The Margin Turned. The Year Got Worse.
Nike delivered the first gross-margin expansion in eight quarters and then guided a year below our own downside case: revenue down high-single digits, earnings of $1.15 to $1.35 against a $1.64 dividend. Of the eight questions we froze before the print, three cleared, four missed and one was not given. Our fair value moves to $35 from $38.
Download PDFDownload modelThe pre-print valuation
The ruler after the print: the starting mark moved back, the end-points did not
How to read it. One horizontal ruler of operating margin (operating profit as a percent of revenue), 4% to 15%. Five marks: the grey mark is what Nike earned in fiscal 2026 without the one-time tariff refund; the red mark, with the arrow, is the margin implied by the midpoint of the company's new fiscal 2027 guide; the black mark is the terminal margin the $33.87 price requires in our rerun model; gold and green are the end-points of our base and upside cases in fiscal 2032, unchanged from before the print. The shaded span is what the price pays for, the dashed span what it does not. It shows the starting point moving backward while the destinations stay put.
This is the update to NIKE (NKE) — Is It Time to Buy?, published September 27 with a scorecard frozen before the print. It says what the release changed, re-runs the model on it, and grades the scorecard — misses first.
What the print changed
The quarter was what Nike said it would be, and on the line that mattered most it was better. Gross margin was 42.8%, up 60 basis points, the first year-over-year expansion in eight quarters once last year’s one-time tariff refund is set aside, and comfortably past the “slightly positive” the company had guided. Selling and administrative expense fell 3% with operating overhead down 6% while demand creation, the marketing line, rose 5% into the World Cup. Earnings were $0.48 a share against a $0.44 consensus, the thirteenth beat in a row, on revenue of $11.2 billion, a little under the roughly $11.3 billion expected. Inventory fell 3% to $7.8 billion. North America wholesale, the engine of the turnaround, grew 9%. The performance business, about a third of revenue — running, football, training, basketball — grew high single digits, low double digits outside China; World Cup team kits sold at twice the 2022 level and club kits rose in the high teens.
And the company gave the thing the pre-print note said it had withheld: a cost number. Pace, announced with the results, is a restructuring of the supply chain, the regional structure and the workforce — a new campus in Bengaluru, four geographies folded to three — expected to save about $2.5 billion cumulatively through fiscal 2031 for about $1.0 billion of charges, most of the savings arriving in fiscal 2029 and 2030 and a portion reinvested. The new chief financial officer also replaced quarter-by-quarter guidance with a full-year range, described on the call as a bottom-up review of the whole plan, and promised a five-year financial framework at the Investor Day on November 16–17.
That is the company’s case, and none of it is contested here. Its holder would add two readings this note can state but cannot test before the December print: that a new CFO’s first range is set to be beaten, and that the revenue being lost is supply the company chose to remove for full-price health. What the release changed is what came with it.
The year. Fiscal 2027 revenue is guided to decline high-single digits. The first quarter was down 4%, so if high-single digits means 7% to 9%, the remaining three quarters are down roughly 8% to 11%. Adjusted earnings are guided to $1.15–$1.35 a share, excluding about $0.15 of Pace charges, with operating profit falling faster than revenue. Against the $1.58 Nike earned last year without the refund, the midpoint is a 21% decline, and nearer 30% on the company’s adjusted basis, which also leaves out last year’s $385 million of severance; against the roughly $1.72 the sell side carried into the print, 27%. Our own downside case had revenue down 5.5%. The guide is below it.
The half that is shrinking is shrinking faster, on purpose. Sportswear, just under half of revenue, fell low double digits: the Dunk was cut by nearly half, about a $200 million headwind, and some higher-volume styles sold through below plan, which management said has already reduced future order books. Jordan fell mid-teens, and the company will now cut the volume and frequency of its retro launches to restore scarcity, with North America taking most of it. Greater China fell 22% as reported and 26% in constant currency, with segment profit down 34%, and the guide assumes it gets worse for the rest of the year as the company removes online distribution it considers too promotional. The pressure, the CFO said, runs through fiscal 2027 and into fiscal 2028.
The direct business did not narrow. NIKE Direct fell 8%, with digital down 13% and stores down 5%, against a 7% decline the quarter before. Total wholesale slipped 1% — North America up, China down 28% — after growing in every quarter of fiscal 2026.
The quarter by region and channel: one line up, six down, one flat
How to read it. Each pair of bars is one region's revenue change from the same quarter a year ago, as reported in dollars: the solid bar is sales to wholesale partners, the lighter bar is NIKE Direct (the company's own stores and digital). Bars to the right of zero grew, bars to the left shrank; the label gives the change and the grey text the quarter's revenue for that line. Compare bar lengths within and across regions. It shows North America wholesale as the one line growing strongly, and Greater China wholesale as the steepest decline.
The dividend is now above the earnings. The $1.64 annual dividend is 131% of the guide’s midpoint and 149% of it after the Pace charges. The release reports no repurchases; the $610 million returned was all dividends. The CFO was unequivocal that the dividend is a priority the company expects to maintain and grow. On our rerun the base case covers it 1.08 times with cash this year, helped by the $684 million tariff collection, and 0.94 times next year.
The guide against the dividend: earnings per share, dollars
How to read it. One horizontal line of annual earnings per share. The solid red bar is the company's guided range for fiscal 2027 on its adjusted basis; the dashed extension to its left is the same range after the roughly $0.15 of restructuring charges it excludes. The three marks are what Nike earned in fiscal 2026 without the tariff refund, the annual dividend at $0.41 a quarter, and the sell-side consensus for fiscal 2027 before the print. Read left to right: every mark sits to the right of the guided range. It shows the dividend above the earnings the company expects this year.
What Nike is worth after this
Before the print our fair value was $38: $23 if the reset did not hold, $38 if the turnaround was slow and real, $56 if it compounded back to 2022 margins. We re-ran the same model and moved only what the release moved, each by the rule published with the scorecard. Fiscal 2027 revenue goes to the guide: down 8% in the base case, 9% and 7% at the tails. Fiscal 2027 earnings go to the guide: $1.25, $1.15 and $1.35, at the mid-20s tax rate the company gave. Greater China’s miss puts the no-offset path for the January distributor exit into the base case, so base-case growth in fiscal 2028 is zero rather than 1.5%. The Pace charges come out of cash flow in every scenario. The cost of equity, the multiples, the terminal growth rates and the terminal margins — 8.5%, 11.5% and 14% — are unchanged; the base end-point already assumed the cost ratio returns to roughly its pre-pandemic level with no program named; Pace is that program, so its charges are new to the model and its savings are not. The margin path in between starts lower and takes a year longer.
| Scenario | Before the print | After | What moved |
|---|---|---|---|
| Downside | $23 | $21 | Fiscal 2027 at the low end of the guide; shrinkage through fiscal 2028 |
| Base | $38 | $34 | The guide midpoint; no growth in fiscal 2028; margin path a year later, same end-point |
| Upside | $56 | $50 | The top of the guide; growth from fiscal 2028 at 3%, not 5%, on the CFO’s statement that the pressure runs into fiscal 2028 |
| Weighted | $38 | $35 | Weights 30/40/30, from 30/45/25 |
The weighted value is $35, inside the $34–$44 band we committed to before the print, near its floor. One point about the weights, stated because it cuts toward the company: the gross-margin gauge cleared by more than 50 basis points, and the rule we froze for that outcome adds five points to the upside weight. The five points come out of the base case, as in the band arithmetic we published. At the weights we published, unchanged, the value is $34. The rule was written before we knew the guide and we apply it as written.
What the rerun did to the value: each scenario before and after, dollars per share
How to read it. Four rows: our three scenarios and the probability-weighted fair value. In each row the hollow circle is the value published before the print and the filled circle is the value after re-running the same model on the release; the line between them is the move. The shaded band on the bottom row is the range we committed to before the print for any single-quarter outcome, and the dotted vertical line is the $33.87 price. Compare the length of the moves, and where the filled circles sit against the dotted line. It shows every scenario moving down and the weighted value landing inside the band, near its floor.
At the $33.87 close after the print, the stock is 3% below our estimate. Reverse-engineered on the new base path, that price requires a terminal operating margin of 9.7%; before the print, $35.76 required 9.3% on the old path. The price fell less than the model did, so the margin the market asks of Nike rose a little rather than fell. Each point of terminal margin is now worth about $2.60 a share. Nike’s operating margin in the quarter was 8.1%, against 7.7% a year ago; the guide’s midpoint implies about 5.8% for the year, which leaves about 5% for the remaining three quarters.
The scorecard we froze before the print — 3 cleared, 4 missed, 1 not given
Eight questions, each with a threshold, a rule for what silence would mean and a rule for what the model would do with the answer, were published on September 27 and locked on September 25. All eight are graded here, misses first.
Rail colors:missednot given, scored as the negative branchcleared
missedDoes Greater China hold the “in line with recent performance” frame?
No. Revenue fell 22% as reported against a floor of −12%, and segment profit fell 34%. The guide assumes it worsens. As committed, the downside China path is now in our base case.
missedHas NIKE Direct’s decline narrowed?
No. Down 8% against a floor of −5%, and wider than the quarter before. The “smaller by choice” reading did not gain its evidence this quarter.
missedIs the “flattish earnings through the second quarter” frame reaffirmed, or replaced by one that implies $0.90 or more for the first half?
No. The frame was not restated; it was replaced by a full-year range whose midpoint leaves $0.77 for the remaining three quarters against about $1.08 a year ago as reported without the refund. Allocated in proportion, the first half comes to about $0.86. Only at the top of the range does it reach $0.90, and the second quarter carries the extra revenue headwind. The company gave no first-half figure, so this grade rests on that allocation.
missedDid the board use the buyback at a twelve-year low?
No. None is reported; the release names dividends only. We said in advance that a zero here was the answer rather than silence.
not givenDoes the second-quarter revenue guide hold “down low-to-mid single digits”?
Not given. Asked directly, the CFO declined to guide the quarter and cited a 400 basis-point headwind from last year’s promotions in Europe and sell-in timing in North America. We had said no guide would be scored as the negative branch, and the full-year guide, read as 7% to 9%, puts the remaining quarters down 8% to 11%.
clearedDoes gross margin expand year over year for the first time in eight quarters?
Yes — 42.8% against a 42.3% bar, up 60 basis points, on lower warehousing and logistics costs. The strongest fact for the price before the print, delivered.
clearedIs North America wholesale still growing?
Yes — up 9%, to $2.98 billion.
clearedIs inventory still being cleaned, not rebuilt?
Yes — $7.85 billion against an $8.0 billion bar, down 3%.
The market reads, resolved or pending. Options had priced a move of ±8.1% against a median of ±6.6% over the prior eight prints. The first session opened down 7.4%, traded as low as 9.0% down, and closed at $33.87, down 3.6% from $35.15, on 3.7 times the twenty-day average volume — the close inside the priced move, and down, as after five of the prior eight prints. One draw, entered on the ledger; no claim rests on it. Whether the record short position — 85.7 million shares at the September 15 settlement — grew or covered is known at the October 15 settlement and after; the September 30 settlement predates the print. Consensus earnings at the freeze were $0.44 and the print was $0.48. Insider transactions over the thirty days after the print are pending.
What would change our view
The downside conditions we published before the print were four, and two of them fired: the second-quarter guide and the earnings frame, the first not given and the second replaced lower, and Greater China worse than −12%. The other two — an eighth gross-margin decline and a dividend cut — did not. That is why the base case itself was rebuilt lower. Re-armed, as dated and checkable conditions:
Toward the upside. An Investor Day framework on November 16–17 that names a double-digit operating margin by fiscal 2029, or selling and administrative expense at or below 33% of revenue for that year; a second quarter, reported in mid-December, with gross margin above the 40.6% of a year ago and the full-year range held or raised; Greater China’s decline narrower than this quarter’s 22%; or the ten-year Treasury at or below 4.5% for twenty consecutive sessions, in which case our discount rate was the error.
Toward the downside. The full-year earnings range cut, or revenue guided to a double-digit decline; second-quarter gross margin below 40.6%; a dividend cut, or a quarter in which the company borrows to pay it; an Investor Day that gives no margin or cost-ratio number at all, which would leave Pace as a savings figure without a destination; or the ten-year at or above 5.75% for twenty consecutive sessions, the mirror of the rate condition above.
Recommendation
Rating: Hold. Fair value $35, from $38, against $33.87. The stock is priced for the year the company has now described; the gap to our estimate is 3%, and a turnaround whose own guide has the next three quarters worse than the last is not an alpha source for the Fund at this price. No position.
The entry ladder in the pre-print note is withdrawn as written. It was built on a base path with four stated break conditions, and two of them occurred. Rebuilt on the new numbers, as conditions and levels and not as a call: the level at which the rebuilt base case alone offers the margin the old ladder asked for is about $27; the evidence configuration is now the Investor Day naming a margin or cost-ratio destination together with a second quarter that holds the gross-margin gain and the full-year range, which would support the upside-weighted value of about $39; confirmation is unchanged in kind — two consecutive quarters of gross-margin expansion of 100 basis points or more with NIKE Direct growing — and is further away than it was.
Review dates: November 16–17 (the Investor Day and the five-year framework), mid-December (the second-quarter print), January 2027 (the China distributor exit). Any position taken is sized under house rules: small or not at all.
Sources & Method
The release. NIKE, Inc. Form 8-K filed 2026-10-01 (accession 0000320187-26-000184): Exhibit 99.1 (results tables, shareholder returns, the Pace description and the fiscal 2027 outlook) and Item 2.05 (Pace charges of about $1.0 billion, about $0.3 billion in fiscal 2027; cumulative savings of about $2.5 billion through fiscal 2031). Every income-statement, balance-sheet, channel and geographic figure is from the exhibit’s tables; Greater China revenue is the sum of its wholesale and direct lines. The call. The company’s own transcript was not posted when this note was written. Call-only statements — performance and Sportswear growth rates, the Dunk and Jordan figures, the 400 basis-point second-quarter headwind, the statement that the guide assumes Greater China worsens, the timing of Pace savings, the dividend priority — are taken from a caption-derived full transcription of the webcast and checked against MarketBeat’s automated summary of the call; the wording rests on that one caption feed, so call statements are paraphrased, not quoted; the provenance table is archived with the note. Year-ago and prior bases. Year-ago quarter figures are the release’s own comparative columns; fiscal 2026 quarterly earnings excluding the tariff refund, the $385 million of fiscal 2026 severance and the second-quarter fiscal 2026 gross margin of 40.6% are from the company’s 10-Qs and the fiscal 2026 10-K as used in the pre-print note; the adjusted-basis comparison adds that severance back after tax and is our arithmetic; consensus of $0.44 for the quarter from Robinhood’s earnings record; the roughly $1.72 fiscal 2027 consensus is implied from published sell-side statements, as in the pre-print note. Prices. Official closes from Robinhood: $35.15 on October 1 before the release; the October 2 reaction session (open $32.55, low $31.97, close $33.87, 142.7 million shares) from the Schwab end-of-day quote, with the twenty-day average volume from Robinhood daily bars; after-hours prints are not used for any grade. Model. The pre-print note’s engine, unchanged: free cash flow to equity over fiscal 2027–2032 with a terminal value, blended 60/40 with a price-to-earnings multiple on fiscal 2028 earnings; cost of equity 9.37%, not re-struck to the tape. Inputs moved by the reading rules frozen with the scorecard; three judgment inputs beyond those rules are labeled in the archived script — the lagged margin path with unchanged end-points, the Pace charges deducted after tax, and the tail-case growth for fiscal 2028. The rerun was archived before this text was written; the workbook is beside the PDF. The scorecard. Frozen 2026-09-25 and published 2026-09-27; graded from the release tables and the call accounts; the proportional first-half allocation behind the earnings-frame grade is our arithmetic, not a company figure, and no repurchase figure appears in the release, so the buyback grade is confirmed against the cash-flow statement when the 10-Q is filed. Known gaps. No company first-half or second-quarter figure exists; the Sportswear, Jordan and performance growth rates are management’s rounded descriptions; FINRA’s first post-print short-interest settlement is October 15.
Disclosures
Information only. TON618 Capital. This report is for information purposes only. Nothing here is an offer to sell or a solicitation of an offer to buy any security, fund interest, or digital asset, and nothing here is personalized investment advice or a recommendation regarding any instrument.
Publisher’s exclusion. All research is published solely as general, impersonal information of regular circulation. It is not tailored to the objectives or circumstances of any individual and is not issued in connection with compensation from any client. The Fund has no clients and distributes all research free of charge. On that basis it publishes in reliance on the publisher’s exclusion from the definition of “investment adviser” under the Investment Advisers Act of 1940 (§202(a)(11)(D); cf. Lowe v. SEC, 472 U.S. 181 (1985)).
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Risk & feedback. Past performance is not indicative of future results. Digital assets and equities are volatile and may result in total loss of capital. Corrections and feedback are welcome — please direct them to CIO Keyth Beck at keyth@ton618capital.com. Version 1.0.