NKE — Q1 FY2027 Financial Report Analysis

Overview

Nike's first quarter of fiscal 2027 (the three months ended August 31, 2026) brought revenue of $11,213 million, down 4% from $11,720 million a year earlier, and down 5% on a currency-neutral basis (what the change would have been if exchange rates hadn't moved). Net income slipped 2% to $712 million and diluted EPS went from $0.49 to $0.48.

The quarter looks like the second half of fiscal 2026, only sharper. North America grew again and its margin held up after last year's one-off tariff credit dropped out. Greater China fell 26% on a currency-neutral basis, double the full-year decline we wrote about three months ago. The bigger news is in the filing's text. Management no longer describes a reset that is close to finished. It now says work on Nike Sportswear and Jordan Brand, and in Greater China, will run beyond fiscal 2027, and it has announced a new cost program, "Pace", with about $1.0 billion of pre-tax charges.

At a glance

• Revenue −5% currency-neutral ($11.2bn): Greater China, EMEA and Converse all shrank; North America (+2%) was the only region that grew.
• Profit before interest and tax (EBIT) $907M, flat: the gross margin gain and a cut in overhead were cancelled out by lower sales. The total held flat only because of a $42 million turnaround in "other" income.
• Cash from operations $135M against net income of $712M: the quarter paid out almost all of last year's severance accrual and the tax on the tariff refund. After capital spending, free cash flow was below zero, and $610 million of dividends came out of the cash pile.

The headline numbers

Gross margin is the share of each sales dollar left after the direct cost of making and shipping the product. EBIT is Nike's own main profit measure: profit before interest and income tax. Nike uses it to judge its regions. Demand creation is Nike's term for brand and sports marketing.

Where the revenue went

North America is now the only region growing. Wholesale revenue rose 9%, while Nike Direct fell 6%, with digital and store sales each down 6%. Footwear units rose 2%. Apparel grew 6% on flat units, because prices per item were higher ("product mix and strategic pricing"). The region's EBIT of $1,170 million is more than the whole company's EBIT of $907 million. Every other part of the business, after central costs, adds up to a net loss.

Greater China got worse on every line. Wholesale revenue fell 31% and Nike Direct fell 18% (digital −28%, stores −14%). Footwear units fell 26%. EBIT fell 34% to $248 million. The filing repeats its description of "a trend of declining store traffic, elevated promotional activity and higher levels of inventory across the marketplace." The −26% is not only weak shoppers. Part of it is Nike choosing to ship less to its retail partners there.

EMEA shows the price cost of clearing old stock. Footwear revenue fell 11%, but only 5 points of that came from fewer pairs. The other 6 points came from lower average selling prices, due to "channel mix and higher discounts." Digital sales in the region fell 26%. Even so, EMEA's gross margin rose 140 basis points (1.4 percentage points) on lower product and logistics costs, so its EBIT fell only 1%.

Apparel outgrew footwear in every Nike Brand region except Greater China, where both fell by about a quarter. Group footwear revenue fell 6% and apparel rose 2%. Footwear is about 62% of revenue, so the shoe business is what is pulling the total down.

What the headline numbers hide

• Flat EBIT came from below the operating line. Gross profit minus selling and administrative expense came to $888 million, down 4.2% from $927 million. As a share of revenue it was 7.9% in both years. "Other (income) expense, net" moved from a $23 million expense to $19 million of income, a $42 million turnaround. That turnaround is the only reason reported EBIT rose at all. The core margin was flat, not better.
• North America's EBIT gain is partly a one-off. The region's EBIT includes $21 million of "other segment items," which the filing defines as "unusual or non-operating transactions that occur outside the normal course of business." Without them, North America's EBIT was $1,149 million against $1,134 million, up about 1% rather than 3%.
• The EPS decline is all tax. Pre-tax income was $921 million against $922 million, essentially identical. The tax rate rose to 22.7% from 21.1%, "primarily due to foreign tax audit settlements recognized in the current year." At last year's 21.1% rate, net income would have been about $727 million, the same as a year ago. There were no buybacks. The diluted share count rose slightly, to 1,484.2 million from 1,479.0 million, so share count did not help EPS either.
• Cash conversion was poor, for mostly known reasons. Operating cash flow of $135 million was less than a fifth of net income. Working capital took $846 million. Accrued liabilities fell, largely through "payments related to employee compensation": Nike paid out "substantially all" of the $243 million severance balance left from fiscal 2026. Income taxes payable fell because Nike paid the US federal tax linked to the tariff refund. Against that, receivables fell $689 million as the tariff refund itself came in ($684 million of it was still owed to Nike at May 31). Capital spending was $199 million, so free cash flow was about −$64 million, and the $610 million of dividends came out of cash. Cash and equivalents fell $660 million to $6,903 million.
• Inventory is fine overall but rising in the wrong place. Group inventory of $7,846 million is down 3.3% from a year ago, about in line with the 4.3% fall in revenue. Over the three months since May 31, though, Greater China's inventory rose 7.6% to $853 million while its revenue fell 26%. The filing also mentions "higher inventory obsolescence reserves" (write-downs for stock that may not sell) in China's gross margin. Some build-up from May to August is seasonal. In a region whose main problem is too much stock, it is still the number to watch.
• Receivables up while sales are down. Accounts receivable of $5,242 million are 5.6% higher than a year ago ($4,962 million), while revenue fell 4% and wholesale was flat. The filing doesn't explain the year-over-year gap. It is not large, but receivables should normally move with sales.
• The tariff comparison is cleaner than it looks. Last year's IEEPA tariff credit was booked in Q4 of fiscal 2026, so this quarter has no reversal flattering it. North America's 110-basis-point margin gain is explained in the filing by higher prices per item and lower warehousing and logistics costs, "partially offset by higher product costs." The filing's margin bridge does not name tariffs as a driver this quarter.

Did last time's read hold up?

Our fiscal 2026 annual report listed three things to watch. Here is how each turned out:

• North America's margin without the tariff credit: it held. Gross margin rose 110 bps to 43.4% and EBIT rose 3% (about 1% without the one-off item noted above).
• Whether digital stabilises: it did not. Nike Brand Digital fell 13% currency-neutral, slightly worse than fiscal 2026's −12%. This is the start of the second year of double-digit declines, which we said would suggest the traffic went to competitors, not to Nike's wholesale partners. Wholesale revenue fell 1% overall, so it did not absorb the shortfall.
• Converse: still shrinking (−28%, units −34%). Its $25 million of Q1 EBIT is more than the $18 million it earned in all of fiscal 2026, which means the brand lost money over the last three quarters of fiscal 2026 combined.

We also said the currency tailwind (help from exchange rates) was not guaranteed. It shrank: translation added about $26 million to revenue, and reported growth was about 1 point better than currency-neutral, compared with roughly 2 points for fiscal 2026.

Takeaway: The reset's finish line moved. Three months ago management said its product and marketplace actions would be complete by the end of December 2026. This filing pushes Sportswear, Jordan and Greater China beyond fiscal 2027. A quarter in which Greater China's decline doubled to −26% and digital kept falling 13% matches that later date. North America's 2% growth is holding the company up, and on its own it isn't enough to stop total revenue falling.

The new cost program: Pace

In October 2026 Nike announced "Pace," a multi-year program that absorbs the March 2026 cost plan:

• Charges: about $1.0 billion pre-tax, mostly severance, on top of the roughly $0.3 billion recognized in fiscal 2026. About $0.3 billion falls in fiscal 2027, "largely within Operating overhead expense," and the rest through fiscal 2031. Most will be paid in cash.
• Savings: about $2.5 billion cumulative through fiscal 2031, before the charges and before any reinvestment.
• Structure: a new campus in India, and a move in fiscal 2028 to three regions: Americas (North America plus Latin America), APGC (Asia Pacific plus Greater China) and EMEA.

The first effects of the March plan show up this quarter. Operating overhead fell 6% on "lower wage-related expense," and Nike spent the savings on marketing, which rose 5% ("higher investment in key sports events"). Because Pace's savings target is cumulative over five years and comes before reinvestment, it does not tell us how much the yearly cost base will fall. Expect GAAP results in the coming quarters to carry roughly $0.3 billion of charges over the rest of fiscal 2027, none of which were in this quarter.

Outlook

The 10-Q gives no numeric guidance. Management's qualitative statements:

• Actions for Nike Sportswear and Jordan Brand "are expected to extend beyond fiscal 2027," reflecting "higher levels of discounting and broader marketplace pressure."
• Converse's reset continues "throughout fiscal 2027"; Greater China's extends "beyond fiscal 2027."
• These actions "are expected to continue to adversely affect, Revenues and overall profitability."
• Buybacks remain paused (none this quarter), though the $18 billion program was reapproved in June with no expiry date, and any future buybacks would be funded from operating cash flow.

Our read: the business is not getting worse on margin. Gross margin is up, overhead is falling, and the core operating margin was a flat 7.9%. Revenue has not found a bottom, though. The next two quarters need North America to keep growing now that the one-time refill of wholesale partners' shelves is behind it, and Greater China to stop accelerating downward. The quarterly dividend is $0.41 against EPS of $0.48. With buybacks paused, roughly $0.3 billion of restructuring charges to come in fiscal 2027, and operating cash flow running far below net income this quarter, the gap between dividends and free cash flow matters more than usual.

Specific things to watch in Q2 fiscal 2027:

• Greater China's direction: whether −26% is the low point or the decline keeps getting deeper, and whether the region's inventory falls back from $853 million.
• Digital: whether the decline narrows from −13%. EMEA's −26% digital figure is the most extreme.
• Pace charges: how much of the ~$0.3 billion fiscal 2027 charge lands in Q2, and whether management separates it out in reported figures.
• Cash: whether operating cash flow recovers toward net income now that the severance and tariff-related tax payments are out of the way.