Nike (NKE) Q2 2026: $4B Classics Reset Drives Portfolio Shift, Margin Recovery Hinges on Execution
Nike’s Q2 2026 marked a decisive shift as a $4 billion classics reset and tariff headwinds forced a portfolio overhaul and margin pressure, even as North America surged and running outperformed. The comeback playbook, centered on the “sport offense” and channel diversification, is working in lead markets but remains uneven globally, with China’s turnaround lagging and margin recovery tied to operational discipline. Investors should watch for margin expansion signals and deeper execution on innovation and local market resets in the coming quarters.
Summary
- North America Playbook Delivers: Wholesale and running outpaced, but international and digital remain in transition.
- Margin Recovery Path Defined: Tariff drag and channel mix weigh on profit, but operational leverage and cost actions show promise.
- China Reset Is Prolonged: Turnaround requires structural changes, with execution risk and no quick rebound in sight.
Performance Analysis
Nike’s Q2 2026 results highlighted a business in active transformation, with reported revenue up modestly and gross margin sharply pressured by structural and transitory headwinds. The most notable driver was the ongoing reset of classics footwear franchises, which have declined over $4 billion from peak levels, intentionally shrinking a legacy pillar to enable a more diversified, innovation-led portfolio. This reset created a $550 million top-line headwind in the quarter alone, but excluding this, currency-neutral revenue rose 6%—a sign of underlying strength in growth categories.
North America remains the anchor of Nike’s turnaround, delivering 9% revenue growth and 24% wholesale growth, powered by double-digit gains in running, basketball, and training. Digital and Nike Direct, however, remain in contraction, reflecting both reduced promotions and a strategic pivot to premium positioning. Internationally, EMEA and APLA saw mixed results, with heavier promotions and inventory pockets, while Greater China’s 16% revenue drop and 49% EBIT decline underscored persistent challenges in brand perception, channel management, and inventory health.
- Wholesale Outpaces Digital: 8% global wholesale growth contrasted with a 9% decline in Nike Direct and 14% in Nike Digital, reflecting a shift back to partner-led growth and tighter channel segmentation.
- Tariff Impact Is Material: New U.S. tariffs drove a $1.5 billion annualized product cost increase, cutting gross margin by 320 basis points in fiscal 2026, with North America alone absorbing a 520 basis point hit.
- Inventory and Cost Discipline Evident: Inventory fell 3% YoY, units down high single digits, and SG&A growth was contained to 1%, with brand marketing prioritized over overhead.
Despite progress in North America and running, Nike’s margin recovery remains a work in progress, with EBIT margin expansion dependent on further operational improvements, channel mix normalization, and successful execution of the “sport offense” strategy globally.
Executive Commentary
"Margin expansion is a top priority for me and my leadership team. While it will take time, we see the path back to double-digit EBIT margins for Nike Inc. That formula includes a multi-branded and diverse product portfolio that is constantly refreshing and bringing in newness and seeking to drive value out of every relationship we have in the marketplace. It also requires us to be bolder and more creative in how we operate."
Elliott Hill, President and Chief Executive Officer
"North America's gross margins were down 330 basis points, despite more than 500 basis points of a headwind to product costs due to the gross impact from the new tariffs. This gives us confidence that our win-now actions are working, profitability is recovering, and we are on the path back to sustainable, profitable growth."
Matt Friend, Executive Vice President and Chief Financial Officer
Strategic Positioning
1. Classics Reset and Portfolio Diversification
Nike’s intentional $4 billion reduction in classics footwear franchises marks a decisive pivot away from overreliance on legacy SKUs, allowing for faster innovation cycles and a broader product mix spanning running, football, basketball, and training. This move, while painful for short-term revenue and margin, is enabling a healthier growth base and a more resilient brand foundation.
2. “Sport Offense” and Innovation Pipeline
The “sport offense,” Nike’s athlete-centered innovation and go-to-market model, is driving momentum in running (over 20% growth), and fueling new platforms like Structure 26 and Nike Mind. Upcoming launches in football (AeroFit, World Cup kits) and basketball (unified brand merchandising) are set to refresh assortments and drive order book gains, with football bookings up nearly 40% versus the last World Cup cycle.
3. Channel and Geography Realignment
North America is Nike’s operational benchmark, with learnings now being exported to EMEA, APLA, and China. The new leadership structure—geographies reporting directly to the CEO—aims to accelerate local decision-making, resource allocation, and execution. However, China’s reset remains in early innings, with aged inventory, off-price channel reliance, and soft digital traffic still weighing on results.
4. Margin Expansion and Cost Efficiency
Margin recovery is a top corporate priority, with a multi-pronged approach: restoring full-price mix, leveraging wholesale for scale, reducing operating overhead, and integrating technology across the value chain. Tariffs remain a structural drag, but management is targeting a return to double-digit EBIT margins through operational discipline and top-line growth.
5. Marketplace and Partner Strategy
Wholesale partners are increasingly strategic, with balanced growth from both new and existing accounts. Nike is setting three-year visions and one-year plans by account, aiming to deliver segmented, locally relevant assortments and marketing. The goal is to create a repeatable playbook for profitable, sustainable growth across all markets.
Key Considerations
This quarter’s results reflect a company deliberately trading short-term pain for long-term gain, with execution risk high as the business pivots across multiple fronts. Investors should weigh the following:
- Portfolio Shift Is Nonlinear: The classics reset is a drag on headline growth, but critical for long-term health and innovation-led expansion.
- North America’s Lead Is Not Yet Replicated: International geographies, especially China and parts of APLA, remain in reset mode, with uneven recovery timelines.
- Margin Recovery Requires Execution: Tariff drag, channel mix, and inventory cleanup must be offset by cost leverage and top-line acceleration to achieve management’s EBIT margin targets.
- Innovation and Launch Cadence: Success in running and football sets a template, but apparel, digital, and sportswear diversification must deliver to sustain momentum.
- China Reset Is Complex: Deep structural changes, partner collaboration, and brand repositioning are needed, with management signaling a multi-quarter, if not multi-year, effort.
Risks
Key risks include continued margin pressure from tariffs and channel mix, execution missteps in China’s reset, and overdependence on North America for growth. Inventory management and promotional discipline remain critical, especially as digital and direct channels contract. Macro volatility and consumer demand shifts in key markets could prolong the recovery or force further resets.
Forward Outlook
For Q3 2026, Nike guided to:
- Revenue down low single digits, with North America modestly positive and China and Converse flat to Q2 trends
- Gross margin down 175 to 225 basis points, with underlying expansion excluding tariffs
- SG&A up low single digits, reflecting higher marketing and sport offense investments
For full-year 2026, management maintained a cautious stance, citing:
- Continued headwinds in China and Converse
- Ongoing focus on cost discipline and operational efficiency
Management emphasized that progress will remain uneven by brand, geography, and channel, with North America as the template for recovery and China as the long-tail challenge. Investors should expect further updates as local resets and innovation launches play out.
Takeaways
- Portfolio Overhaul Is Underway: The $4 billion classics reset is enabling a healthier, more diversified growth platform, but creates near-term volatility in reported results.
- Margin Expansion Is a Multi-Quarter Journey: Tariffs and mix weigh on profitability, but operational leverage and cost actions are beginning to show results, especially in North America.
- China Remains a Key Watchpoint: The reset is deep and slow, with execution risk high and no clear bottom yet, but management is acting decisively to restore brand equity and premium positioning.
Conclusion
Nike’s Q2 2026 was defined by deliberate disruption—shrinking legacy franchises, absorbing tariff shocks, and doubling down on innovation and operational discipline. The “sport offense” is validating the comeback in North America and running, but global consistency and margin recovery remain works in progress. Investors should monitor margin signals, China execution, and the cadence of new product launches in evaluating the turnaround trajectory.
Industry Read-Through
Nike’s aggressive classics reset and margin-first approach signal a broader industry pivot away from legacy SKUs and promotional dependency, with innovation, channel segmentation, and local execution becoming critical levers. Tariff impacts and supply chain cost pressures are likely to persist across global brands, putting a premium on operational agility and partner collaboration. China’s prolonged reset highlights the risks of overreliance on lifestyle positioning and the need for locally relevant, sport-driven strategies—a lesson for all consumer brands navigating post-pandemic demand shifts.