The China conundrum for Nike deepens as the turnaround stalls and shares fall 13%

Nike is running out of time to prove its China playbook is working, as the country’s sixth straight quarterly sales decline underlines how a market once seen as a growth engine has become the biggest pressure point for the US sportswear giant. Second-quarter shoe sales fell 21% in China, accounting for about 15% of Nike’s annual revenue. “It is clear that we need to rethink our approach to the China market,” CEO Elliott Hill said on Thursday’s post-earnings call.

The company’s problems in China have been long-standing and investors never expected a quick return to growth. But Hill’s aggressive push to revamp product offerings and ditch old lifestyle lines hasn’t even delivered the slow, steady progress investors had hoped for.Instead, margin pain is mounting: Gross margins fell about 300 basis points in the second quarter, hit by tariff costs and a glut of outdated inventory. Shares of Nike fell 10% to $59 in early trading on Friday. The stock is down 13% this year and is on pace for a fourth straight year of declines.

ONGOING CHALLENGES

The structural challenges are significant in a consumer market beset by fierce competition and consumer fatigue, driving down prices.

Hill acknowledged that Nike “had not invested enough in revamping its Chinese outlets to drive foot traffic, but China’s so-called monobrand retail landscape – where brands typically operate their own stores rather than sell through third-party retailers – also limits Nike’s ability to replicate the multi-channel dominance it enjoys in the US.” Meanwhile, digital, considered crucial to growth, is sputtering with online sales down 36% as competition from domestic brands like Anta and Li-Ning intensifies.

“It may be the economy, but it is likely that the backlash against Western brands will continue,” said Kim Forrest, chief investment officer at Bokeh Capital Partners. “Nike products feature the swoosh, which lets people know what you’re wearing and makes it look like all the more expensive products are out of fashion. Combine this with the company’s design flaws and you get this quarter’s results.”

Hill and Chief Financial Officer Matthew Friend declined to take the bait when an analyst asked Thursday for a timetable for China’s recovery. Friend mentioned a “dynamic environment” and a “complicated” turnaround.

“We believe our growth will come from sports,” Hill said, “but the reality is we have become a lifestyle brand that competes on price in China.”

‘PARTLY DESIGN’

A friend said Nike was less promotional than last year during its main sales event on Singles Day on November 11, cutting back on spring sales events and reducing summer purchases in an effort to improve full-price sales.

David Bartosiak, an analyst at Zacks Investment Research, said Nike appeared to be betting that “brand heat and partner relationships will ultimately overpower the margin headwinds,” although profitability will take a hit in the meantime.

“The results in China were…partly by design, as Nike tries to eliminate outdated and slow-selling inventory,” said Morningstar analyst David Swartz.

Swartz said Nike deserved the benefit of the doubt — at least for a few more quarters. “Nike was in a similar situation in North America” when Hill took over in October 2024, “and the results have gotten better.”