Why Nike Stock Dropped 11% in June
Key Points
Nike surprised the market with a beat on the top and bottom line in the fiscal fourth quarter.
It's struggling in China, but it's making progress in North America.
A tariff refund is easing pressure on the gross margin.
Nike (NYSE: NKE) stock fell 11% in June, according to data provided by S&P Global Market Intelligence. Investors were feeling negative about it as it got closer to earnings, especially since competitor Lululemon Athletica reported disappointing results early in the month. But it's already bouncing back.
No fast turnaround
Nike has gotten into a quagmire as several headwinds converged on it at the same time. It started with some internal decisions that didn't turn out as expected, including curtailing wholesale partnerships in favor of its direct-to-consumer business and devoting resources to its long-term franchises in place of innovating in sport. As these actions dragged on sales, inflation soared, hurting it further, and tariff changes put tremendous pressure on profits.
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Image source: Nike.
It's taken meaningful action to get back on track, starting with getting a new CEO. It has reversed the wholesale mess and restructured operations to get back into the innovative spirit, with a commitment to speed in getting new products to market. The inflation piece is still in place, but it's lapping the tariff changes and also getting a refund for some of it.
Nike released its fiscal 2026 fourth-quarter (ended May 31) report this past week, which was mixed. Full-year revenue was flat, while fourth-quarter revenue was down 1%. Wholesale revenue increased 4% year over year in the quarter, while direct-to-consumer revenue fell 7%. The bright spot was gross margin, which increased 8.9 percentage points to 49.2% with the refunded tariffs, and earnings per share of $0.72, including a $0.52 benefit for the same reason, up from $0.14 last year.
Investors are hopeful
Nike stock fell after the report, but it made a full recovery and is on the rise again. While there were some severely negative updates, led by a 17% sales decrease in China in the fourth quarter from last year and the lowering of near-term guidance, there were several more positive updates.
The company beat on both the top and bottom line, and the easing of the tariff issue was a relief for the market. For the full year, wholesale revenue increased double-digit in North America. And while sales guidance was lowered due to unexpected changes in global shopping behaviors related to the Iran war, the company is responding by tightening inventory, and it expects further improvement in the gross margin.
In other words, while the recovery has been hampered, it appears to be in progress, and Nike stock is up 4% since the report.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Lululemon Athletica Inc. The Motley Fool has a disclosure policy.
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