Nike says tariffs will cost it $1 billion before price increases, supply chain shifts

Nike reported better-than-expected fiscal fourth-quarter earnings and revenue

The sneaker giant said it took its biggest financial hit yet from its turnaround plan during the period, but expects sales and fit declines to moderate moving forward

Rachel Wisniewski | ReutersNike on Thursday said it expects sales and fit declines to moderate ahead, after the sneaker giant took its biggest financial hit yet from its turnaround plan during its fiscal fourth quarter

While the worst could be behind the company, it has new challenges such as tariffs to face, making a tough turnaround that much more difficult

On a call with analysts, finance chief Matt Friend called the duties a "new and meaningful" cost. "With the new tariff rates in place today, we estimate a gross incremental cost increase to Nike of apximately $1 billion" in its current fiscal year 2026, Friend said

He added that the company intends to "fully mitigate" that cost over time as it tweaks its supply chain, works with its factory and retail partners and implements price increases

Currently, 16% of its supply chain is in China and it expects to reduce that to the high single-digit percentage range by the end of its current fiscal year, which is expected to end next summer. "Despite the current elevated tariffs for Chinese ducts imported into the United States, manufacturing capacity and capability in China remains important to our global source base," said Friend

Friend said the company will consider cost cuts, but its highest priority remains stabilizing its , which requires investment

Once those efforts are implemented, Friend said the financial impact to fiscal 2026 gross margins is expected to be 0. 75 percentage points, with a greater impact expected in the first half

While Wall Street's expectations were low coming into the report, Nike beat estimates on the top and bottom lines

Here's how the company did for the three-month period that May 31, compared with estimates from analysts polled by LSEG:Earnings per : 14 cents per vs. 13 cents expectedRevenue: $11. 10 billion vs. 72 billion expectedThe company's reported net income for the quarter was $211 million, or 14 cents per , compared with $1. 5 billion, or 99 cents per , a year earlier

Last quarter, Nike warned that its fiscal fourth quarter would be the low point of its turnaround, but in the months since, conditions worsened, leaving investors wondering if more pain was still to come

In a press release, Friend confirmed that the fiscal fourth quarter will see the "largest financial impact" from its turnaround and headwinds are expected to moderate moving forward

On a call with analysts, CEO Elliott Hill said it is time to "turn the page. ""The results we're reporting today in Q4 and in FY25 are not up to the Nike standard, but as we said 90 days ago, the work we're doing to reposition the through our 'Win Now' actions is having an impact," said Hill. "From here, we expect our results to imve. "For the current quarter, Nike expects sales to decline by a mid-single-digit percentage, in line with expectations of down 7%, according to LSEG

It expects its gross margin to be down between 3. 25 percentage points, including 1 percentage point from the tariff rates currently in place today

The largest hit to margins came from Nike's use of discounts and ance channels to offload inventory, coupled with its shift back to wholesale, which is a less fitable channel than selling directly on its website and stores

The company has warned the strategy would lead to lower near-term fits, but would leave the in a healthier position in the long term

Nike stores, however, were a bright spot

Foot traffic data at Nike stores has been declining since October, but those figures also indicate that conditions could be imving, according to Placer

Ai, an analytics firm that uses anonymized data from mobile devices to estimate overall visits to locations

Monthly visits to Nike stores dropped 10. 2% in April compared to the previous year, but that decline narrowed to 3. 2% in May, according to Placer

Revenue fell in all regions during the quarter, but came in a bit better than expected in North America, Nike's largest market

Sales fell 11% to $4. 70 billion in North America, better than the $4. 42 billion analysts had expected, according to StreetAccount

Still, China revenue came in at $1. 48 billion, just below the $1. 50 billion analysts had expected, according to StreetAccount

Hill told analysts that the sales recovery in China will take longer "due to the unique characteristics of the marketplace. " It now has more competition in the region and said it has more work to do to clean up inventory

It is also testing new retail concepts with a local apach

Since Hill took over as Nike's CEO in October, a lot of his work has focused on unwinding the strategy his predecessor John Donahoe implemented

He has worked to win back wholesale partners after Donahoe pursued a direct selling strategy, and he is also bringing Nike back to its sports focus

Under Donahoe, Nike moved away from its sport segmentation and instead broke up its into women's, men's and kids

Some critics say that is part of the reason Nike's innovation pipeline fell apart because the was more focused on lifestyle ducts geared to a wide range of consumers, instead of being directed at athletes

On a call with analysts, Hill said the company is realigning teams to focus back on sports. "Nike, Jordan and Converse teams will now come to work every day with a mission to create the most innovative and coveted duct, footwear, apparel and accessories for the specific athletes they serve," Hill said

On the wholesale front, Nike is moving into more retailers and highlighted fresh efforts with brands such as Aritzia and Urban Outfitters

Beginning this fall, Amazon will begin carrying a "select asment" of shoes, apparel and accessories and Nike will have a brand store on the platform focused on running, training, basketball and sportswear, Hill said

The decision to partner with brands such as Aritzia and come back to Amazon highlights the scrappy apach Nike is taking to wholesale

It also highlights the success Amazon has had in winning over big brands

In the past, few brands were willing to sell on Amazon over concerns it could dilute its image

These days, it is seen as an essential channel for many es

The company is still seeing declines in its performance category for Nike ducts, but it said it saw strong sales for new launches in running and training in North America

During the quarter, it released a new sneaker and collection for A'ja Wilson, a star center with the Las Vegas Aces

The first drop sold out in three minutes and the company plans to double the amount of pairs in the coming seasons, Hill said

During Nike's conference call, its delayed partnership with Skims was not discussed or asked

The first duct launch with Kim Kardashian's intimates line was supposed to go during the quarter, but that has been delayed to later this year, CNBC previously reported

Nike has lost market to athletic apparel competitors such as Lululemon and Alo Yoga, which cater to a similar customer but are more geared toward women