NIKE’s turnaround bumped by tariffs — margins squeezed even as wholesale and innovation are leaned on

What happened

NIKE is accelerating a turnaround that leans on refreshed product innovation and a renewed push into wholesale while deliberately shrinking legacy footwear supply and re‑setting NIKE Digital toward full‑price selling. New U.S. tariffs and persistent discounting have materially squeezed gross margin—FY25 gross margin landed at ~42.7% and Q1 FY26 fell to ~42.2% with a ~320bp hit—turning management’s “temporary reset” narrative into a real test of pricing power. The company still shows a strong balance sheet and positive free cash flow in a weak year, but revenue fell ~10% in FY25 and net income roughly halved, and independent retailer surveys flag share and “brand heat” erosion among Gen‑Z and lifestyle buyers. Market pricing continues to assume a margin recovery (shares trade near ~33x TTM EPS while a conservative DCF sits near $57), so upside is conditional and the margin of safety is limited if tariffs and digital weakness persist. In short, NIKE could re‑ignite growth if innovation and wholesale execution pay off, but tariffs, channel execution risk and faster fashion cycles make a multi‑quarter, possibly multi‑year, reset a realistic outcome rather than a quick snap‑back.

Implication

For investors the practical move is to WAIT and watch: don’t accept management’s temporary‑reset framing as proof. Monitor gross margin moving out of the low‑40s toward the mid‑40s, NIKE Digital reversing double‑digit declines, and evidence Greater China and youth/lifestyle share are stabilizing. If those triggers appear within the next 2–4 quarters, the current valuation (TTM P/E ~33x; DCF ≈ $57) could justify adding exposure; absent them, expect multiple compression and further FCF pressure. Tariffs materially increase downside risk because they limit pass‑through and force deeper promotions, so size any positions conservatively and prefer staged or hedged entries. Use the company’s next quarterly disclosures and independent retail/consumer‑survey data as the decisive inputs for changing the stance.

Thesis delta

The new coverage emphasizing tariff headwinds makes our view modestly more cautious but does not change the WAIT recommendation. We now assign a higher probability that tariffs will stretch the recovery timeline beyond a simple 2–4 quarter reset, while still acknowledging upside if wholesale momentum and innovation drive durable, full‑price sell‑through.