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After NIKE (NKE) ran past analysts' muted 2Q25 expectations, but delivered soft Q3 revenue and gross margin guidance, shareholders were reminded that the company's turnaround will be more of a marathon than a sprint. CEO Elliott Hill, who returned to NKE on September 19 after retiring from the company in 2020, replacing John Donahoe, believes that the iconic sneaker and sports apparel maker lost its way, relying too much on a few key products: Air Force 1, Dunks, and Air Jordans. This, in turn, caused NKE to lose its innovative and competitive edge, while the company simultaneously shunned its retail partners as it steered customers towards its digital channel.

Correcting these missteps will take some time -- perhaps more than some market participants had initially expected -- and the next couple of quarters are looking rough as NKE works through stale inventory and mends relationships with its partners. On that note, the company guided for a double-digit revenue decline in Q3, badly missing expectations, with gross margin contracting by 300-350 bps.

• Another revenue decrease in Q3 would mark four consecutive quarters of yr/yr declines. In Q2, sales fell by 7.7% to $12.35 bln and the weakness was once again broad-based. Following an 11% drop last quarter, revenue in North America fell by 8%, further solidifying the notion that NKE is losing ground to On Holding (ONON), Deckers' (DECK) Hoka brand, and Skechers (SKX).
• Meanwhile, the situation in China isn't much better as macroeconomic headwinds continue to weigh on consumer spending. In that market, the sales decline accelerated to 8% from 3% in the preceding quarter.
• Despite NKE's prior emphasis on its DTC business, NIKE Direct Revenue still decreased by 13% to $5.0 bln, mainly driven by a 21% plunge in the digital channel. The primary issue relates back to NKE's reliance on those big three franchises and an associated lack of newness in other product areas. With little to excite consumers, NKE has been forced to become overly promotional to drive sales. In fact, Mr. Hill stated that about 50% of sales coming from the digital platform have been promotional sales.
• Accordingly, gross margin has been on a steady downhill slide, dipping by 100 bps in Q2 to 43.6%. More margin pressure is underway as NKE clears out old inventory in order to transition NIKE Digital into a full price business model. The company may also need to offer friendlier terms to its retail partners as it looks to regain shelf space at Foot Locker (FL) and Dick's Sporting Goods (DKS).

Heading into NKE's Q2 earnings report, expectations were low as the company struggles through one of the worst losing streaks in its history. Although the company managed to exceed those downbeat Q2 estimates, its weak Q3 guidance indicates that a comeback is still off in the distance. We do believe that Mr. Hill has the right playbook to execute the turnaround as he places a renewed focus on innovation, sports, and retail partnerships, but like in football, he can't erase a 21-point deficit in just one possession -- it's going to take a couple of quarters.