with NIKE Brand Digital sales down 14% and NIKE stores sales down 3%.
• Inventories as of November 30, 2025, increased 3% to $7.7 billion, driven by increased product costs including higher tariffs.
• Cash provided by operations for the first six months of fiscal 2026 decreased by $642 million to $801 million, primarily due to lower net income and unfavorable working capital changes.
• Share repurchases were paused during the first quarter of fiscal 2026 due to lower operating cash flows, with no shares repurchased in the second quarter.
• Converse revenues decreased 30% on a reported basis and 31% currency-neutral, with EBIT down 108% for the quarter, reflecting a strategic brand reset.

Sentiment

Score: 3

Explanation: The sentiment is negative due to significant declines in net income and EPS, substantial gross margin contraction driven by tariffs and discounts, and underperformance in key segments like Greater China and Converse. The pause in share repurchases and a debt rating downgrade further contribute to a cautious outlook, despite some positive performance in North America wholesale.

Positives

• North America revenues increased 9% on a currency-neutral basis for the quarter, with wholesale revenues up 24% due to marketplace management actions and expanded distribution.
• Operating overhead expense decreased 4% for the quarter, driven by lower wage-related expense and other administrative costs.
• Favorable changes in net foreign currency exchange rates, including hedges, increased gross margin by approximately 40 basis points for the quarter.
• Lower warehousing and logistics costs contributed positively to gross margin, increasing it by approximately 50 basis points for the quarter.

Negatives

• Net income decreased 32% and diluted EPS decreased 32% for the second quarter.
• Gross margin contracted by 300 basis points to 40.6% for the quarter, primarily due to higher tariffs and lower average selling prices.
• NIKE Direct revenues declined 8% for the quarter, with NIKE Brand Digital sales down 14% and comparable store sales down 3%.
• Greater China revenues decreased 17% on a reported basis and 16% currency-neutral for the quarter, with EBIT down 49%, impacted by declining store traffic and elevated promotional activity.
• Converse revenues decreased 30% on a reported basis and 31% currency-neutral for the quarter, with EBIT down 108%, reflecting a strategic brand reset.
• Cash provided by operations decreased by $642 million for the first six months of fiscal 2026.
• Share repurchases were paused during the first quarter of fiscal 2026 due to lower operating cash flows, and no shares were repurchased in the second quarter.
• Moody's Investor Services downgraded Nike's debt rating from A1 to A2 in November 2025.

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 and a negative impact on gross margin for fiscal 2026.
• Declining store traffic, elevated promotional activity, and higher inventory levels in Greater China are negatively impacting revenues and profitability, with expected continuation throughout fiscal 2026.
• The strategic reset of the Converse brand and marketplace is expected to continue having negative impacts throughout fiscal 2026.
• The outcome of the Belgian Customs Claim for alleged underpaid duties is uncertain and could have a material adverse effect on results of operations, financial position, and cash flows if resolved against the Company.
• The Company is subject to taxation in various jurisdictions and is currently under audit by the U.S. IRS for fiscal years 2017 through 2023, with potential changes to unrecognized tax benefits.
• A formal investigation by the European Commission into Netherlands tax rulings could result in additional amounts assessed for prior periods if adversely resolved.

Future Outlook

The Company expects a negative impact on gross margin for fiscal 2026 due to new tariffs, which are projected to incur a gross incremental cost of approximately $1.5 billion on an annualized basis. Negative impacts from Greater China and Converse are expected to continue throughout fiscal 2026. Management believes ongoing product, marketplace, and brand management actions will reignite brand momentum and reposition the business for long-term shareholder value, despite current negative impacts on revenues and profitability.

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."
• "We are taking actions to mitigate the impact of new tariffs; however for fiscal 2026, we expect a negative impact on gross margin."
• "North America has made the most progress against these actions, while Greater China and Converse will take more time."
• "In Greater China, a trend of declining store traffic, elevated promotional activity and higher levels of inventory across the marketplace are negatively impacting revenues and overall profitability."
• "Converse is in the midst of a strategic reset of the brand and marketplace."
• "We believe these product, marketplace and brand management actions taken across our portfolio will reignite brand momentum and reposition our business to drive long-term shareholder value."

Industry Context

Nike's performance reflects broader industry challenges, including shifting consumer preferences towards wholesale channels, increased promotional activity, and the impact of geopolitical factors like tariffs. The decline in digital sales traffic suggests a potential saturation or shift in online consumer engagement, contrasting with the previous trend of strong direct-to-consumer growth. The struggles in Greater China highlight regional economic headwinds and intense competition, a common theme for global brands. The strategic reset at Converse indicates a need for brand revitalization in a competitive casual footwear market.

Comparison to Industry Standards

• NA

Management Changes

Legal Proceedings

• The Company is subject to a Belgian Customs Claim for alleged underpaid duties related to products imported beginning in fiscal 2018. The Company disputes these claims and is in the appellate process, but the final outcome is uncertain and could have a material adverse effect.
• The European Commission opened a formal investigation in January 2019 to examine whether the Netherlands breached State Aid rules when granting certain tax rulings to the Company. An adverse resolution could lead to increased income taxes for prior periods in the Netherlands.

Stakeholder Impact

• Shareholders: Negative impact on earnings per share and a pause in share repurchases, potentially affecting shareholder returns. Debt rating downgrade could impact investor perception.
• Employees: Changes in management structure (e.g., elimination of Chief Commercial Officer role) and potential impacts from cost management efforts.
• Customers: Increased markdowns and discounts may benefit consumers in the short term, while repositioning NIKE Brand Digital as a full-price platform could alter the shopping experience.
• Suppliers: Participation in voluntary supplier finance programs continues, with $1.164 billion in outstanding obligations confirmed as valid, indicating ongoing business relationships.
• Creditors: Moody's debt rating downgrade from A1 to A2, though facility fees and interest rates remain unchanged, could signal increased risk perception.

Next Steps

• Continue to evaluate the impact of ASU 2023-09 (Income Taxes) on disclosures.
• Continue to evaluate the impact of ASU 2024-03 (Income Statement Expense Disaggregation Disclosures) on disclosures.
• Continue to evaluate the impact of ASU 2025-09 (Derivatives and Hedging) on financial statements and disclosures.
• Monitor changes to U.S. and other countries' import and export policies.
• Continue actions to mitigate the impact of new tariffs.
• Accelerate product innovation and reduce the supply of certain footwear products to rebalance the footwear portfolio.
• Reposition NIKE Brand Digital as a full-price platform and reinvest in wholesale distribution.
• Liquidate inventory through increased markdowns across NIKE Direct and higher sales returns and discounts with wholesale partners.
• Increase investment in demand creation, including brand marketing and sports marketing, to support key product launches and sports moments.
• Potentially resume share repurchases in the future, depending on market conditions, liquidity, and capital needs.

Key Dates

Recommendation

The filing presents a mixed but predominantly negative picture. While North America wholesale shows strength, overall profitability (net income, EPS, gross margin) has significantly declined due to tariffs, lower ASPs, and struggles in key international markets like Greater China and for the Converse brand. The pause in share repurchases and a debt rating downgrade are concerning. The company is undertaking strategic actions to rebalance its marketplace and reignite brand momentum, which are long-term positive initiatives, but they are currently negatively impacting short-term financial performance. Given the significant headwinds and the ongoing strategic adjustments, a 'hold' recommendation is appropriate. Investors should monitor the effectiveness of the strategic initiatives and the impact of tariffs, particularly in Greater China and for Converse, before considering a stronger position.

Keywords

Nike, NKE, Quarterly Report, Earnings, Gross Margin, Tariffs, Direct-to-Consumer, Wholesale, Greater China, Converse, Footwear, Apparel, SEC Filing, Financial Results