Nike shares sold off sharply after the company warned investors that tariffs and weakening demand in China are hitting profits harder than expected, raising fresh questions about the pace and durability of its turnaround.

The sneaker giant’s stock fell nearly 10 percent in early Friday trading after Nike disclosed that new tariffs would add roughly $1.5 billion in annualized costs, while revenue and earnings slid well below last year’s levels. Shares dropped to around $58 from a prior close near $65 as investors reacted to shrinking margins, falling China sales, and continued pressure from inventory cleanup efforts.

The market response underscores how sensitive Nike remains to global trade policy and China demand at a time when investors are increasingly focused on margins, pricing power, and execution.

Earnings Slide as Costs Climb

Nike reported revenue of $12.4 billion for the second quarter of fiscal 2026, up just 1 percent year over year. That modest growth masked a much steeper decline in profitability. Net income fell 32 percent to $792 million, while diluted earnings per share dropped to $0.53 from $0.78 a year earlier.

Gross margin declined 300 basis points to 40.6 percent, reflecting higher tariff costs, discounting to clear excess inventory, and weaker pricing power in China.

Nike said tariffs alone represent about $1.5 billion in incremental annualized product costs, a figure that caught investors’ attention given how aggressively Wall Street has been rewarding margin stability across the consumer discretionary sector.

CEO Elliott Hill acknowledged the uneven nature of the company’s recovery during the earnings call.

“I’d say we’re in the middle innings of our comeback,” Hill told analysts.

That comeback, he emphasized, is not moving evenly across regions or product lines.

“It won’t be a straight line, but we’re acting decisively to accelerate the lagging areas with China at the top of that list,” Hill said.

Hill also made it clear that restoring profitability is front and center.

“I want to state it very clearly margin expansion is a top priority for me and my leadership team,” he said.

North America Provides a Bright Spot

Despite the headline disappointment, Nike’s performance in North America stood out as a relative strength and management repeatedly framed it as the blueprint for the broader turnaround.

Revenue in North America rose 9 percent to $5.6 billion, driven by a 24 percent surge in wholesale sales that more than offset a 16 percent decline in Nike Digital. Companywide wholesale revenue increased 8 percent.

“The geography that is leading the way for Nike right now is North America,” Hill told investors.

“As our largest business that’s where much of our focus has been.”

Nike’s running category continued to outperform, with footwear and apparel sales in the segment rising more than 20 percent for the second consecutive quarter. Growth was broad-based, spanning Nike-owned stores, digital channels, and wholesale partners.

For investors, this matters because it shows that Nike’s brand still resonates strongly in its core market when product, distribution, and pricing are aligned. The concern is whether that success can be replicated elsewhere.

China Remains the Major Drag

If North America is the proof point, China is the problem.

Revenue in Greater China fell 17 percent to $1.4 billion, while EBIT plunged 49 percent. Nike Direct sales in the region declined 18 percent, including a staggering 36 percent drop in Nike Digital, the company’s e-commerce business.

Management pointed to weak store traffic, poor sell-through, and heavy promotional activity that has undercut Nike’s premium brand positioning. The reliance on discounts has become a double-edged sword, helping clear inventory in the short term while training consumers to wait for lower prices.

This weakness comes at a time when competition from domestic Chinese brands remains intense and consumer sentiment has softened amid broader economic uncertainty. For investors, the China exposure raises questions about how long it will take Nike to stabilize its largest international growth market.

Strategic Pullbacks Add to Short-Term Pain

Nike is also intentionally shrinking parts of its business, a strategy that is weighing on near-term results but is intended to support long-term brand health.

The company is on track to reduce classic footwear franchises by more than $4 billion from peak levels by the end of the fiscal year. That move alone created an estimated $550 million revenue headwind in the quarter.

CFO Matt Friend framed the results as evidence of resilience during a difficult repositioning phase.

“Our second quarter results demonstrated the resilience of our portfolio, with modest year-over-year reported top-line growth, despite managing headwinds from the actions we have taken to reposition our business,” Friend said.

For investors, this deliberate contraction is a key part of the story. Nike is sacrificing volume in lower-growth, lower-margin categories to focus on innovation, premium products, and performance segments like running. The trade-off is fewer sales today in exchange for a potentially stronger brand and margin profile tomorrow.

Why Investors Should Care

Nike’s earnings highlight several themes investors should be watching closely.

First, tariffs are no longer an abstract risk. A $1.5 billion cost increase is material and forces tough decisions around pricing, sourcing, and margin protection.

Second, the China recovery remains uncertain. Until traffic and demand stabilize, Nike’s international growth narrative will remain under pressure.

Third, North America’s strength shows the turnaround is not broken, but it is uneven. Execution across regions will determine whether Nike can regain consistent earnings growth.

Finally, the company’s willingness to cut back legacy franchises signals a long-term mindset, but patience will be required. Investors betting on Nike are effectively wagering that short-term pain will lead to a more profitable and resilient business.

The market’s sharp reaction suggests confidence has been shaken. Whether this sell-off proves to be a buying opportunity or a warning sign will depend on how quickly Nike can restore margins, reduce tariff exposure, and reignite growth in China.