NKE

Nike ($NKE) Directors Buy $4.5M, But China's 5th Quarterly Decline and Margin Collapse Push Turnaround to 'Post-2026' Story

12/30/2025 21:27

Three Nike ($NKE) directors purchased approximately $4.5 million in shares over the past six months, with Timothy Cook buying $2.95 million, Jorgen Vig Knudstorp $1 million, and Robert Holmes Swan $500,000—all near the 52-week low of $52.28. However, Nike's harsh reality makes this insider buying signal hard to take at face value. Nike is the global sportswear giant operating across North America, Europe, Asia, and Latin America, generating $46.5 billion in annual revenue through footwear, apparel, and equipment sales. The company owns the Jordan Brand and Converse subsidiaries and maintains an exclusive NFL uniform contract through 2038, demonstrating enduring brand power. Yet shares are down 19% year-to-date and have plummeted 57% over five years as competitors capture market share. The December 19 Q2 results (ended November 30, 2025) superficially beat expectations: revenue of $12.4 billion exceeded the $12.1 billion estimate, and EPS of $0.53 surpassed the $0.37 forecast by 43%. However, revenue growth was essentially flat year-over-year (+0.59%), and net income plunged 26%. More alarming is margin compression—gross margin fell 100 basis points to 43.6%, and management warned of an additional 300-350 basis point decline in Q3. China's weakness is particularly severe. Greater China revenue declined 8% in Q2, marking the fifth consecutive quarterly decline. Local brand competition from Li-Ning and Anta, combined with consumption weakness, makes recovery timing uncertain. North America fell 8%, EMEA dropped 7%, and direct sales (stores + digital) plummeted 13%, with digital revenue collapsing 21%. Wholesale channels declined 3%. Every segment is contracting—a structural crisis. New CEO Elliott Hill, who took over in October 2024, is implementing a 'WinNow' turnaround strategy focused on returning to sport-centric positioning. He's reversing predecessor John Donahoe's direct-to-consumer push, rebuilding retail partner relationships, reducing supply of lifestyle products like Air Force 1s, Dunks, and Jordan 1s to restore brand scarcity, and launching innovation in core sports categories including running, basketball, and soccer. The NikeSKIMS partnership with Kim Kardashian's label is a positive move into women's athleisure. The problem: this strategy needs time. Hill stated improvements won't begin until H2 FY2026 (June-November 2026)—meaning investors must endure 9-12 more months of pain. Meanwhile, aggressive discounting to clear old inventory continues, with 50% of digital sales at promotional prices, further pressuring margins. Tariff burdens are substantial. Nike estimates $1 billion in tariff costs for FY2025. US tariffs of 20% on Vietnam (which produces 50% of Nike's footwear) and 40% on transshipped goods directly hit profitability. While the company plans price increases, weak consumer purchasing power raises demand concerns. Supply chain diversification can't happen quickly. Institutional investors are exiting. In Q3 2025, 1,136 institutions reduced positions versus 945 that increased. Wellington Management sold $834.7 million, Pacer Advisors liquidated 98.4% ($420.1 million), Two Sigma dumped $275.3 million, and Sands Capital exited entirely ($266.7 million). Institutions worry about turnaround uncertainty and valuation. Analysts disagree—all 12 rate it Buy with a median $73 price target (19% upside from $61.19). Goldman Sachs, Truist, Piper Sandler, Needham, and Guggenheim recently reaffirmed Buy ratings. Yet the gap between institutional outflows and analyst optimism is stark. Wall Street bets on the turnaround story while real money flees risk. Competitive pressures intensify. On Holding, Deckers Outdoor (Hoka brand), and Lululemon are capturing share through innovation and premium positioning. Particularly in running, Hoka and On threaten Nike's dominance. UK retailer JD Sports noted Nike products comprise 45% of sales and praised product innovation and retailer relationship improvements, but market reaction remains skeptical. Valuation is unjustifiable. P/E of 35.78x and forward P/E of 38.46x are inappropriate for a stagnant-growth company. With the S&P 500 averaging low-20s P/E, Nike's premium is excessive. EV/EBITDA of 30.71x is also elevated. A business with declining revenue and compressing margins trading at growth-stock multiples is contradictory. Even granting turnaround expectations, current pricing assumes perfect execution. Positive factors exist: the NFL contract through 2038 ensures stable cash flow; the NikeSKIMS partnership targets women's markets; certain running products are gaining traction; women's basketball is growing; and Hill's 32-year sports industry experience demonstrates leadership capability. Inventory remains flat year-over-year, limiting overhang risk. The dividend also matters—$1.64 annually yields 2.68%, with 23 consecutive years of increases. An $18 billion share repurchase program is ongoing, with $11.3 billion executed through Q2. Financial health is sound: debt-to-equity of 80.1% and $8.3 billion cash. Bankruptcy risk is near zero. Yet these positives don't offset structural problems: uncertain China recovery timing, persistent tariff burdens, margin compression, intensifying competition, and rich valuation. Near-term catalysts are absent. Q3 results will worsen (expected double-digit revenue decline, 300-350 basis point further margin contraction), and turnaround effects won't appear until H2 2026. Investors should watch clear criteria: First, China revenue decline moderating or stabilizing. Second, margin decline reversing (gross margin recovering above 44%). Third, wholesale channel recovery (quarterly growth turning positive). Fourth, digital sales normalizing (promotional mix falling below 40%). Until these four confirm, it's not time to buy. From a price perspective, if shares fall below $55, the valuation would improve to P/E ~30x, creating some appeal. Given analyst Jay Sole's (UBS) lowest price target of $62, further downside is possible. If Q3 results come in worse than guidance or China issues additional warnings, retesting the 52-week low of $52.28 cannot be ruled out. Long-term, Nike's brand power and global distribution remain formidable assets. If Hill's strategy succeeds, China stabilizes, and tariff burdens ease, the company could return to a growth trajectory post-2027. But that's 18-24 months away minimum. There's insufficient reason to invest now. Director purchases reflect long-term bottom-fishing, not imminent recovery. In conclusion, Nike has turnaround potential but faces unfavorable timing and valuation. Current pricing embeds an optimistic scenario assuming perfect execution, with unattractive risk/reward. Existing holders should consider stop-losses below $55 on further declines. New buyers should wait for China stabilization signals or margin improvement evidence. Patient long-term investors might consider phased buying in the $52-55 range after additional correction.