Nike just dropped earnings that made Wall Street look like it's been hitting the snooze button. Revenue up 8%. EPS of $1.35 — a solid 12 cents above consensus. Gross margins expanding like a yoga instructor on espresso. The headlines write themselves: Nike is back, baby.
Except there's a catch. A big, juicy, $400 million catch that has nothing to do with sneakers, sweat, or Steph Curry.
That margin expansion? Largely fueled by a one-time tariff refund from the U.S. government. Strip that out, and the picture gets a lot less rosy. Suddenly, Nike's operating margin looks flat. Suddenly, that beat feels a lot more like a government handout than a business triumph.
The Refund That Fooled Everyone
Here's what happened: Nike paid tariffs on footwear imported from Vietnam and China under Trump-era trade policies. Then the Biden administration, in a move to ease trade tensions, refunded a chunk of those duties. Nike got a check — a big one — and it landed right in the gross margin line.
CFO Matt Friend was candid about it on the call: “The tariff refund contributed approximately 150 basis points to gross margin in the quarter.” Translation: Without that refund, gross margins would have been 44.5% instead of 46%. Still decent, but not the blowout everyone's cheering.
“The tariff refund contributed approximately 150 basis points to gross margin in the quarter.”
Analysts ate it up. At least a dozen raised their price targets. But if you're looking at Nike as a long-term bet, you have to ask: what happens when the refunds stop? Because they will. Trade policy giveth, and trade policy taketh away.
China Is Still a Headache
Let's talk about Greater China — Nike's most profitable region and its biggest migraine. Revenue there grew 5%, but that's on easy comps from last year's COVID lockdowns. More telling: traffic in Nike's own stores in China is still down. Way down. Consumers in Shanghai and Beijing are choosing local brands like Anta and Li-Ning, which now have better designs and faster supply chains.
Nike's direct-to-consumer business in China grew 12%, but wholesale dropped 2%. That's a polite way of saying Nike is losing shelf space. And the brand heat? Fading. Young Chinese consumers see Nike as a legacy brand, not the cool kid. That's a problem money can't always fix.
“We're seeing a structural shift in consumer preference in China,” one analyst noted. “Local brands are no longer the cheap alternative.”
Nike's response: more local collaborations, more WeChat activations, more KOLs. But the trend lines are stubborn. If China slips, Nike's global growth story gets shaky.
Tariff Cliff Looms
Here's the part that keeps CFOs up at night: the tariff refunds are a one-off. The U.S. government has signaled it won't extend the program. Meanwhile, Nike is still importing most of its footwear from Vietnam and Indonesia, both of which face potential new tariffs under the next administration.
Nike's supply chain is a tangled web of contract manufacturers, and those factories are getting squeezed. Labor costs in Vietnam are up 12% year-over-year. Shipping costs have stabilized, but they're still double pre-pandemic levels. Nike can raise prices — and it has — but at some point, the consumer pushes back.
The gross margin story for the next few quarters will depend on how much pricing power Nike actually has. And that depends on whether people still want $220 Air Jordans when rent is due.
Inventory: The Good, the Bad, the Bloated
Inventory was down 5% year-over-year, which sounds good. But it's still 20% above pre-pandemic levels. Nike has been discounting to clear old stock, and that cuts into margins. The company insists it's “optimizing the mix,” but retailers grumble about too many basic styles and not enough heat.
The good news: North America demand held up. Revenue grew 7% in Nike's home market, driven by running and lifestyle shoes. The bad news: Europe is soft, and Latin America is a mess with currency volatility. Currency headwinds alone cost Nike 3 points of revenue growth this quarter.
So Is Nike a Buy or a Sell?
That's the wrong question. The right question is: can Nike grow earnings without a tax refund? The answer is yes, but not at the pace the stock price implies. Nike's P/E ratio is 32, which prices in 12-15% annual earnings growth. Without the refund, underlying growth is closer to 6-8%. That's a gap.
CEO John Donahoe talked up innovation — new Pegasus, new Vaporfly, and a revamped apparel line. Those are real growth drivers. But they take time. And in the meantime, the market is paying a premium for a company that just got a sugar high from Uncle Sam.
Here's the verdict: Nike's Q4 was a good quarter, not a great one. The refund masked underlying softness in China and margin pressure. The stock will probably pop on the headline, but savvy investors should look past the glow and ask what happens next quarter, when the refund is gone and the comps get harder.
Nike is still a great company. But great companies can have overpriced stock. And right now, the price is telling you the refund was the story. Don't be the last one buying that narrative.
