19 hours ago
Is NIKE's Margin Pressure a Temporary Setback or a Red Flag?
NIKE, Inc. NKE has been grappling with sustained margin pressures for a while. Margins, a critical barometer of profitability, have been under strain for NIKE, due to factors including aggressive discounting to clear excess inventory, rising product and logistics costs, elevated tariffs, currency volatility and changes in channel mix.
In third-quarter fiscal 2025, NIKE's gross profit fell 16% year over year, whereas gross margin contracted 330 basis points (bps) to 41.5%. The gross margin decline was caused by higher markdowns on NIKE Direct, higher wholesale discounts, inventory obsolescence, elevated product costs and headwinds in channel mix.
Persistent margin pressures are expected to continue, as management had predicted the gross margin to decline nearly 400-500 bps in fourth-quarter fiscal 2025, inclusive of the prior-year restructuring charges and anticipated tariff impacts on imports from China and Mexico. Our model predicts gross margin contraction of 450 bps for the fiscal fourth quarter.
Nevertheless, management is confident that the fiscal fourth quarter is likely to reflect higher benefits from NKE's Win Now strategy, with headwinds to revenues and margin likely to moderate thereafter. It continues to manage through external factors, ranging from geopolitical dynamics and tariffs to foreign exchange, tax policies and uncertainty to consumer confidence. In addition, initiatives like full-price selling in digital channels, inventory liquidation, maintaining a full-price orderbook with the wholesale partners, easing tariff-cost pressures, supply-chain diversification, strategic pricing and forward-looking innovations might restore margins on the growth trajectory in the long haul.
How NKE's Peers' Margins Fare?
lululemon athletica inc. LULU and adidas AG ADDYY are the key companies competing with NIKE.
lululemon is focused on driving margins through strategic pricing, innovations, supply-chain diversification and geographic expansion. The company is introducing modest price hikes on high-demand items and launching differentiated products to reinforce its brand. Contrary to NIKE, lululemon has been witnessing improved margin trends for a while now, buoyed by improvement in product margin, supported by lower product costs, reduced damages and better markdowns. These factors led to 60-bps gross margin expansion in first-quarter fiscal 2025 and 100 bps in the preceding quarter. Broad-based gains across channels, categories and key markets, particularly the United States, underscore continued strength and adaptability of its business model. Positive response to its product innovations, newness and brand activations further bolster its margins.
adidas is another sporting goods titan vying for a larger slice of the global sportswear industry. The company has implemented several margin-growth initiatives to boost profitability. These include cutting down on product and freight costs, optimizing product mix, streamlining operations and managing discounting. These efforts have driven gross margin expansion of 0.9 percentage points in first-quarter 2025, backed by reduced product and freight costs and fewer markdowns. The year-over-year rise in adidas brand's gross margin was even more pronounced, increasing 1.6 percentage points. adidas' brand strength including a diversified product portfolio, along with a sharper focus on local consumer preferences and strengthened relationships with retail partners, will continue to serve as the catalysts for growth.
NKE's Price Performance, Valuation and Estimates
Shares of NIKE have lost 17.6% year to date compared with the industry 's decline of 18.1%.
From a valuation standpoint, NKE trades at a forward price-to-earnings ratio of 31.28X compared with the industry's average of 24.76X.
The Zacks Consensus Estimate for NKE's fiscal 2025 and 2026 earnings implies a year-over-year plunge of 45.8% and 12.1%, respectively. The company's EPS estimate for fiscal 2025 has been stable and that of fiscal 2026 has moved down in the past 30 days.
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NIKE stock currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
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