NKE Analysis: Nike's $97 Billion Turnaround Under New CEO Elliott Hill — Down 21% From Highs as New Balance and Tariffs Squeeze the Swoosh
Key Takeaways
- Nike trades at $65.40 with a 38x trailing P/E — a premium that reflects turnaround expectations rather than current earnings power, with forward estimates suggesting compression to roughly 28x.
- Revenue has stabilised and is trending upward, reaching $12.43 billion in Q2 FY2026, but gross margins of 40.6% remain below Nike's historical 44-46% range due to heavy discounting.
- The balance sheet provides a robust safety net with $8.35 billion in cash, a 2.06 current ratio, and manageable net debt of $4.31 billion — giving CEO Hill room to invest in the turnaround.
- New Balance's 19% revenue surge to $9.2 billion and gains by On Running and Hoka represent the most serious competitive threat Nike has faced in a generation.
- The March 19 earnings report is the next major catalyst — investors should watch for evidence of stabilising market share and improving margins before committing to a full position.
Nike, Inc. (NYSE: NKE) is at an inflection point. The world's largest athletic footwear and apparel company trades at $65.40 — down 21% from its 52-week high of $82.44, though up 25% from the $52.28 low it touched in 2025. The stock's $97 billion market capitalization still dwarfs every competitor, but the narrative has shifted dramatically from the days when Nike commanded a premium multiple as the undisputed king of global sportswear.
New CEO Elliott Hill, who took the reins after a decades-long career inside Nike, has acknowledged the problems: over-reliance on a few legacy franchises, a botched direct-to-consumer pivot that alienated wholesale partners, and margin erosion from markdowns. His turnaround plan centres on relaunching performance innovation — including the ACG outdoor brand unveiled in Milan this week — rebuilding wholesale relationships, and cutting costs. The market is cautiously optimistic, pricing the stock at 38x trailing earnings while waiting for proof that the strategy is working.
The February 19 CNBC report that New Balance's 2025 sales surged 19% to $9.2 billion underscores the competitive pressure Nike faces. Add Trump's new 10% global tariff — which directly impacts Nike's Asia-heavy supply chain — and the turnaround task becomes even more daunting. Yet Nike's scale, brand power, and $8.3 billion cash position give it resources that no competitor can match. The question is whether Hill can deploy them fast enough.
Valuation: Premium Multiple Reflects Turnaround Expectations, Not Current Earnings
Nike trades at a trailing P/E of 38.25x on $1.71 in trailing twelve-month EPS — a significant premium to the S&P 500's ~21x and consumer discretionary sector average of ~25x. The price-to-book ratio of 6.86x and price-to-sales of 7.78x similarly reflect investors paying for the brand franchise rather than current profitability.
The elevated multiple is partly an artefact of depressed earnings. Fiscal Q4 2025 (ending May 2025) saw EPS collapse to just $0.14 on heavy markdowns and restructuring costs, dragging the trailing figure down. Strip out that outlier quarter and the earnings power looks healthier — Q2 FY2026 delivered $0.54 EPS and Q1 FY2026 came in at $0.49.
On a forward basis, analysts estimate EPS of roughly $0.52 for Q3 FY2026 (ending February 2026) and $0.65 for Q4 FY2026, implying a forward annualised run rate closer to $2.20, which would put the forward P/E nearer 30x. That's still not cheap, but it's more reasonable for a company with Nike's brand and global distribution.
NKE Quarterly EPS (TTM)
The enterprise value-to-EBITDA ratio of 101x on the most recent quarter's annualised EBITDA is eye-wateringly high, reflecting the margin trough. As margins normalise, this should compress meaningfully. The PEG ratio of 2.99 suggests the stock is priced for growth that hasn't yet materialised.
Earnings Performance: Revenue Stabilising, Margins the Key Battleground
Nike's most recent quarter — Q2 FY2026 ending November 2025 — showed encouraging signs. Revenue came in at $12.43 billion with a gross margin of 40.6%, though operating margin was just 8.1% as the company continues to invest heavily in the turnaround.
The revenue trajectory tells the recovery story: $11.10 billion in Q4 FY2025, $11.27 billion in Q3 FY2025, $11.72 billion in Q1 FY2026, and $12.43 billion in Q2 FY2026. That's a clear sequential improvement, and the $12.43 billion figure represents a solid quarter by any standard.
NKE Revenue Trend ($B)
Gross margins have ranged from 40.3% to 42.2% over the last four quarters — respectable for a footwear company, but below Nike's historical 44-46% range. The compression reflects aggressive discounting to clear excess inventory, unfavourable product mix, and higher input costs. SG&A expense has been tightly managed at $4.04 billion in Q2 FY2026, down from $4.15 billion a year earlier, suggesting the cost-cutting programme is delivering.
Net income of $792 million in Q2 FY2026 was more than double the Q4 FY2025 trough of $211 million, but still well below the $1.4 billion-plus quarterly levels Nike routinely delivered in fiscal years 2022-2024. The effective tax rate has normalised at roughly 21%, removing one headwind that distorted earlier quarters.
Financial Health: Strong Balance Sheet Provides a Turnaround Safety Net
Nike's balance sheet remains a fortress. As of November 2025, the company held $8.35 billion in cash and short-term investments against $11.28 billion in total debt (including $2.75 billion in capital lease obligations), yielding a net debt position of just $4.31 billion. The current ratio of 2.06 provides ample liquidity.
Total shareholders' equity stands at $14.09 billion, giving a debt-to-equity ratio of 0.80x — conservative for a consumer company of Nike's scale. Interest coverage of 11.2x comfortably services the debt load.
Free cash flow is where the picture gets more nuanced. In FY2025 (ending May 2025), Nike generated $3.70 billion in operating cash flow and $3.27 billion in free cash flow — solid, but a sharp decline from FY2024's $7.43 billion and $6.62 billion respectively. The decline reflects lower earnings and working capital pressures, particularly elevated inventory levels ($7.73 billion as of November 2025) that the company is still working to normalise.
NKE Annual Free Cash Flow ($B)
Nike continues to return substantial capital to shareholders — $2.30 billion in dividends and $2.99 billion in share repurchases in FY2025 — though the combined $5.29 billion outpaced free cash flow, funded partly by the cash pile. The dividend yield of 0.62% is modest, but the payout has been maintained through the downturn, signalling management confidence in the recovery.
Competitive Position: The Swoosh Faces Its Toughest Challenge in a Generation
Nike's competitive moat — the most recognised brand in global sportswear, distribution across 190+ countries, and endorsement deals with elite athletes — remains formidable. But it's being tested on multiple fronts.
New Balance's 19% sales surge to $9.2 billion in 2025, as reported by CNBC, captures the shift. Where Nike spent years focusing on direct-to-consumer digital channels and running on the fumes of the Air Force 1 and Dunk franchises, New Balance invested in performance running, lifestyle crossover, and wholesale partnerships. The 'dad shoe' aesthetic resonated with younger consumers while Nike's innovation pipeline stalled.
On Running, Hoka, and Asics have similarly captured share in the running segment — the category where Nike built its legend. CEO Hill's push to relaunch the ACG outdoor performance line, showcased in Milan on February 20, represents an attempt to open new growth vectors beyond running and basketball.
Nike's direct-to-consumer business, which under previous CEO John Donahoe was positioned as the primary growth engine, has been recalibrated. Hill is rebuilding wholesale relationships with key retailers like Foot Locker and Dick's Sporting Goods — an acknowledgement that cutting off wholesale to push direct sales destroyed demand creation. The inventory days outstanding of 94 days (down from 108 in Q1 FY2026) suggests the product glut is slowly clearing.
The tariff environment adds a structural headwind. Nike sources heavily from Vietnam, China, and Indonesia. The Supreme Court's recent ruling striking down Trump's original tariffs has been replaced by a new 10% global levy that will squeeze margins further unless Nike can pass costs to consumers — difficult when competitors are gaining share.
Forward Outlook: Analysts See Recovery, but the Path Is Narrow
Consensus estimates point to a gradual recovery. For Q3 FY2026 (ending February 2026), analysts expect revenue of approximately $11.76 billion with EPS of $0.52. The following quarters show a steady build: $12.06 billion revenue and $0.65 EPS for Q4 FY2026, $12.85 billion and $0.75 for Q1 FY2027, and $11.83 billion and $0.42 for Q2 FY2027.
Annualising the forward estimates suggests a fiscal year 2027 EPS in the range of $2.30-$2.50, which would put the forward P/E at approximately 26-28x — still a premium, but one that could be justified if Nike returns to mid-single-digit revenue growth and margins normalise toward the historical 12-14% operating range.
Catalysts for upside include: a successful ACG relaunch and broader innovation pipeline; wholesale revenue recovery as retail partners restock; China consumer recovery (Nike derives roughly 15% of revenue from Greater China); and cost savings from the restructuring programme.
Risks are equally significant: tariff escalation beyond the current 10% levy; continued market share losses to New Balance, On, and Hoka; inventory clearance taking longer than expected; and a global consumer slowdown. The March 19 earnings report will be the next major data point — and with the stock up 25% from its lows, expectations have risen.
Capital Allocation: Buybacks and Dividends Signal Long-Term Confidence
Nike's capital return programme remains aggressive. In FY2025, the company returned $5.29 billion to shareholders — $2.30 billion in dividends and $2.99 billion in share repurchases — despite free cash flow of only $3.27 billion. This was funded partly by the $7.46 billion cash balance at fiscal year-end.
Shares outstanding have declined from roughly 1.49 billion in Q3 FY2025 to 1.48 billion in Q2 FY2026, reflecting ongoing buyback activity. At current prices, the stock yields 0.62% — modest but reliable, with Nike having increased its dividend for over 20 consecutive years.
The willingness to maintain heavy capital returns during a turnaround signals management's conviction that the earnings trough is temporary. However, if the recovery takes longer than expected, the gap between free cash flow and shareholder returns could pressure the balance sheet. Net debt of $4.31 billion is manageable today, but Nike's FY2024 free cash flow of $6.62 billion shows how much room earnings have to recover before capital allocation is fully self-funding again.
Conclusion
Nike is a turnaround story priced for success. At $65.40 and 38x trailing earnings, the stock demands that CEO Elliott Hill's strategy — innovation revival, wholesale rebuilding, cost discipline — delivers measurable results over the next 12-18 months. The March 19 earnings report will provide the first real scorecard.
The bull case is compelling: Nike's brand, scale, and $8.3 billion cash position give it the resources to out-invest every competitor. If margins normalise to the 12-14% operating range and revenue resumes mid-single-digit growth, a $2.50+ EPS is achievable, making the current price look reasonable. The stock is 21% below its 52-week high, offering a meaningful entry discount for patient investors.
The bear case is equally real: New Balance, On, and Hoka are taking share in Nike's core categories. Tariffs will compress margins. The P/E premium assumes earnings growth that hasn't materialised yet. For conservative investors, waiting for the March earnings report — and evidence of stabilising market share — before building a position is the prudent approach. For those willing to underwrite the turnaround, the risk/reward at $65 is more favourable than it's been in over a year.
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Disclaimer: This content is AI-generated for informational purposes only and does not constitute financial advice. Consult qualified professionals before making investment decisions.