By Brooke DiPalma

Nike shares drop as tariffs are expected to hit next quarter's results. Yahoo finance

Nike (NKE) beat modest earnings expectations with new CEO Elliott Hill, but investors remain jittery over the impact of Trump tariffs.

Shares in Nike fell by 4% in pre-market trading on Friday.

The footwear giant posted its fiscal third quarter earnings on Thursday after market close. Its revenue of $11.27 billion surpassed estimates of $11.03 billion, though a drop compared to the $12.43 billion from a year ago.

Adjusted earnings per share came in at $0.54 compared to estimates of $0.30, but also under last year's $0.98.

The earnings report is the second under Hill, a company veteran who took the helm on Oct. 14. Shares initially popped, then dropped roughly 5% in after-hours trading as the company shared its fourth quarter guidance.

CFO Matthew Friend warned of the impact of Trump's tariffs, including a 20% duty on all goods from China.

"We expect fourth quarter gross margins to be down approximately 400 to 500 basis points, including restructuring charges during the same period last year. We have included the estimated impact from newly implemented tariffs on imports from China and Mexico," Friend said on the earnings call.

Nike reported gross margin of 44.7% in Q4 of last fiscal year. This third quarter, gross margins dropped year over year to 41.5%, missing estimates of 43%.

Friend said the team is "navigating through several external factors that create uncertainty in the current operating environment, including geopolitical dynamics, new tariffs, volatile for rates and tax regulations as well as the impact of this uncertainty and other macro factors on consumer confidence."

Q4 revenue is expected to be "down in the mid-teens range, albeit at the low end," per Friend. Last fiscal year's fourth quarter revenue came in at $12.61 billion.

Here's what Nike posted in the fiscal third quarter versus Bloomberg consensus estimates:

• Adjusted earnings per share: $0.54 versus $0.30

• Revenue: $11.27 billion compared to $11.03 billion

• Nike brand revenue: $10.89 billion compared to $10.6 billion

"We've been through a lot of change, but what's encouraging is that in the 150 days since I've been back, we've reclaimed our identity. We know who we are. NIKE, Inc. is a sports company," Hill said on the earnings call.

The road ahead will not be easy. Competitors like On Holding (ONON), Skechers (SKX), and Hoka (DECK) sneakers have taken market share in recent years. Meanwhile, a slew of tariff news have reignited inflation fears and shaken consumer confidence, which dropped sharply in February.

Nike has been proactive in diversifying its manufacturing base since President Trump's first time in office. In 2016, it produced 26% and 29% of its apparel and footwear in China, respectively, compared to 18% and 16% in 2024.

The company also has a large exposure to sales outside of North America.

"Nike does about 60% of their revenue outside of the US, so that portion of their revenue is not affected by tariffs at all. They sell in Europe, the stuff they sell in Asia, the stuff they sell in Latin America," Needham & Company analyst Tom Nikic told Yahoo Finance over the phone.

Certain Nike shoes and products, which it does not disclose, are only made in China, so it "can't get around all of the tariffs," CFRA analyst Zachary Warring said.

Warring said Adidas manufactures about 16% of its products in China and the figure for Skechers (SKX) is higher, though it has not disclosed specific breakdowns.

Warring said Hill can revive the company, but investors likely won't see the same growth from 10 to 15 years ago given its sheer size at a $108 billion market cap.

That's compared to roughly $43 billion for Adidas, $18 billion for Hoka owner Deckers, and $8.4 billion for Skechers.

"I've spoken to a lot of industry contacts who all tell me that Elliot's the real deal. He's the right person to turn the ship around," said Nikic, who has a Buy rating on shares.

Part of the key will be a refocus on that core sports offerings. "They've gotten too far off-field, off-court, outside the gym, footwear and apparel," Nikic said.

Other corrections Hill needs to make include managing inventory to make iconic brands like Jordan and Nike Dunks "scarce and hard to get" again, after making them "very easy to get," Nikic said.

It's also working to turn Nike Digital into a full-price model with fewer promotions.

Compared to last year's January and February, Nike Digital in North America "went from over 30 promotional days to zero," Hill said.

Another major initiative is rebuilding partnerships with retailers like JD Sports (JDSPY), Dick's Sporting Goods (DKS), and Foot Locker (FL) after Nike went all in on direct-to-consumer.

"A lot of people who, when they walked into a Foot Locker ... they didn't find what they were looking for from Nike [and] said, 'Okay, well, as long as I'm here ... I'm going to buy a pair of Adidas or I'm going to buy a pair of New Balance, I'm going to buy a pair of Hokas,'" Nikic said.

—

Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on X at @BrookeDiPalma or email her at bdipalma@yahoofinance.com.

Source: Yahoo finance