Nike has a limited amount of time to demonstrate the effectiveness of its China strategy. A market that was once thought to be a growth engine has now become its biggest pressure point, as seen by the U.S. sportswear giant's sixth consecutive quarterly sales fall in the nation, which included a 20% decline in footwear.
During the post-earnings call on Thursday, CEO Elliott Hill acknowledged that "it's clear we need to reset our approach to the China marketplace," which accounts for approximately 15% of revenue.
Investors never anticipated a swift return to growth due to Nike's long-standing difficulties in China. However, Hill's strong efforts to reduce legacy lifestyle lines and update product offerings have not even yielded the gradual, steady development investors had hoped for.
Rather, margin pain is increasing: tariff expenses and an abundance of outmoded inventory caused second-quarter gross margins to drop by around 300 basis points. So far this year, Nike's stock has dropped 13%, putting it on course for a fourth consecutive year of falls.
In a consumer market where intense competition and customer fatigue are driving down costs, the fundamental issues are glaring.
Nike's capacity to reproduce its multi-channel domination in the U.S. in China's "monobrand retail landscape" As homegrown businesses like Anta and Li-Ning become more competitive, digital, which is thought to be essential for growth, is faltering, with online sales down 36%.
Online and in-store direct-to-consumer traffic decreased. David Bartosiak, a Zacks analyst, described the segment as a "problem child." When an analyst on Thursday's call asked for a timeline on China's recovery, Hill and Chief Financial Officer Matthew Friend refused to fall for the ruse. A "dynamic environment" and a "complicated" turnaround effort were mentioned by Friend.
"We firmly believe our growth will come through sport," Hill stated, "but the reality is we've become a lifestyle brand competing on price in China."
"PARTLY BY DESIGN" According to a friend, in an effort to increase full-price sales, Nike was cutting back on summer purchases and spring sales events, and they were less promotional than they were at the major Singles Day selling event on November 11 of last year.
Although profitability may suffer in the interim, Bartosiak claimed Nike appeared to be placing a wager that "brand heat and partner relationships will eventually overpower" margin challenges.
"The China results were partly by design, as Nike tries to eliminate obsolete and slow-selling inventory," Morningstar analyst David Swartz continued.
For a few more quarters, at least, Nike had earned the benefit of the doubt, according to Swartz. When Hill became leadership in October 2024, "Nike was in a similar situation in North America" "and the results have gotten better."
