To The Moon

$Nike(NKE)$

Nike Inc. (NYSE: NKE) released its fiscal fourth-quarter and full-year results after the U.S. markets closed on June 26, 2025. The immediate reaction? The stock soared nearly 10% in after-hours trading, snapping a prolonged slump and temporarily reversing negative sentiment that had surrounded the athletic apparel giant throughout much of the past year.

But the question facing investors now is this: Was the rally justified?

Because under the hood, Nike’s earnings report was anything but impressive. In fact, by some metrics, this was one of the most challenging fiscal years in the company’s modern history — with double-digit sales declines, significant margin compression, and declining profits across every operating segment.

In this article, we’ll dissect Nike’s latest financial report, explore the strategic decisions that contributed to the brand’s current challenges, review the market’s surprising reaction, and consider whether this rebound is signaling the start of a genuine recovery — or simply a temporary surge of misplaced optimism.

Earning Overview

Nike Inc. reported its fiscal fourth-quarter and full-year 2025 earnings on June 26, 2025, triggering a sharp rally in its share price. Despite a challenging year marked by broad-based sales declines and profitability pressures, the company’s stock surged nearly 10% following the release as investors responded positively to forward-looking commentary and stabilization signals.

Financial Highlights

• Full-Year Revenue: $46.3 billion, down 10% year-over-year.

• Fourth Quarter Revenue: $11.1 billion, down 12% from the same period last year.

• Net Income: $3.2 billion for the full year, a 44% decline.

• Earnings per Share (Q4): $0.14, down 86% year-over-year.

• Gross Margin (Q4): 40.3%, down 440 basis points.

Nike’s revenue decline was broad, with every region and product category reporting negative growth. The company also faced declining profitability, due to higher promotional activity, tariff headwinds, and the cost of restructuring its sales strategy.

The Brutal Numbers: Nike’s Worst Performance in Years

Let’s start with the facts. Nike reported full-year revenue of $46.3 billion, a 10% decline year-over-year — a stunning drop for a brand that has historically been synonymous with global dominance in the athletic wear space. In the fourth quarter alone, revenue declined 12% to $11.1 billion.

These aren’t isolated declines in a few troubled markets — this was broad-based weakness.

Revenue by Geography:

• North America: Down 11%

• Europe, Middle East & Africa (EMEA): Down 9%

• Greater China: Down 21%

• Asia Pacific & Latin America (APLA): Down 8%

Revenue by Product Segment:

• Footwear: Down 13%

• Apparel: Down 10%

• Equipment: Down 2%

Nike also reported a significant compression in gross margins, which fell 440 basis points in the fourth quarter to 40.3% — reflecting increased promotional activity, higher input costs, and greater reliance on discounting to clear inventory.

On the bottom line, net income for the full year declined 44% to $3.2 billion. This marked one of the sharpest annual profit contractions Nike has experienced in over a decade.

Fundamental Analysis

Strategic Missteps: A Broken DTC Strategy and Lost Shelf Space

Much of Nike’s current predicament stems not from external shocks — but from its own internal strategy.

Over the past few years, Nike embarked on an aggressive direct-to-consumer (DTC) transformation. Former CEO John Donahoe pushed the company to cut back its wholesale distribution — scaling back product allocations to long-time partners like Foot Locker, Macy’s, and Dick’s Sporting Goods — in favor of selling directly through Nike-owned stores, apps, and websites.

The appeal of this move was obvious: control over the customer experience, higher gross margins, and better data visibility. However, the execution backfired.

By voluntarily giving up shelf space at major retailers, Nike ceded valuable retail real estate — which competitors quickly seized. Brands like Hoka, On Running, Adidas, and New Balance stepped into the void, eager to gain traction in high-traffic retail channels. Nike’s presence diminished just as these competitors ramped up distribution and marketing, ultimately eroding Nike’s dominance at the point of sale.

The result? A loss of market share, a weakened wholesale channel, and diminishing top-line performance.

To Nike’s credit, the company has acknowledged this miscalculation. Under its current leadership, the company is rebuilding wholesale partnerships and recalibrating its omnichannel strategy to regain lost ground. But trust — whether with retail partners or consumers — is not easily or quickly rebuilt.

Free Cash Flow

In the third quarter of fiscal year 2025 (ending February 28, 2025), Nike generated approximately $1.71 billion in free cash flow. This figure represents the company’s cash generated from operations minus capital expenditures.

Trailing Twelve Months (TTM)

Over the trailing twelve-month period, Nike produced around $5.3 billion in free cash flow. This positions the company among the top consumer discretionary names in terms of consistent cash generation.

Annual Free Cash Flow Trends

• Fiscal 2024: $6.6 billion

• Fiscal 2023: $4.9 billion

• Fiscal 2022: $4.4 billion

• Fiscal 2021: $6.0 billion

While fiscal 2022 saw a temporary dip in free cash flow due to post-pandemic adjustments and supply chain costs, Nike rebounded strongly in the following years, reaffirming its operating strength and financial discipline.Risk and Challenges.

• Free Cash Flow per Share (TTM): Approximately $3.54

• Price-to-Free-Cash-Flow (TTM): Around 20 times the company’s trailing free cash flow

At these levels, Nike's valuation is consistent with its long-term historical averages, reflecting investor expectations for a recovery in earnings growth and continued strength in cash generation.

Why Free Cash Flow Matters for Nike

1. Strong Operational Efficiency Even during a difficult year with double-digit revenue declines, Nike continued to generate multi-billion-dollar free cash flow, showing its ability to maintain profitability and reinvest strategically.

2. Supports Shareholder Returns Nike uses its free cash flow to fund dividends and share repurchases, maintaining a capital return policy that rewards long-term shareholders. In recent years, these returns have accounted for billions in cash distributed annually.

3. Balance Sheet Flexibility High free cash flow gives Nike the flexibility to adapt to external shocks like tariffs, shifting trade policies, and consumer demand fluctuations without over-reliance on debt.

4. Brand Investment Nike has steadily increased its investment in marketing and innovation, funded in part by strong cash flows. This supports the brand’s global visibility and helps drive long-term customer engagement.

Risk and Challenges

The Tariff Overhang and Profitability Headwinds

As if the internal challenges weren’t enough, Nike now faces a renewed threat from tariffs, stemming from escalating trade tensions and the evolving U.S. policy stance on Chinese manufacturing.

During the earnings call, Nike told investors it expects a $1 billion impact from tariffs over the coming year. That’s a substantial headwind, especially for a company already contending with falling revenues, rising input costs, and thinning margins.

In previous years, Nike successfully diversified some of its supply chain away from China — increasing production capacity in Vietnam and Indonesia. However, the magnitude of its Chinese exposure remains high, and supply chain re-balancing takes years, not quarters.

Add to that macroeconomic concerns such as elevated interest rates, slowing global consumer demand, and the threat of recession in key markets, and Nike’s path to recovery becomes even more complex.

Market Sentiment

Given the dismal year-over-year numbers, many investors are puzzled by the post-earnings rally. The key lies in forward guidance — not backward-looking results.

Nike management said they expect the current quarter to mark a turning point, projecting that revenue and profit declines will moderate moving forward. CEO John Donahoe admitted that current results were disappointing, but assured investors that the worst is likely over.

“While our financial results are in line with our expectations, they’re not where we want them to be. We expect our business will improve moving forward.”

Nike also cited early indicators of stabilizing consumer demand, as well as more efficient inventory management.

Inventories were flat year-over-year at $7.5 billion — a positive sign that Nike is managing its supply chain and demand forecasts more effectively than expected. During downturns, inventory often piles up — leading to steep discounting and channel stuffing. Nike appears to have avoided that fate, at least for now.

But perhaps most importantly, Wall Street loves a narrative of recovery. After multiple quarters of disappointment, any sign of stabilization — even just rhetoric from management — can spark a rally, especially for a brand as iconic as Nike.

The Demand Creation Strategy: Leaning into Brand Power

If there is one bright spot in Nike’s strategy, it’s their willingness to double down on advertising and brand building.

“Demand creation” spending — Nike’s term for marketing, sports sponsorships, and promotional campaigns — rose 15% year-over-year to $1.3 billion in Q4. The company is leaning into its competitive advantage: brand power.

Few companies on Earth have the marketing muscle of Nike. From decades-long partnerships with Michael Jordan and LeBron James to their cultural resonance with younger consumers, Nike knows how to tell a story. If any company can regain market share through sheer brand presence, it’s Nike.

The company appears to recognize this and is investing accordingly. With key sports events on the horizon, including the Summer Olympics in Paris in 2026, this brand-centric strategy could yield results — especially internationally, where Nike has long used global events to reinforce dominance.

Still, it’s a long game. Marketing spend must eventually translate into sales. So far, that connection has been tenuous.

Valuation: Still Too Rich for the Risk

Despite a 10% year-to-date decline in 2025 (prior to this post-earnings bounce), Nike remains an expensive stock by historical standards.

At the current share price, Nike trades at a forward price-to-earnings (P/E) ratio above 32x, even after a year of shrinking earnings and no confirmed recovery in sight. For context, Nike’s average forward P/E over the past decade is closer to 25x — during periods of strong revenue and earnings growth.

Right now, investors are paying a premium for a turnaround story that’s not yet visible in the numbers. Free cash flow is down, net margins are under pressure, and return on equity has fallen from mid-30s levels to below 20%.

With the S&P 500 offering stronger earnings growth and higher margins from more consistent businesses, Nike’s risk-reward profile is skewed. Until there is tangible evidence of a turnaround, this rally feels speculative.

Conclusion: A Legendary Brand with a Lot to Prove

Nike is not a broken company. It is still one of the most recognizable consumer brands in the world, with deep moats in marketing, athlete endorsements, and global distribution. It has the resources and legacy to mount a comeback.

But this is not a short-term fix. The challenges facing Nike are strategic and structural. It must regain consumer loyalty, rebuild retailer relationships, navigate geopolitical risk, and contend with aggressive competitors — all while facing rising costs and a cautious global consumer.

My Rating: Hold

Nike’s fiscal 2025 results show a company in transition. Revenue and profit declines, regional weakness, and competitive pressures have weighed heavily on performance. However, signs of stabilization, a re-commitment to wholesale channels, and proactive tariff mitigation efforts have provided hope for a turnaround. Given the current setup, I’m maintaining a Hold rating on Nike stock. The recent price jump appears to be based more on hope than on evidence of an operational turnaround.

• Nike reported a 10% drop in revenue and a 44% fall in net income in FY2025.

• Sales declined across every region and product category.

• Strategic missteps in distribution and growing competition contributed to weakness.

• Tariffs are expected to cost Nike $1 billion over the next year.

• Marketing spend is rising, but results haven’t followed yet.

• Valuation remains elevated despite weak fundamentals.

If you own Nike stock, there’s no immediate reason to sell — but I wouldn’t be allocating fresh capital at these levels. The valuation is too rich, the margin of safety is thin, and the recovery story is still unproven.

There are better opportunities elsewhere in the market with stronger fundamentals and clearer near-term catalysts. Nike may yet earn its comeback — but for now, I’m staying on the sidelines.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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