Nike's Turnaround Gains Momentum Despite Tariff Headwinds
Nike (NKE) is showing positive signs of a turnaround, reporting better-than-expected first-quarter results. Wholesale revenue rose, and running gear sales surged, but the company is still grappling with rising tariff costs and underperforming "classic" footwear lines.
Key Takeaways from Nike's Q1 Performance
- Nike shares are up following the earnings report, signaling investor confidence in the company's recovery.
- Wholesale revenue increased, and running gear sales saw a significant jump last quarter.
- The athletic brand faces ongoing challenges, including higher-than-anticipated tariff expenses and weak sales in its "classic" footwear franchises.
- CEO Elliott Hill believes the "Win Now" turnaround campaign is effective.
Positive Performance Indicators
Nike reported a 5% year-over-year increase in wholesale revenue and a 20% surge in running gear sales for the quarter. The company also highlighted robust spring wholesale orders, a strong initial response to its collaboration with Kim Kardashian, and the potential boost from the upcoming World Cup next summer. Investors have generally welcomed Nike's ongoing recovery, with shares recently up 5%, close to their 2024 finish.
“I’m even more convinced that the Win Now actions are absolutely the right focus for our teams,” Hill said. “With that said, we’re also realistic that we are turning our business around in the face of a cautious consumer, tariff uncertainty and teams that are settling [in].”
The Impact of Tariffs
The evolving landscape of trade policy continues to present challenges. Nike now anticipates annual tariff expenses of $1.5 billion, up from the previous estimate of $1 billion. The company, along with other footwear manufacturers like Steve Madden (SHOO) and VF Corp. (VFC), relies heavily on finishing footwear production in countries subject to import taxes.
Manufacturing Locations and Cost Mitigation
In the last fiscal year, approximately 51% of Nike brand footwear was completed in Vietnam, 28% in Indonesia, and 17% in China. Nike is actively reducing its production in China, where tariffs have fluctuated significantly, while simultaneously collaborating with partners to lower costs and increase prices.
Challenges and Future Outlook
Despite overall positive results, Nike faces challenges with its classic footwear franchises, including Jordan and Converse shoes, which experienced a 30% decline in North America. The company is shifting its focus towards expanding its sports gear business. Citi analysts predict that overall traffic and transactions may be impacted by the reduced promotional activity. Nike anticipates a low single-digit percentage decline in sales and lower profit margins for the current quarter.
Q1 Financial Highlights
Nike reported $11.7 billion in sales, surpassing the $11 billion consensus estimate among analysts, and $0.49 in diluted earnings per share.
