Nike announced plans to decrease its dependence on manufacturing in China for products destined for the United States, aiming to reduce the percentage of US footwear imports from China from approximately 16% to a high single-digit range by the end of May 2026. This strategic shift is a direct response to US tariffs, which company executives estimate could add around $1 billion to Nike's costs. The company will also evaluate corporate cost reductions and implement surgical price increases in the US starting in the fall of 2025 to offset these cost pressures. Despite these challenges, Nike's fourth-quarter sales of $11.10 billion were better than expected, beating estimates of a 14.9% drop to $10.72 billion.
However, Nike continues to face significant weakness in the Greater China market, where sales have dropped, and a turnaround is expected to take time. In the second fiscal quarter of 2026, revenue in Greater China fell 17% to $1.42 billion, marking a seventh consecutive quarter of decline when looking at historical data for Q3 2026, where sales fell 7% year-over-year to $1.62 billion. This regional underperformance has led analysts to express caution regarding Nike's recovery in the Chinese market, anticipating that a complete reset could take up to four quarters.
The tariff impact has also significantly affected Nike's gross margins. The company experienced a 130 basis-point slump in its gross margin to 40.2%, primarily due to tariffs in North America. For the first quarter of fiscal 2026, Nike expects a 100-basis-point impact on its gross margin and a 75-basis-point impact for the full fiscal year. Despite these headwinds, Nike recorded a net income of $792 million in its second fiscal quarter, though this was a 32% drop from the prior year, on revenue that rose 1% to $12.43 billion, beating analyst estimates. North American sales saw a 9% increase to $5.63 billion, helping to offset the losses in China.
To comprehensively address the $1 billion tariff hit, Nike is implementing a four-pronged approach. Besides shifting production out of China, the company is working with suppliers and retail partners to mitigate structural cost increases, with new arrangements set to take effect throughout fiscal year 2026. These measures, combined with price increases and potential corporate cost reductions, are intended to fully mitigate the tariff impact over time. Morningstar analyst David Swartz noted that while the tariff impact is substantial, Nike's competitors are likely to also raise prices, potentially preventing significant market share loss in the US.
