Athletic footwear company Nike (NKE 2.58%) has trailed the market year to date in 2026, falling about 1% as the S&P 500 has risen about 2%. This extends a stretch of poor performance for Nike stock that has gone on for a few years, resulting in a total decline of more than 50% over three years.
Is this major pullback creating a buying opportunity?
Unfortunately, I believe investors should continue to exercise caution when it comes to Nike stock.
On the surface, Nike's recent financial results suggest its turnaround efforts are working. After all, the company's year-over-year trends and total quarterly revenue have improved in fiscal 2026 compared to fiscal 2025. But beneath the surface, there are some major problems, including significant weakness in China and meaningful declines in the company's important direct-to-consumer sales business.
Image source: Getty Images.
Discouraging results
After reporting a year-over-year revenue decline of 10% for the full year of fiscal 2025, the company is off to a better start in fiscal 2026. Revenue in both the first and second quarters of fiscal 2026 increased 1% year over year.
But there were two major concerns in Nike's most recent quarterly results. While overall revenue rose 1% year over year, two of the catalysts investors care about the most saw deteriorating performance compared to fiscal Q1. First, Nike's direct consumer sales fell 8% year over year in fiscal Q2. This is a much steeper decline than the 4% decrease the company reported in fiscal Q1. Meanwhile, Greater China revenue fell 17% year over year in fiscal Q2. Worse than a 9% decline in fiscal Q1.
What held Nike's fiscal second quarter up? Its wholesale revenue rose 8% year over year, an acceleration from 7% growth in the prior quarter.
Still, weakness in direct-to-consumer and Greater China overshadows improvement in wholesale. Both of these segments are important to the investment thesis for Nike stock for their own reasons.
First, while Nike doesn't report its profit margin on a segment-by-segment basis. Direct-to-consumer sales are considered higher-margin than those through wholesale partners. Deterioration in this business could hurt Nike's profitability. Indeed, the company's net income fell 32% year over year in fiscal Q2. Of course, lower sales in its direct consumer business were not the only factor to blame. But they were likely among them, as management cited a shift away from higher-margin sales channels as one of the reasons its gross profit margin decreased by 300 basis points during the period. Other factors weighing on profitability were greater discounts and higher tariffs in North America.
And China, of course, is important to investors because it's a massive market. Additionally, Nike's poor performance in China is particularly discouraging, as Lululemon is seeing exceptional growth in the market, indicating Nike is losing market share and relevance in this important market.
Looking ahead
Investors shouldn't get their hopes up for a big comeback in 2026. Nike chief financial officer Matt Friend emphasized in the company's most recent earnings call that fiscal 2026 continues to be a transition year for the company. Additionally, the CFO said that Nike is "navigating through both transitory and structural headwinds across the portfolio," negatively impacting its profit margins.
"And I'd say we're in the middle innings of our comeback," said Nike CEO Elliott Hill during Nike's fiscal second-quarter earnings call.
To this end, the company's guidance for fiscal Q3 was unsurprisingly disappointing. Management said it expected revenue for the quarter to decrease by a low single-digit percentage year over year. In addition, the company guided for its fiscal third-quarter gross margin to contract between 175 and 225 basis points.
NASDAQ: LULU
Key Data Points
With that said, there was one silver lining in the company's guidance: Excluding 315 basis points of negative impact on year-over-year comparisons due to tariffs, its guidance would have called for a gross profit margin expansion in fiscal Q3.
Ultimately, given Nike stock's price-to-earnings ratio of 38 as of this right now, I believe a successful turnaround is largely already priced into the stock. With that said, I personally don't think shares are a buy today despite the stock falling more than 50% over the last three years. But if the stock were to decline another 10%, I might consider changing my view.
