Nike

Nike has confirmed that, as of January, it will restrict its franchise partners in China from selling its products through digital channels. By doing so, Nike will limit e-commerce in the nation to official company-operated e-commerce and stores on major platforms Tmall, Douyin, and JD.com.

Why it matters: After surging during the pandemic, Nike has struggled with product innovation and lost share to rising peers over the past few years. Its Chinese sportswear share declined to 16% from 26% between 2020 and 2025 as narrow-moat Anta replaced it as market leader (Euromonitor). Nike's move to end e-commerce by franchisees is part of a larger plan to limit markdowns and offer locally produced merchandise and marketing to Chinese consumers. It will take time, but we think these efforts will succeed as Nike holds advantages in visibility and product development. The policy change damages partners like narrow-moat Topsports, which generates 22% of its revenue from online sales of Nike products. However, in the long run, partner retailers in China should benefit if Nike regains sales momentum, margins, and brand health.

The bottom line: We make no change to our $94 fair value estimate, leaving wide-moat Nike's shares as undervalued. We think investors overlook its potential for improving margins and a return to midsingle-digit annual sales growth as it releases innovative products and raises prices. The new policy may reduce near-term sales, but a large (14%) sales decline and poor (22.5%) EBIT margin in Greater China in fiscal 2027 were already in our model. After changes are implemented, we think Nike will return to sales growth and a more typical EBIT margin of 31% in fiscal 2028.

Big picture: Greater China accounted for only 13% of Nike's fiscal 2026 sales, but the region has high growth potential. Although already the world's second-largest market, per-capita spending on sportswear in China (about $45 in 2025) is only about one-tenth that of the US.

After a six-year hiatus, Nike reopened its store on Amazon in the US in 2025. It is possible that Nike could do something similar with Topsports and others in China once it has cleaned up the marketplace. Most likely, such a return would entail greater restrictions on its partners to ensure order. Ultimately, Nike is dependent on its franchises in China and needs them to remain viable. We think it has learned from past mistakes with partners in North America and will not cede share to competitors. In a statement released by Nike, Topsports' CEO expressed confidence in the future of the partnership.

We hold our fair value estimate on Nike’s shares at $94.

Nike's sales fell 1% in fiscal 2026’s fourth quarter as a 12% decline in Greater China (11% of total) offset a 3% rise in North America (44%). Operating expenses fell 2% on reductions in marketing and administrative costs. Excluding a tariff refund, EPS rose to $0.20 from $0.14 last year.

Nike's fourth-quarter sales outpaced our estimate by 1%, but trends slowed in the second half of the period. Management attributed this weakness to higher gas prices and war in the Middle East and suggested that sales would remain subpar through (calendar) 2026. In addition, Nike intends to reduce near-term sell-in intentionally to limit oversupply and discounts, especially for casual apparel and shoes.

For fiscal 2027, we anticipate a 1.5% sales decrease, a 6.8% EBIT margin (down from 8.3% in fiscal 2026), and $1.69 in EPS (down from $2.10). We anticipate improving results in the latter part of fiscal 2027, and then a return to sales growth (5%) in fiscal 2028.

Despite the anticipated near-term sales weakness, we forecast compound average sales growth for Nike of 5% over the next 10 years. We expect it will achieve compound annual revenue growth of 3% in North America, perhaps slightly below expected market growth. We think Nike’s innovative products and e-commerce will allow it to hold its market position and premium pricing, but we acknowledge that the market has become very competitive. In Greater China, its fastest-growing segment prior to recent challenges (such as rising competition and poor customer traffic at franchised stores), we expect compound average growth of 9% over the next decade.

As Nike deals with a difficult demand environment and discounts inventory, its gross margin was only 42.9% in fiscal 2026, a decline of more than 300 basis points from fiscal 2022. Moreover, with ongoing struggles (especially in Greater China) and higher tariffs, we forecast a 41.7% gross margin in fiscal 2027. Nonetheless, we forecast Nike’s gross margin will return to 46% by fiscal 2029 as its inventory management and sales growth improve. In the long run, we project the company’s gross margins to gradually rise to 48%. The firm may increase gross margins through greater production and distribution efficiencies, its shift to digital sales, product mix changes, and price increases.

We think Nike’s operating margins will strengthen as it achieves cost efficiencies, shifts sales to direct channels, and increases sales in Greater China. The firm’s restructuring plan is expected to bring about $2 billion in expense reductions. We forecast Nike’s overall EBIT margins will gradually increase from this fiscal year’s low (6.8%) level to above 18% over the next decade. In Greater China, we forecast its EBIT margins will rise to 32% from a poor 22% in fiscal 2026. Nike’s EBIT margins in the region have recently been inconsistent due to economic conditions, clearing of obsolete inventory, and competition from native brands but should improve over time through greater investment in the region. In North America, we forecast segment operating margins of about 28% after fiscal 2030 as it increases its direct-to-consumer sales and limits discounting of its products.

We assign a wide moat rating to Nike, the world’s largest athletic apparel and footwear firm, based on a brand intangible asset.

As evidence of its competitive edge, Nike’s adjusted returns on invested capital, including goodwill, have averaged 24% over the past five fiscal years, well above our 9% estimated weighted average cost of capital. Moreover, we forecast that the company’s annual adjusted ROICs, including goodwill, will average 31% over the next decade and exceed its WACC for at least the next 20 years, as required for our wide moat rating.

In addition to quantitative factors, we evaluate activewear producers like Nike using five specific criteria: geographic reach; pricing; sponsorships/visibility; product quality/performance; and control over distribution. We rate the company as high in geographic reach, sponsorships/visibility, pricing, and product quality/performance, but moderate in control over distribution.

Nike benefits from the popularity of athletics. The company serves more than 190 countries, has 6,000 or so branded stores that are operated by franchisees, primarily in Greater China, and directly operates more than 1,000 stores (two thirds outside of the US). In (calendar) 2025, Nike’s share of the $175 billion (retail) global sports footwear market was estimated at 23%, nearly double that of second-place Adidas (Euromonitor). In North America, its share of the sportswear market—estimated to be about $167 billion in retail sales—was 14% in 2025, far ahead of Adidas’ 5% (Euromonitor). In Western Europe, with $75 billion in retail sales, Nike’s leading 15% share was about 2 percentage points better than that of Adidas.

Nike has excellent growth prospects in a Chinese sportswear market, estimated at $62 billion at retail in 2025 (roughly triple 2014’s level). With 16% share of its sportswear market in 2025, Nike is positioned to benefit from China’s athletic aspirations. The company’s revenue in Greater China increased to $5.8 billion in fiscal 2026 from $3.9 billion in fiscal 2016, and we forecast compound annual average sales growth of 9% over the next decade. Even so, Nike faces growing competition in the region, so it is responding with new flagship stores, marketing investments, better control over e-commerce, and products designed specifically for Chinese consumers.

Nike benefits from the immense popularity of athletics. The vast reach of athletics benefits the firm as it sponsors many of the world’s most popular athletes, leagues, and teams in virtually all major sports. For example, it is the uniform provider for each of the three largest sports leagues in the US (NFL, NBA, and MLB). Individuals sponsored by Nike include many of the world’s most famous athletes, including Cristiano Ronaldo (football/soccer), Kevin Durant (basketball), and LeBron James (basketball), all three of whom have the equivalent of lifetime deals with the brand.

Nike’s success in sports sponsorships largely stems from its more than 40-year relationship with Michael Jordan. More than 20 years since the basketball great retired, Nike’s Jordan premium sub-brand is the gold standard for sports sponsorships—it generated $7 billion in sales in fiscal 2026 alone.

Although marketing is important, Nike needs to offer quality products to maintain its position. We believe the firm’s technical innovations contribute to its brand and support our wide-moat view. It has been known for its innovative products ever since it introduced running shoes with pressurized air in their soles in the 1980s. Nike produces shoes for many sports, but running (about $4 billion in annual sales) may be its most important category in terms of brand perception. Other key sports include basketball and football (soccer).

Nike supports its innovation with high investment in research and development. Its research and development spending greatly exceeds that of competitors and totaled nearly $1 billion in fiscal 2026 (2% of sales).

Nike achieves premium pricing on key products, supporting our view of its brand power. The firm has always been led by footwear, which accounts for about two-thirds of its sales. Many styles of Nike’s athletic shoes sell for more than $150 per pair, at or near the top of the market in many categories. The firm also offers limited-edition shoes at high prices, and there is a large secondary market for its shoes.

As for its distribution, Nike has made a big push into direct selling. The firm has invested heavily in its physical stores. It also has a large digital presence and intends to increase its digital sales further, which should be achievable as incomes and online access rise in developing markets. The high usage of Nike’s digital tools is a great opportunity for full-price selling with limited marketing costs and a source of vast amounts of consumer data.

Even so, Nike continues to have exposure to wholesale accounts, especially in North America and in China (most franchised stores). Nike’s exposure to third-party sellers has contributed to inventory and discounting problems at times, but it is also an opportunity to reach large numbers of consumers without the cost of operating thousands of stores.

Our view is that Nike’s moat is based solely on its brand intangible asset. Its financial resources and relationships with suppliers may allow for production investment unavailable to others in the short term, but any advantage is likely to be transitory. Further, we do not believe there is any network effect or efficient scale in the apparel business, and switching costs are nonexistent. Finally, we do not believe Nike has a moat based on cost advantage; virtually all its production is outsourced to factories that also serve other sportswear firms.

The global sportswear market continues to expand, especially in Asia and other developing markets. As the share leader, Nike is positioned to benefit.

Nike generates significant free cash flow and consistently returns capital to shareholders through dividends and share repurchases.

Nike’s Win Now strategy is designed to improve efficiency while developing innovative merchandise to drive sales and improve pricing. EBIT margins should return to midteens levels in the medium term.

Nike has had a tumultuous period due to economic issues in key regions and its own mistakes. Given the depth of its problems, the timing of a turnaround is uncertain, especially in China.

Tariffs and higher oil prices are near-term risks that Nike cannot fully overcome through cost-cuts and price increases. Moreover, inflation could reduce consumer demand for sportswear.

The success of relative newcomers like Hoka and On demonstrates how consumers will sample new footwear brands. Nike is under constant pressure to innovate to hold share.