Nike Q3 Earnings Preview: A Critical Checkpoint in Its Turnaround Effort

Nike (NKE) is set to report fiscal Q3 earnings after the market close, with investors keenly watching for signs of progress in the company's turnaround efforts under CEO Elliott Hill. After a 32% stock decline in 2024, nike has entered 2025 as an underdog, struggling to regain its footing against rising competition from brands like On Holdings (ONON) and Deckers' Hoka (DECK). Hill, a long-time Nike veteran who took over as CEO last September, has made it clear that Nike must return to its roots in sports innovation, strengthen retail partnerships, and move away from an over-reliance on a few key franchises (Air Force 1, Dunks, and Air Jordans). As one of the world's largest athletic footwear and apparel companies, Nike’s results also serve as a broader read on the consumer and potential tariff impacts on retail in an increasingly uncertain macroeconomic environment.

Q3 Expectations: Analysts Predict Another Tough Quarter

Nike’s turnaround will take time, and Q3 is expected to reflect continued weakness as the company works through excess inventory and refreshes its product lineup. According to FactSet estimates, analysts are expecting:

- EPS: $0.30

- Revenue: $11.02 billion

The company had already guided for a low-double-digit revenue decline in Q3, marking its fourth consecutive quarter of year-over-year revenue declines. Additionally, gross margin is expected to contract by 300-350 basis points as Nike continues clearing discounted inventory.

Piper Sandler expects Q3 sales to decline by 11%, aligning with Nike’s previous guidance, and sees management reiterating expectations for further Q4 weakness. Meanwhile, Needham believes there’s little near-term risk to FY25 estimates but sees FY26 as a potential trouble spot, with continued sales and margin declines through the first half before returning to growth in the back half.

Another area of concern comes from Dick’s Sporting Goods (DKS), which recently issued downside guidance for FY26, raising questions about softening demand for athletic footwear and athleisurewear amid macro uncertainty. Nike’s renewed focus on retail partnerships could help in the long run, but the near-term sales outlook remains cloudy.

Turnaround Efforts Under CEO Elliott Hill

Hill has already made several key moves to put Nike back on track, including:

- Leadership Restructuring: The company has seen a shake-up at the executive level, with top strategy and communications executives departing as part of a broader effort to streamline operations and refocus on growth.

- Nike x SKIMS Collaboration: The NikeSKIMS partnership, launching this spring, is a significant initiative designed to expand Nike’s presence in the growing women’s activewear market, an area where it has underperformed compared to competitors like Lululemon (LULU).

- Inventory and Pricing Adjustments: Hill has prioritized returning Nike’s digital business to a full-price model, a challenging task given that nearly 50% of digital sales have been promotions. Clearing inventory and reducing markdowns should help stabilize margins by late FY25.

- Retail Partnerships: Nike is re-engaging with key accounts like Foot Locker (FL) and Dick’s Sporting Goods (DKS) after previously pushing direct-to-consumer (DTC) sales at the expense of wholesalers. This shift could help Nike regain lost shelf space and drive higher-margin wholesale revenue.

Despite these efforts, investors will be looking for early signs of tangible progress in Q3, particularly in inventory management, product innovation, and retail re-engagement.

Q2 Recap

Nike (NKE) exceeded analysts’ low expectations in Q2 FY25 but delivered disappointing Q3 revenue and gross margin guidance, reinforcing that its turnaround will be a long process. CEO Elliott Hill, who returned in September, acknowledged that Nike had lost its competitive edge by over-relying on key franchises like Air Force 1, Dunks, and Air Jordans while alienating retail partners in favor of its digital channel.

The company’s challenges were evident in Q2, with revenue declining 7.7% to $12.35 billion, including an 8% drop in North America and an accelerating sales decline in China (-8%). Direct-to-consumer (DTC) sales fell 13%, weighed down by a 21% drop in digital sales, forcing Nike to rely on heavy promotions, with about 50% of digital sales being discount-driven. This pricing pressure led to a 100 bps decline in gross margin to 43.6%, with further margin compression expected as the company clears excess inventory.

Looking ahead, Nike guided for a double-digit revenue decline in Q3, marking its fourth consecutive quarter of year-over-year sales declines. While Hill’s renewed focus on innovation, sports, and retail partnerships could eventually drive a recovery, the turnaround remains a multi-quarter effort rather than an immediate fix.

Stock Performance & Market Sentiment

Nike shares have found support around the $72 level, but investors remain cautious. Analysts from UBS note that global sales growth trends have deteriorated over the last three months, while Barclays sees Nike nearing a fundamental bottom but still expects FY26 performance to be weighed down by franchise management, tariffs, and China risks.

Meanwhile, Needham expects the stock to remain range-bound in the near term, as Nike still has a lot of heavy lifting to do before convincing the market that a true recovery is underway. The options market is pricing in a 7.9% move post-earnings, above the historical average of 6.0%, signaling potential volatility depending on the Q3 results and management’s commentary on FY26.

Key Questions Heading Into Q3 Earnings

1. Can Nike show early signs of a turnaround? Investors will be looking for progress in inventory normalization, improved product innovation, and traction in retail partnerships.

2. How bad is the near-term pain? With a fourth straight quarter of revenue declines and significant margin compression expected, management’s tone around Q4 and early FY26 expectations will be crucial.

3. Will Nike provide any early FY26 commentary? Some analysts, including UBS and Citi, believe Nike’s initial FY26 guidance could come in below expectations, potentially weighing on sentiment.

4. How are macro and tariff concerns impacting demand? While Citi’s recent consumer survey showed no major macro weakness, the survey was conducted before recent tariff and layoff concerns escalated.

5. How is the SKIMS partnership tracking? This collaboration could be a significant long-term driver if successful, particularly in the women’s activewear space.

Bottom Line: A Pivotal Earnings Report

Nike’s Q3 earnings report will be a critical checkpoint in its turnaround story, with investors closely monitoring whether the company is making meaningful progress under CEO Elliott Hill. While expectations remain low for the quarter, any signs of stabilization in sales trends, inventory management, and retail partnerships could give the stock a much-needed boost. However, if Nike’s FY26 commentary disappoints, shares could face renewed pressure in the near term.

The stock’s recent bottoming-out around $72 suggests that investors are willing to give the turnaround time to play out, but Nike needs to show early proof of execution to regain confidence in the market. If Hill’s plan starts showing tangible results, investors could slowly start creeping back into the name, setting the stage for a potential longer-term recovery.

Ask Aime: What's the outlook for Nike's fiscal Q3 earnings and strategic turnaround efforts?