Nike's Apparel Deceleration Confirms Persistent Challenges Amid High Valuation

What happened

Nike's market share decline continues, as highlighted by a recent Motley Fool article pointing to years of erosion and decelerating apparel growth in fiscal 2026 Q2. DeepValue's report corroborates this with Q2 FY26 data showing only 1% revenue growth and a 300 basis point gross margin drop to 40.6% due to tariffs and a wholesale-heavy mix. The article notes that apparel was the only segment with meaningful growth, but it slowed sequentially, indicating weakening demand even in relatively strong areas. Filings reveal deeper structural issues, including double-digit revenue declines in Greater China and a contracting NIKE Direct channel, which undermine earnings recovery. Despite these headwinds, Nike trades at premium multiples like 39x trailing EPS, pricing in a faster turnaround than the fundamentals support.

Implication

The deceleration in apparel growth and persistent market share loss signal that Nike's turnaround is more protracted than consensus expects, with limited near-term catalysts. Tariffs and a reliance on wholesale distribution continue to compress gross margins, likely keeping them near 40-41% through FY27, per DeepValue's base case. China's structural challenges and NIKE Direct contraction further delay earnings inflection, increasing de-rating risk if upcoming quarters disappoint. With no margin of safety at current prices, the stock is vulnerable to downside in the bear scenario where margins stagnate and China declines persist. Therefore, investors should wait for clear evidence of execution on Sport Offense and tariff mitigation, potentially at lower entry points around $55, before reconsidering the investment thesis.

Thesis delta

The new article reinforces DeepValue's 'POTENTIAL SELL' thesis by confirming that market share erosion and growth deceleration are ongoing, aligning with the report's bearish outlook on margins and China. No material shift is warranted, but it underscores the urgency for Nike to demonstrate progress in upcoming quarters, such as Q3 FY26 gross margin trends. Investors should remain aligned with the base case, trimming above $80 and seeking re-assessment only if China stabilizes or margins exceed guidance thresholds.