Nike's Running Gains Mask Persistent Sportswear and China Weaknesses in Ongoing Turnaround

What happened

Nike's running segment is showing strong performance, as highlighted in recent news, offering a positive signal amid broader challenges. However, this strength is offset by lingering softness in sportswear and continued weakness in the critical China market, which remains a drag on overall momentum. According to DeepValue analysis, Nike's FY25 revenue fell 10% with EBIT margin plummeting from 12.7% to 8.2%, driven by aggressive discounting, tariff impacts, and strategic missteps. Q1 FY26 saw only 1% revenue growth and a further 320 basis points of gross margin erosion, indicating that the company's multi-year product and channel reset is still in early stages. With S&P downgrading Nike's credit rating and competitive pressures intensifying, the path to regaining full brand momentum remains uncertain and fraught with execution risk.

Implication

The mixed performance underscores that Nike's turnaround is uneven, with running gains failing to compensate for broader portfolio issues, suggesting investors should not overreact to positive headlines. Gross margin erosion from ~$1.5 billion in annual tariff costs and persistent discounting threatens profitability recovery, requiring vigilant monitoring for stabilization by late FY26. At a current P/E of 32x and a stock price above DCF-based intrinsic value, there is limited margin of safety if the company's repair efforts falter or take longer than expected. Key investment monitors include sustainable mid-single-digit revenue growth in North America and China, along with evidence of reduced discounting and tariff mitigation to support margins. Until these factors show consistent improvement, the risk/reward skews toward caution, with capital better deployed elsewhere until clearer signs of a durable recovery emerge.

Thesis delta

The news confirms that Nike's recovery remains fragmented, with running segment strength not yet translating to broader portfolio health, which aligns with DeepValue's view of a protracted repair cycle. No material shift in the investment thesis is warranted; the 'WAIT' recommendation stands, as the company must demonstrate balanced growth and margin stabilization before justifying a more optimistic stance.