Nike's Q2 Beat Overshadowed by Weak Guidance, Reinforcing Turnaround Concerns

What happened

Nike reported Q2 earnings that exceeded expectations, but management's guidance for Q3 points to a revenue decline and further margin compression, highlighting ongoing challenges in its multi-year turnaround. This follows a difficult FY25 where revenue fell 10% to $46.3B and diluted EPS dropped to $2.16, driven by heavy discounting, weaker NIKE Direct traffic, and adverse channel mix. Persistent headwinds include tariff impacts, China sales declines, and a strategic shift that continues to pressure profitability, with Q1 FY26 showing only 1% revenue growth and a 320 bps gross margin contraction. Despite the earnings beat, the stock trades at a demanding ~34x P/E and ~23x EV/EBITDA, embedding an optimistic recovery scenario not yet visible in the financials. Overall, the turnaround remains incomplete, with no clear evidence of durable margin improvement or demand stabilization in the near term.

Implication

Investors should expect continued stock volatility and potential price declines until Nike demonstrates consistent margin recovery and growth stabilization, which management's guidance indicates is not imminent. The elevated P/E ratio of around 34x implies the market is pricing in a successful multi-year turnaround, but this optimism is premature given ongoing tariff pressures, competitive threats, and execution risks. Key monitoring points include quarterly gross margin trends, direct-to-consumer traffic, and inventory levels to assess progress, but recent data shows deterioration. Until there is clearer evidence of improvement, such as several quarters of margin expansion or reduced discounting, it may be prudent to avoid new positions or trim existing holdings. The lack of margin of safety at current prices reinforces the need for patience, as further operational setbacks could lead to additional valuation compression.

Thesis delta

The recent Q2 earnings beat does not materially change the investment thesis, as guidance for Q3 confirms ongoing revenue and margin pressures that align with the DeepValue report's 'POTENTIAL SELL' stance. This reinforces the view that Nike's turnaround is protracted and valuation remains optimistic, with no shift in fundamentals to warrant a more bullish outlook. Investors should continue to await concrete signs of recovery, such as sustained margin improvement or a valuation reset, before considering a position change.