Tariff pressure and declining consumer confidence double blow! NIKE, Inc. Class B (NKE.US) warns that Q4 sales may see a double-digit decline.

On Thursday, NIKE, Inc. Class B (NKE.US) warned that due to the extended time required for the sports shoe giant's recovery plan, as well as challenges posed by new tariffs and declining consumer confidence, sales for this quarter are expected to see a double-digit percentage decrease. During a conference call with analysts, Chief Financial Officer Matt Friend stated that NIKE, Inc. Class B expects sales for the fiscal fourth quarter ending in May to decline in the "around 15%" range at the low end. Additionally, due to intensified efforts to clear excess inventory and discontinue outdated styles no longer favored by consumers, as well as the impact of tariffs imposed by the United States on Chinese and Mexican products, the company's gross margin is expected to decrease by 4 to 5 percentage points, with this process expected to continue until the fiscal year 2026. Friend said, "We believe the fourth quarter will reflect the largest impact of our current actions, and headwinds in revenue and gross margin will begin to moderate from here. We are also dealing with multiple external factors that create uncertainty in the current operating environment, including political dynamics at GEO Group Inc, new tariffs, exchange rate fluctuations, tax regulations, and the impact of this uncertainty and other macro factors on consumer confidence." This earnings guidance falls far below analysts' expectations. According to LSEG consensus estimates, Wall Street had previously expected sales for this quarter to decrease by 11.4%. Following the announcement, the stock price of NIKE, Inc. Class B fell over 4% in after-hours trading, accumulating a total decline of over 5% since the beginning of the year. Despite the disappointing earnings guidance, NIKE, Inc. Class B's performance in the third quarter exceeded Wall Street expectations. For the three months ending on February 28, the company reported a net income of $794 million, or $0.54 per share, compared to $1.17 billion, or $0.77 per share, in the same period last year, with the market expecting $0.29 per share. Revenue declined to $11.27 billion, a decrease of approximately 9% from $12.4 billion in the same period last year, with the market expecting $11.01 billion. Like other retailers, NIKE, Inc. Class B experienced strong demand in December but a "double-digit" decline in January and February. However, it is worth noting that NIKE, Inc. Class B's performance exceeding expectations was mainly due to the lower market expectations before the release of the financial reports. In this quarter, NIKE, Inc. Class B's gross margin decreased by 3.3 percentage points to 41.5%, below the market's expectation of 41.8%. This was primarily due to the costs incurred by NIKE, Inc. Class B to clear old inventory and introduce new innovative styles. The company attributed the decrease in gross margin in the press release to "higher discounts, higher inventory write-offs, higher product costs, and changes in channel mix." At the same time, the decline in sales was mainly due to the weak performance in the Chinese market. This quarter, sales in this key region decreased by 17% to $1.73 billion, below the market's expectation of $1.84 billion. Morningstar analyst David Swartz said that despite overall performance exceeding Wall Street expectations, the weak performance in the Chinese market should not be overlooked. In October last year, Elliott Hill, a long-time executive at NIKE, Inc. Class B, returned to the company as CEO after retiring. After a year of declining sales and company layoffs, he is working to turn around the business and restore growth. He is focused on regaining wholesale partners, reigniting innovation, and attracting athletes who have switched to new competitors, but these efforts have not yet yielded results. Hill said during the conference call with analysts, "First, I want to say I'm proud of the progress we've made on key actions we committed to 90 days ago. While we met the expectations we set, we are not satisfied with the overall result. We can and will do better." This quarter, direct sales channels for NIKE, Inc. Class B decreased by 12% to $4.7 billion. Wholesale revenue decreased by 7% to $6.2 billion. Additionally, since Hill took office, the company has faced a series of new dynamics that may make its recovery more difficult. During the three months since NIKE, Inc. Class B last reported earnings, Trump imposed a 20% new tariff on goods imported from China, consumer confidence decreased, and retail sales in January and February were lower than expected. According to a manufacturing disclosure released in January, about 24% of the hundreds of suppliers and manufacturers that NIKE, Inc. Class B collaborates with are located in China. If retailers do not raise prices to offset tariffs and cannot fully pass on costs to suppliers, NIKE, Inc. Class B's profit margins are expected to be impacted by the new tariffs. During the Thursday earnings conference call, NIKE, Inc. Class B did not specify whether prices would be raised and how exactly the new tariffs would affect profit margins. Furthermore, when consumer confidence is low and spending is cut, non-essential items such as new clothes and shoes are often the first items to be cut, with consumers turning to essential items instead. In recent years, the overall sports shoe and apparel market has been weak due to consumers reducing purchases of clothes and shoes. However, until recently, strong companies have still performed well and taken market share from weaker competitors. However, in recent weeks, this trend has begun to change, with even the strongest companies issuing warnings about weak consumer spending when announcing first-quarter earnings, raising questions about the health of the economy. This quarter, sales in NIKE, Inc. Class B's largest market - the North America region - decreased by 4% to $4.86 billion. Nevertheless, revenue in this region was still higher than analysts' expectations of $4.53 billion. It is widely expected that NIKE, Inc. Class B will focus on...Regain lost market share and reset their business, some insiders said that the company's issues have been exaggerated. However, tariffs and economic concerns may mean that the recovery of retailers may take longer than expected and be more difficult.The key to NIKE, Inc. Class B's transformation plan lies in its ability to reignite innovation and create industry-leading footwear and apparel products that have long made it a market leader. During a conference call with analysts, Hill stated that the company's new high-end Pegasus Premium series had "almost sold out" in North America and will expand sales by fall 2025. The Vomero 18, designed for everyday runners, has achieved "excellent" results, and NIKE, Inc. Class B plans to double its release by mid-April. Hill said, "It will take time to achieve sales that are significant enough to replace the few classic series products we have relied on, but our approach is simple - to make consumers fall in love with NIKE, Inc. Class B's new products, rather than replacing one classic product with another." NIKE, Inc. Class B has made progress in regaining market share and expanding its female customer base, which is a key component of revenue growth and clothing sales. Last month, the company announced a collaboration with Kim Kardashian's underwear brand Skims to launch a new product line called NikeSKIMS, including clothing, footwear, and accessories. This highly anticipated collaboration is expected to help NIKE, Inc. Class B penetrate the female market better and compete more effectively against brands like Lululemon, Alo Yoga, and Vuori, which currently cater more to female consumers than NIKE, Inc. Class B. Additionally, NIKE, Inc. Class B launched a new advertising campaign targeting female athletes during the Super Bowl, marking the first time in decades that the company has advertised during a major sporting event. This campaign indicates that attracting female athletes and capitalizing on the trend of women's sports will be a key focus of Hill's strategy. If NIKE, Inc. Class B continues to show positive signs from new product launches and collaborations, other unfavorable factors may be seen as irrelevant distractions. Bloomberg Intelligence analyst Poonam Goyal said that this performance indicates that "recovery is starting to show," but that "the company still has a lot of work to do in reducing inventory." Jefferies analyst Randal Konik also believes that the performance shows that NIKE, Inc. Class B has had a "good start to its two-year recovery journey." He cited positive signals from new products, inventory clearance, and rebuilding relationships with wholesalers.