Can the Swoosh Make a Comeback?

For decades, Nike (NKE) wasn’t just a sneaker company; it was a marquee brand closely associated with winning. But lately, the Just Do It spirit has felt more like just try and maybe it’ll work out. Yesterday Nike released their Q2 2026 earnings and while the headline numbers showed a beat, the market’s reaction was a cold shower with a sizable drop right after earnings came out.

The Backdrop: A Titan in Transition

Nike has spent the last year in a state of self-inflicted misery. After years of pivoting heavily toward a Direct-to-Consumer (DTC) model, which alienated long-time retail partners and allowed upstarts like Hoka and On to steal shelf space, Nike is now in the midst of a massive strategic pivot back to wholesale(which has a risk of upsetting the online shopper)

That’s why Nike brought in Elliott Hill as CEO after he came out of retirement in late 2024 to try and revive the brand. His mission: reignite innovation, fix the fractured relationship with retailers, and stop the bleeding in key markets like China.

The Q2 Numbers: A Surprise Beat with a Catch

On the surface, Nike’s Q2 2026 results (ending November 30, 2025) looked like a solid performance compared to Wall Street’s low expectations:

• Earnings Per Share (EPS): $0.53 (Adjusted) vs. $0.38 expected.
• Revenue: $12.4 billion vs. $12.2 billion expected.
• Wholesale Growth: A massive 8% jump, proving that Nike’s return to retail partners like Dick’s Sporting Goods and Foot Locker is bearing fruit. However, DTC sales were down 8% as old inventory was discounted to clear it out.

However, the catch was hidden in the margins. Gross margin fell 300 basis points to 40.6%. While Nike sold more shoes than analysts feared, they made significantly less profit on each pair. The culprit? A mix of heavy discounting to clear old inventory and a massive Tariff Tax.

Why the Drop? The Long Walk to Recovery

If Nike beat expectations, why did investors dump the stock? It comes down to three major red flags that emerged during the report:

1. The China Crisis: Revenue in Greater China plummeted 17%. That’s a big drop. Nike admitted they had become a lifestyle brand competing on price in the region. Their premium status is under attack, and the recovery there is happening much slower than management hoped.
2. The Tariff Wall: CFO Matthew Friend revealed that new U.S. tariffs are expected to cost the company a staggering $1.5 billion annually. Even a strong 9% growth in North America couldn’t mask the fact that these costs are eating the bottom line as evidenced by the gross margin impact.
3. The Timeline: CEO Elliott Hill used a baseball metaphor, stating Nike is in the middle innings of its comeback. For investors who have already watched the stock lose half its value over five years, middle innings sounds like several more years of waiting for a home run.

The 1-Year and 5-Year Performance: A Sea of Red

Investors haven’t had much to cheer about lately. As of late 2025:

• 1-Year Performance: Down roughly 15% before the market sell off post earnings.
• 5-Year Performance: Down 52% before the market sell off.

While the S&P 500 has been hitting record highs, Nike has been a take your money and burn half of it asset. Long-term holders who bought during the 2021 highs (near $170) are now looking at a stock trading in the high $50s with no end in sight. The frustration is palpable; Nike has gone from a pristine brand that grew every year to a show me turnaround story.

Revenue for this upcoming year is basically where it was in 2022 and the market expects the stock to return to mid single digit growth as soon as next year and this middle innings metaphor makes it seem like that might take longer especially with the struggles in China.

The Q&A: Management Under Fire

During the Investor Q&A, analysts didn’t hold back. Here’s how management handled the heat:

• On the China Timeline: When asked exactly when China would return to growth, management was cautious. Hill acknowledged that promotional pricing had eroded the brand’s premium feel and that a Nike Store pilot program is being tested to fix the ground game. Sounds like a bunch of we sure don’t know.
• On Margin Recovery: Analysts pressed for a timetable on returning to high-40% margins. CFO Matt Friend pointed to the win now actions(focus on sport, accelerate innovation, rebuild marketplace access, be more efficient operationally and foster a more agile culture) but warned that the recovery wouldn’t be linear, especially with the $1.5 billion tariff headwind looming. Win now sounds great but so far there’s been little winning and investors are quickly getting tired.
• On Innovation: Management highlighted the running segment, which grew 20% for the second straight quarter, as proof that their focus on performance gear is working. They also teased the 2026 World Cup as a major brand catalyst.

Valuation: Is Nike Still Worth Owning?

With the stock down post-earnings, Nike is trading at a much more reasonable valuation than its historical highs if you assume they can get back to those historical margins. Earnings power is being squeezed by tariffs and international weakness and that leads to net income and free cash flow margins that are half of their historical norms.

The Bull Case: Nike is still the most recognized sports brand on the planet. Their North American wholesale business is surging (+24%), and the running category is finally seeing a resurgence. If you believe the middle innings will eventually lead to a win and a return to historical margins, this drop might be a solid entry point.

The Bear Case: The tariff tax is a permanent headwind, at last for the next few years, and Nike’s brand cachet in China might be broken beyond a quick fix. If the turnaround takes another 18–24 months, there are likely better places to park your capital. Due to the pressure on earnings, this still trades at a 32x+ multiple to earnings which isn’t particularly cheap. Even if you normalize earnings back to a 10% net income margin which is closer to historical norms, it’s still around an 18x multiple which isn’t bad but not particularly cheap when you consider brands like Deckers(parent of Hoka) which are still growing are cheaper than that.

Final Thoughts

Nike is one of those stocks that people can’t seem to step away from because of its historical brand power(Disney is another). The Q2 earnings proved that the brand still has a pulse and can sell products(outside of China at least), but the profitability profile has changed and may remain pressured for quite some time. For now, owning Nike requires the patience of an ultramarathoner. You might get to the finish line, but there’s going to be a lot of pain in the legs before you get there. I’m staying away and would need for the stock to drop into the 40s to spark my interest.

Disclaimer: I am long DECK. This article is for informational purposes only and does not constitute financial or investment advice. The author is not a registered investment advisor. All investment strategies and investments involve risk of loss. Nothing contained in this article should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit. Please consult with a professional financial advisor before making any investment decisions.