Nike fails to contain margin bleed amid tariffs, turnaround, as shares fall

• Sales in China fell for the sixth straight quarter, down 17%
• Nike's recovery strategy includes focus on core sports and retail partnerships
• Tariffs from Southeast Asia cost Nike $1.5 billion this year, CFO says
• Nike's revenue beat estimates, net income fell 32% year-on-year
• Gross margin fell 300 basis points, expected further decline this quarter

By Juveria Tabassum and Nicholas P. Brown

Dec 18 (Reuters) - Nike NKE.N on Thursday reported a drop in gross margins for the second consecutive quarter, as poor sales in China and efforts to reset its product mix continued to vex the struggling sportswear giant, sending shares down 10%.

The results were "slightly better than we had anticipated 90 days ago" but "nowhere near our potential," said CEO Elliott Hill on a post-earnings call, insisting that the company remains "in the middle innings" of its recovery.

Sales in China fell for the sixth straight quarter, tumbling 17%, and while the company has insisted recovery would be slower there than in North America, observers are starting to show signs of impatience.

"It is a concern that the China results continue to be so poor," said Morningstar analyst David Swartz.

Nike is trying to regain its cultural cachet after a string of subpar quarters that have seen it lose market share to younger, hipper brands like On ONON.N and Hoka DECK.N.

CEO Hill, who took the reins in 2024, has built a recovery strategy based on core sports like running and football, reestablishing ties with retail partners such as Dick's DKS.N and shifting focus from classic shoe lines to newer ones.

But it's led to a short-term hit on margins: third-party stores tend to sell at lower prices than direct-to-consumer retail, and Nike's strategy for clearing out old inventory has involved heavy discounts.

Tariffs remain a "significant headwind," Hill added on Thursday's call. CFO Matthew Friend reiterated the company's expectation that U.S. President Donald Trump's steep tariffs on the Southeast Asian nations where Nike manufactures most of its products will cost the company $1.5 billion this year.

TURNAROUND IS 'COSTING REAL MONEY'

The company's gross margin for the quarter ended November 30 fell 300 basis points, and Nike expects margins to fall between 175 and 225 basis points in the current quarter. Hill said Nike's full recovery won't be linear.

But his insistence that Nike was in the "middle innings" of its recovery — comparing the brand to the powerhouse Los Angeles Dodgers who, in October, won their third World Series in six years — seemed not to land with investors hungry for specifics about a timeline for growth.

Among the questions asked by analysts on Thursday's call were pleas for more detail on what exactly "middle innings" meant, and a request for a timetable on China.

"The best way to think about it is, we have the dimensions of our businesses moving at different speeds," Hill said. Geographically, for example, North America is strong while China remains weak, he explained.

Likewise, the Nike brand was performing well, and new product lines like NikeSKIMS — the company's partnership with Kim Kardashian's women's wear brand — have shown promise. But there's room for improvement with the Jordan brand, Hill said, and Converse faces a reset after a leadership change in July.

The results reminded "investors that this turnaround is still costing real money," said David Bartosiak, analyst at Zacks Investment Research. "This was not a clean quarter. Nike showed resilience on the top line, but earnings power is under pressure."

Nike's second-quarter revenue came in at $12.43 billion, above analysts' average estimate of $12.22 billion, according to data compiled by LSEG.

The company expects revenue for the third quarter, which includes the December holiday shopping period, to be down in the low-single digits, compared with estimates of a 1.5% fall.

Second-quarter net income fell 32% from a year earlier, but adjusted earnings per share of 53 cents beat estimates of 38 cents.