Nike Shares Plunge as Profitability Concerns Overshadow Earnings Beat

Nike Inc. delivered a quarterly earnings surprise, yet investors responded with a severe sell-off. The sportswear giant's results for its second fiscal quarter of 2026 surpassed revenue and per-share profit expectations. However, a deeper examination reveals significant pressures: collapsing margins, persistent weakness in China, and a sobering forward outlook that have market participants questioning the depth and duration of the company's profitability challenges.

The headline numbers appeared robust. Quarterly revenue increased by 1% year-over-year to $12.4 billion, exceeding analyst estimates of approximately $12.2 billion. Adjusted earnings per share also came in strong at $0.53, well above the projected range of $0.37 to $0.38.

Beneath this surface, a different narrative emerges. Net income plummeted 32% to $0.8 billion. A critical red flag was the 300-basis-point contraction in gross margin, which fell to 40.6%. This sharp decline signals the company is aggressively cutting prices to clear inventory and move product, a strategy that directly undermines profitability and weighs heavily on the stock's valuation.

Key Quarterly Metrics:
* Revenue: $12.4 billion (+1%)
* Earnings Per Share (EPS): $0.53 (above forecast, but down year-over-year)
* Gross Margin: 40.6% (-300 basis points)
* Net Income: $0.8 billion (-32%)
* Nike Direct Sales: $4.6 billion (-8%)

The combination of modest top-line growth and sharply declining earnings power suggests Nike is relying more on discounts and promotional activity to drive sales—a scenario that typically alarms investors.

Regional Performance Highlights a Growing Imbalance

The company's geographical performance shows a stark divergence. Greater China, once a reliable growth engine, has become a pronounced area of weakness. Revenue in the region fell approximately 17% to $1.4 billion. This follows a 10% decline reported in the first quarter, indicating the slowdown is accelerating rather than stabilizing.

In contrast, North America provided a counterbalance with solid growth, where sales advanced 9% to $5.6 billion. While positive, the strength in Nike's home market is insufficient to fully offset the downturn in China, creating an increasing regional imbalance within the corporate profile.

Should investors sell immediately? Or is it worth buying Nike?

Distribution Shift and Brand Weakness Add to Woes

The earnings report highlighted a notable pivot in sales channels. Revenue from the higher-margin Nike Direct segment, which sells straight to consumers, dropped 8% to $4.6 billion. Conversely, wholesale revenue through retail partners grew by 8% to $7.5 billion.

This shift implies a greater reliance on wholesale channels to clear inventory, typically at lower margins than direct sales. For shareholders, it represents a warning sign as a more profitable business model gives way to a volume-driven approach.

Further pressure came from the Converse subsidiary, where revenue collapsed by 30% to $300 million for the quarter. Instead of providing support, the brand's struggles reinforce the picture of a company facing headwinds on multiple fronts.

Management's Guidance Confirms a Prolonged Challenge

The forward-looking statements did little to reassure the market. For the upcoming third quarter, management anticipates a slight revenue decline in the low single-digit percentage range. More concerning is the forecast for profitability, with the gross margin expected to contract by an additional 175 to 225 basis points.

CEO Elliott Hill characterized the ongoing turnaround efforts as being in the "middle innings," suggesting a longer process is underway with no quick recovery in sight.

Tariffs present another persistent hurdle. CFO Matthew Friend stated that annual costs from tariffs have now reached approximately $1.5 billion. This direct hit to the bottom line reduces the company's financial flexibility to invest in brand building, innovation, and distribution without sacrificing further margin.

The market's verdict on this mix of declining profitability, Chinese softness, and high tariff costs was decisive. Nike's stock price fell more than 10% on Friday, dropping below the $60 mark. This reaction clearly signals that investors have significantly lowered their expectations for a return to profitable growth and are bracing for a turnaround that may be longer and more arduous than previously anticipated.