NIKE leans on wholesale muscle as tariffs and China reset bruise margins

A fragile return to growth

NIKE’s second quarter of fiscal 2026 underscored the company’s delicate balancing act: reigniting top-line growth while absorbing the financial cost of a strategic reset and a punitive new U.S. tariff regime.

Reported revenue inched up 1% year-on-year (flat on a currency-neutral basis) but masked a more dynamic underlying story. Excluding the deliberate downsizing of “Classics” footwear franchises — now on track to be more than $4 billion below peak by year-end — NIKE said currency-neutral revenue would have risen about 6%. That growth was driven by a resurgent wholesale business, a tightly managed North American marketplace, and booming demand in performance categories led by running.

Yet that progress came at a price. Group gross margin fell 300 basis points to 40.6%, hit by roughly 320 basis points of tariff-driven product cost inflation and additional inventory write-downs in Greater China that were not anticipated three months ago. Earnings per share landed at $0.53, with the effective tax rate rising to 20.7% from 17.9%.

The structural headwind is stark: management now estimates about $1.5 billion in annualized incremental product costs from higher U.S. tariffs — a gross impact of some 320 basis points on FY26 gross margin, partially offset to a net drag of around 120 basis points after NIKE’s mitigation efforts.

CEO Elliott Hill and CFO Matt Friend repeatedly framed the company as being in the “middle innings” of a turnaround. The WinNow clean-up actions and a new “sport offense” go‑to‑market model are beginning to show through in North America and performance categories, while lagging regions and lifestyle-heavy portfolios remain under reset.

North America: template for the comeback

If the group narrative is one of uneven recovery, North America is firmly in the leading role.

Second-quarter revenue in the region grew 9%, despite NIKE Digital being down 16% and NIKE-owned stores down 2%. The engine was wholesale, which surged 24%, powered both by liquidation into value channels and robust growth with core strategic partners. Management emphasized that the forward order book shows a “balanced” contribution from both new and existing accounts.

Category mix was notably healthier than a year ago. Running, kids, basketball and training all fueled growth; sportswear returned to low single-digit increases despite classic footwear franchises being down roughly 20%. Running, in particular, delivered high double-digit growth across all channels – NIKE-owned stores, digital and wholesale – suggesting that the much-trailed running innovation pipeline is now translating into sell-through and share gains.

Crucially for margin-focused investors, North America is also where the financial benefits of the WinNow actions are most advanced. Inventory in the region declined mid-single digits with units down double digits; closeout units fell double digits and are now “very healthy” as a mix of the total. Gross margins fell 330 basis points year-on-year, but that came despite roughly 520 basis points of tariff headwind – implying that underlying regional margin expanded for the first time in this reset cycle.

NIKE Digital in North America is being deliberately repositioned from a promotional, volume-chasing channel to a more premium brand showcase. Fewer promotion days and lower markdown rates were accompanied by NIKE.com posting its best Black Friday ever, spearheaded by the Jordan AJ4 Black Cat launch. That pivot is painful in the short term – driving a 10% decline in North America NIKE Direct – but management sees it as foundational to restoring brand heat and pricing power.

For now, North America serves as both the proof point and the playbook: a multi-brand, multi-sport, multi-price-point portfolio, tightly segmented across a diversified wholesale network, with digital acting as a brand flagship rather than a clearance mechanism.

EMEA and APLA: work in progress

Outside North America, the picture is more mixed.

In EMEA, revenue dipped 1%, with NIKE Direct down 3% (digital -2%, stores -5%) and wholesale flat. EBIT fell 12%, as heavier-than-expected promotional activity eroded profitability despite what management described as a “healthy” inventory position and flat unit volumes. Performance categories, led by running, posted double-digit growth; training and sportswear also grew, with sportswear expansion driven by apparel as footwear was held back by a mid-20s decline in Classics offset by strength in Air Max and “look of running” silhouettes.

EMEA only activated the sport offense on December 1, and is now re‑hiring local sales and commercial teams in key countries. The strategic intent mirrors North America’s: more locally relevant assortments and sharper retail execution in influential cities and high streets. But investors should expect a lag before that structural retooling is visible in reported revenue and margins.

Asia Pacific & Latin America (APLA) delivered a 4% revenue decline, with NIKE Direct down 5% (digital -10%, stores +1%) and wholesale down 3%. EBIT was down 15%. The region continued to show bifurcated performance: solid results in Latin America were more than offset by headwinds in Asia Pacific markets, where promotions were used to address pockets of excess inventory. Running grew double digits and apparel mid-single digits, but total inventory was still up double digits, with units up mid-single digits – a sign that the clean-up process is less advanced than in North America and EMEA.

China: resetting a premium brand that became “off‑price”

The starkest reset is underway in Greater China, where revenue fell 16%, NIKE Direct declined 18% (digital -36%, stores -5%), wholesale was down 15%, and EBIT plunged 49%. The region’s profitability has deteriorated into what Friend called a “cycle” of soft store traffic, slower in-season sell-through, high levels of aged inventory and persistent discounting – particularly on digital platforms.

Hill offered an unusually blunt diagnosis: in a marketplace where NIKE had historically been rewarded for innovation and sport, the brand had drifted toward a lifestyle positioning “competing on price.” Combined with underinvestment in store teams and fleet, that pushed the integrated marketplace into a structurally off-price equilibrium, undermining premium perception and compressing margins.

Management has responded with a suite of corrective actions:

• Sharply reducing promotional intensity around key events – notably an approximately 35% decline in 11/11 sales versus last year, in line with plans.
• Accelerating the return of aged inventory from partners and booking higher obsolescence charges; partner and NIKE stock was written off in the quarter.
• Cutting sell-in plans for spring and trimming buys for summer to improve sell-through and full-price realization.
• Reducing NIKE-owned inventory mid-teens in value and 20% in units year-on-year.
• Piloting a reimagined NIKE store format that emphasizes sport, innovation and elevated presentation; initial pilots are showing better traffic and positive comps versus the broader fleet.

Despite these moves, Hill conceded that change is “not happening at the pace we like,” and that Greater China will remain on a distinct and longer timeline than other geographies. All regions now report directly to the CEO, and the Greater China GM has joined his senior leadership team – a governance shift intended to tighten feedback loops and accelerate decision-making on the ground.

For investors, the key tension in China remains clear: restoring NIKE’s premium positioning and profitability requires sacrificing near-term volume and accepting margin hits from inventory clean-up, all against an increasingly competitive and digital-first local market.

Portfolio pivot: from Classics to sport-led innovation

Beneath the geographic noise, NIKE is also re‑engineering its product portfolio. The multi-year dependence on a narrow band of lifestyle “Classics” is being unwound in favor of a broader, sport-led innovation engine across price points and categories.

Running is the clearest beneficiary. The three-by-three framework NIKE shared with partners last year – organizing the category around a structured set of cushioning and stability silos and corresponding price tiers – is now supported by tangible product launches. The Vomero premium and Structure 26 have both seen strong sell-through, with the Structure+ set to arrive in January. Running has now delivered over 20% growth for two consecutive quarters, with double-digit gains across wholesale, NIKE-owned stores and digital.

Other performance franchises are following similar playbooks:

• Football (soccer): A sharpened Mercurial–Tiempo–Phantom cleat platform is being paired with Aerofit, a new apparel technology described as “air conditioning for the body.” World Cup 2026 bookings for NIKE Football are nearly 40% higher in units than for the 2022 tournament, and more than 1,500 NIKE and partner doors will be refreshed ahead of the event.
• Basketball: NIKE is leaning into a multi-brand architecture (Swoosh, Jordan, Converse’s Star Chevron) with unified merchandising – exemplified by planned activations around the NBA All-Star Game in Los Angeles. Player-led franchises such as Ja Morant, the GT series, and women’s signatures (Sabrina Ionescu, A’ja Wilson, Caitlin Clark) are being scaled across men’s, women’s and kids’ lines.
• Training: NIKE Mind, a new footwear platform focused on pre-performance preparation, is being introduced alongside broader “24/7” training apparel designed for continuous wear.
• Lifestyle and collaborations: The NIKE x Skims partnership launched successfully in North America and will expand into EMEA and APLA, while collaborations like the T90 x Palace capsule and Hollywood Keepers collection aim to re-root sportswear in sport culture rather than pure fashion.

This diversification is still in its early stages on the sportswear side. While NIKE has aggressively shrunk its Classics business, management acknowledges that the replacement pipeline – particularly in lifestyle footwear – has more ground to cover. The shift from aging, high-volume icons to a more constantly refreshed blend of performance-inspired and lifestyle product inevitably entails volatility in the near term.

Financial architecture: rebuilding margins under tariff pressure

Behind the rhetoric of “sport offense” and city-by-city execution sits an unglamorous but critical financial agenda: rebuilding EBIT margins back into double digits after a sharp contraction.

Friend was explicit that the path runs first through growth – particularly in higher-quality, full-price channels and categories – and then through operating leverage. The levers include:

• Channel mix: Renewed modest growth in wholesale, which is structurally more cost-efficient than direct shipments. Palletized shipments to partners reduce per-unit logistics costs compared with one-to-one fulfillment in e-commerce.
• Price and mix: A gradual recovery of full-price sales as promotions recede – particularly in North America and, eventually, China – should support gross margin. Underlying expansion is already visible in North America once tariffs are stripped out.
• Supply chain efficiency: Growth in volumes should allow NIKE to leverage fixed supply chain costs; in recent quarters, declining scale has turned that relationship into a headwind.
• Cost discipline: SG&A rose only 1% in the quarter, with higher brand marketing spend offset by lower operating overhead. Management signaled that roughly 10% of revenue remains an appropriate level for demand creation, with any additional structural cost savings likely to flow toward both profit restoration and more agile, “liquid” marketing activations.

The new Chief Operating Officer, Venkatesh Alagirisami, has been tasked with integrating technology across the end-to-end value chain – from product creation and planning to making, delivering and selling – in search of structural efficiency gains. While details remain sparse, the implication is that NIKE sees material opportunity in streamlining its operational backbone as it adjusts to a more fragmented, digitally mediated marketplace.

For now, the headline numbers still reflect the cost of transition. Group gross margin will remain under pressure in the near term, with management guiding to another 175–225 basis point decline in Q3, including a 315 basis point drag from tariffs. But their disclosure that margins would be expanding absent those tariffs, combined with underlying North American improvement, gives investors an early glimpse of what the business could look like once the heavy lifting of the reset is complete.