Nike (NKE) is approaching its fiscal first-quarter earnings report with an unusual set of expectations. Management has guided for a low-to-mid-single-digit decline in revenue, yet the market is focusing on a more critical metric: gross margin. After a quarter that was artificially boosted by a one-time tariff refund, investors are looking for signs that the company's underlying operations are improving.
Shares closed at $36.80 on Friday, September 11, down 4.2% from the previous week's close. At that price, the stock appears inexpensive when measured against reported annual earnings of $2.10 per share, yielding a trailing P/E of 17.5x. However, that earnings figure includes a $0.52 per share benefit from a tariff recovery under the International Emergency Economic Powers Act. Stripping out that one-time item, adjusted earnings fall to $1.58 per share, pushing the P/E to a more sobering 23.3x.
The Tariff Distortion
The distortion is even more pronounced in the fiscal fourth quarter. Reported gross margin surged 890 basis points to 49.2%, but the $986 million tariff-recovery benefit accounted for roughly 900 basis points of that gain. Excluding the benefit, gross margin would have been 40.2%, a slight decline year-over-year. Reported EPS of $0.72 drops to just $0.20 without the recovery.
This makes the upcoming October 1 report a critical test. Analysts are currently projecting revenue of approximately $11.37 billion and adjusted EPS of $0.45, though these estimates are subject to change. The focus should be on operational metrics, not the flattering year-ago comparison.
Direct Sales: The Harder Challenge
The revenue picture is mixed. In Q4, wholesale revenue grew 1% on a currency-neutral basis, but Nike Direct fell 9%, with digital sales down 12% and company-owned stores down 7%. For the full fiscal year, Direct revenue declined 8% while wholesale grew 4%. Wholesale growth is a positive sign for distribution, but it doesn't yet prove that consumer demand is strong enough to support full-price selling.
Management noted that performance sports grew in the mid-single digits in Q4, while sportswear fell by double digits and retail sales decelerated from mid-April. The clearest sign of progress would be a narrowing decline in Direct sales and an expansion in gross margin without another exceptional benefit.
Geographic Divergence
Geographically, North America showed resilience with 3% revenue growth, driven by 10% wholesale growth, though Direct still fell 6%. Greater China was a drag, with revenue down 17% as both digital and wholesale struggled. The valuation depends on a broader recovery; one strong region can't offset persistent weakness in China and promotional pressure in sportswear.
What Would Change the Thesis?
The bullish case rests on improving performance categories, recovering wholesale relationships, and a strong balance sheet. Nike ended May with $9.0 billion in cash and equivalents and $7.5 billion in inventory. Management has also tightened future buying, which should support full-price realization if demand remains soft.
The bear case is that the turnaround still relies on consumer traffic returning amid economic pressure and intense competition. Analyst actions reflect this risk: BMO Capital and Morgan Stanley both have underperform or underweight ratings, with price targets of $30 and $31, respectively, implying 18.5% and 15.8% downside from the current price.
October 1 doesn't need to bring revenue growth to strengthen the investment case. It needs to demonstrate that lower promotions, better product mix, and tighter inventory are lifting underlying gross margin—and that Direct's decline is narrowing rather than being masked by wholesale shipments. Until both are evident, the 23.3x tariff-adjusted P/E leaves less room for error than the headline multiple suggests.
