Nike’s Sept. 30 Earnings: What the Quarter Says About Consumer Demand, China and the Holiday Outlook

Nike’s fiscal Q1 print delivered a rare and positive surprise: revenue rose 1% year over year to $11.72 billion, materially above consensus expectations near $11.0 billion. EPS landed at $0.49, well ahead of the $0.27 that Wall Street anticipated, even as net income declined 31% to $727 million. The positive sales delta was driven by an improving wholesale channel and resilience in North America, validating early elements of CEO Elliott Hill’s strategy shift.

The quality of the beat, however, was tempered by margin pressure. Gross margin fell 320 basis points to 42.2%, reflecting higher discounting associated with inventory clearance and a step-up in tariff costs. Management increased its annualized tariff cost estimate to roughly $1.5 billion, up from $1.0 billion previously, implying a roughly 120-basis-point headwind to fiscal 2026 gross margin versus the prior 75-basis-point outlook. CFO Matthew Friend cautioned that progress will not be linear as different parts of the portfolio recover on different timelines.

Guidance for the seasonally critical second quarter (covering most holiday shopping weeks) was appropriately conservative: revenue is expected to decline in the low single digits year over year, including a roughly 1-point tailwind from FX. Gross margin is guided down 300 to 375 basis points, inclusive of an estimated ~175 bps net impact from incremental tariffs. SG&A dollars are expected to increase in the high single digits, reflecting elevated marketing (demand creation) to support launches and brand heat.

The most visible early win in the quarter was a wholesale rebound. Revenue through wholesale partners rose 7% to roughly $6.8 billion as retailers restocked ahead of key product cycles and as Nike leaned back into relationships it had previously deemphasized. North America led the recovery, with revenue up 4% to $5.02 billion, exceeding sell-side expectations and demonstrating improved sell-in and sell-through cadence.

By contrast, Nike Direct fell 4% to approximately $4.5 billion, with digital softness and ongoing clearance activity weighing on both top line and margins. The direct channel remains critical to Nike’s long-term brand and margin narrative, but the near-term reset requires prioritizing marketplace health over growth. Management signaled that the direct business is not expected to return to growth in fiscal 2026, implying mix effects that could keep gross margin more volatile this year.

Category strength in performance, particularly running, helped offset some of the DTC softness. Management pointed to over 20% growth in the running category as an early read that the sport-first focus is resonating with the core athlete consumer. Re-engagement with Amazon added incremental scale and visibility, with the Nike Brand Store driving stronger-than-anticipated engagement and sales. The balance of improving wholesale momentum and a more muted direct channel should provide distribution flexibility into holiday, even if it moderates the margin profile near term.

Greater China remains the toughest region. Revenue declined 9% year over year, and management described seasonal sell-through as underperforming. The company reiterated that it expects revenue and gross margin headwinds to persist in China throughout fiscal 2026 and emphasized the need for larger investments to clean up the marketplace. That implies continued focus on inventory discipline and product relevance tailored to regional demand patterns, even at the expense of near-term growth.

Converse was a second notable drag, with revenue down 27%. Management guided to continued headwinds from this business in fiscal 2026, compounding the China pressure. The combined effect of a soft Converse and a challenged China augments the earnings sensitivity to the rest of the portfolio—namely North America performance categories and select international markets where new product cycles are accelerating.

Academic work on post-Covid sportswear consumers in mainland China suggests the importance of more granular segmentation and targeted positioning. Clustering analyses of consumer cohorts indicate significant differences in purchasing habits across segments, underscoring the need for precise assortment, pricing, and storytelling. For Nike, that translates to sport-led innovation with localized merchandising, calibrated price ladders, and tighter channel curation to restore full-price sell-through and rebuild brand heat in the region.

Nike’s structural pivot back to a sport-centered organization—aligning Nike, Jordan, and Converse into nimble, sport-led teams—continued in the quarter. The company realigned staff, including a roughly 1% headcount reduction, to sharpen insights, speed innovation, and improve storytelling by sport. Early read-outs from sport-segmented retail formats, such as the New York House of Innovation, suggest double-digit revenue lifts post-refresh, reinforcing the strategy.

On product, Nike is prioritizing a steady cadence of performance-led innovation. Running is leading the way, with new silhouettes and technical updates that management says better connect lab-to-field innovation with consumer-facing messaging. Lifestyle remains strategically relevant, particularly to broaden women’s reach, but the emphasis skews toward athlete needs. The NikeSKIMS collaboration launched with strong early response, indicating that curated partnerships can complement the sport-first approach without diluting positioning.

Inventory remains a coordinated cross-functional effort. Units were down year over year, but higher product costs linked to tariffs offset some gains. Clearance and discounting are still present in the near term, yet management expects less clearance activity in the back half as fresher assortments reach shelves. That should support a gradual improvement in gross margin trajectory—contingent on execution and demand holding—though elevated tariffs and a slower direct channel will still cap upside.

For the holiday quarter, Nike’s low-single-digit revenue decline guide embeds a 1-point FX lift and acknowledges a promotional backdrop that remains elevated. Marketing spend will step up to back new product launches and key retail partners, balancing the need to support sell-through with preserving brand equity. The spring order book is up year over year, led by sport categories, and wholesale is expected to deliver modest growth for the full fiscal year—key mitigants to a slower direct channel.

Tariffs are the marquee cost swing factor for fiscal 2026. The updated annualized tariff estimate of ~$1.5 billion raises the gross margin headwind to ~120 bps for the year from 75 bps previously. Management is pursuing mitigation via sourcing optimization, reducing China footwear import exposure, supplier negotiations, and selective price increases. Even so, Nike’s near-term margin trajectory is now more sensitive to execution, mix, and promotional intensity.

Peer read-throughs reinforce the industry’s tariff sensitivity and uneven U.S. demand. Lululemon’s full-year guide cut—driven in part by the removal of de minimis exemptions and higher rates—highlights profit compression from trade policy changes. In the U.S., discretionary demand pockets remain mixed, with sector performance modestly positive over the last month, while macro conditions reflect a still-resilient labor market and a moderately restrictive policy stance. In the market, Nike shares have rebounded to roughly $74 in recent trading from sub-$70 levels prior to the print, reflecting renewed confidence in the turnaround, tempered by realistic expectations for margin rebuilding.