NIKE

On 16 July we published on Nike at $44.57. The verdict was "Watch the Turn": start a modest position, and then the sentence that mattered most, "add on evidence, not hope". We did not leave evidence to taste. We named three specific things that would have to happen, and we said to back up the truck toward $40.

Nine weeks later the price is $36.36. It went through $40 without stopping and now sits about two percent above a fifty-two-week low, down roughly half over twelve months. The zone we named has arrived and been passed. That is precisely when a writer owes you the marking rather than a new opinion, so here it is.

One of three. That is not a disaster and it is not a turn. It is a company where the wholesale repair is real and the profit repair is not yet, trading eighteen percent lower than when we last wrote.

The dials move: Management 6 → 5, for reasons in Part VI that have nothing to do with the shoes. Financial Strength 7 → 6, for the reason in Part III. Moat, Growth and Valuation stay at 6, 4 and 6. The global score falls from 6.2 to 5.4.

One thing you should know before reading any further, because it changes how much weight to put on all of it. Nike reports its first quarter on 1 October, thirteen days after this was written. Nothing here is based on that quarter. Everything here was available on 30 June and has simply not been priced or, in the case of Part II, properly read.

On 30 June, Nike reported a fourth-quarter gross margin of 49.2%, up 890 basis points. For a business whose normal gross margin is in the low forties, that is not an improvement. That is a different company. And it was not real.

In February the Supreme Court ruled that tariffs levied under the International Emergency Economic Powers Act had not been authorised. Nike concluded that recovery of what it had already paid was probable and booked a one-off benefit of $986 million. The chief financial officer put the size of it plainly on the call: about 900 basis points of the margin, and $0.52 of the $0.72 of earnings per share.

Take it out and the fourth quarter reads: gross margin 40.2%, down 10 basis points; earnings per share $0.20. For the full year, gross margin 40.8% rather than 42.9%, and earnings per share $1.58 rather than $2.10.

Two further things about that $986 million, both of which matter more than they sound. Only a little over $300 million of it had actually been collected by 31 May. The rest, roughly $686 million, sits in receivables and carries collection risk. And Nike is being sued in Oregon by consumers who say it raised prices to cover the tariffs and has not committed to handing the refund back.

We flagged this risk in July without being able to size it. The exact sentence was that the test would be "margins up without a tariff refund". We now have the answer and it is no. That is the single most important thing in this report, and the reason the valuation section later reads so differently from the headline multiple everybody quotes.

Nike pays $0.41 a quarter, $1.64 a year, a yield of 4.5% at this price. It was raised last November from $0.40, the twenty-fourth consecutive annual increase. On the reported earnings of $2.10 the payout is a comfortable 78%.

On the earnings that exclude the refund, $1.58, the payout is 104%.

And the cash flow tells the same story from the other direction. In the twelve months to 31 May, Nike generated $2,184 million of free cash flow and paid $2,407 million of dividends. That is 110%. Three of the four quarters produced less cash than the dividend consumed; the fourth, which generated $1.5 billion, carried the year.

The buyback has been switched off. Nike has $5.9 billion of authorisation left, reapproved in June with no expiry, and it bought $122 million of stock in an entire year — nothing at all in the last two quarters. For a company that has retired 124 million shares at an average of $97.57 under this programme, buying none at $40 is a statement. The share count has stopped falling.

Let me be careful about what this does and does not mean, because "uncovered dividend" is a phrase that gets used to frighten people. Nike is not in danger. It holds $9.0 billion of cash and short-term investments against $11.0 billion of debt, net debt of $3.5 billion, an Altman Z-score of 3.3, and inventory that is flat rather than bloated. It can pay this dividend out of the balance sheet for years and nobody will send a bailiff.

But that is the point. It is now being paid out of the balance sheet rather than out of the business, and the twenty-fifth consecutive increase falls due in November, between the October results and the Investor Day. A board that raises into a 104% payout is making a statement about confidence. A board that holds it flat breaks a twenty-four-year streak. Neither is free, and Nike has signalled nothing either way. If you are buying this for the 4.5%, that decision is the thing to watch, not the share price.

It would be easy, and wrong, to write this report as a wake. Two things in the fourth quarter were genuinely good, and one of them was our own test.

Running. Five consecutive quarters of double-digit growth, and about a billion dollars of revenue added over that period. In Western Europe and North America, Nike gained five points of market share in statement running footwear in a single year, more than any other top-five brand. It grew double digits in Europe and in Asia-Pacific and Latin America, and mid-single digits even in a Greater China that fell 17%. This is the category Nike was accused of abandoning to On and Hoka, and it is the category that has turned first.

Wholesale, and the Foot Locker line. Full-year wholesale revenue rose 6% to $27.5 billion, North American wholesale grew 10% in the quarter, and Nike refreshed more than 15,000 wholesale spaces. The sentence from the call that carries the most information is this one: revenue growth and retail sales comparables with Foot Locker were positive for the first time in four years. The retreat into direct-to-consumer, which is the original sin of the previous strategy, is being reversed and the partner is selling more shoes.

Set against that is the thing which makes the top line look worse than the business is. Nike deliberately took two billion dollars of classic franchises out of the market in fiscal 2026 — Air Force 1, Dunk, Air Jordan 1 — to stop the discounting and restore scarcity. Sportswear fell double digits in the quarter, and management expects Sportswear and Jordan Streetwear to stay negative this year with improvement only in the second half. Those two together are about half of Nike's revenue. A company cutting half its revenue base on purpose will report ugly numbers for as long as it takes, and you cannot read the reported line without that in mind.

Greater China fell 17% currency-neutral in the quarter and 13% for the year, to $5.8 billion. Digital fell 25%, wholesale 19%, segment profit 20%. Management guided the near term to be "in line with recent performance", which is a polite way of saying it has no recovery to promise.

Then, on 21 July — five days after our last report — Nike made it structural. From January 2027, its Chinese digital business consolidates to Nike.com.cn, the Nike App, and official flagship stores on Tmall, JD.com and Douyin. Partner-operated online storefronts stop selling Nike product. That includes Topsports, its largest mainland distributor for twenty-seven years, for whom online Nike sales are reported to be about a fifth of total revenue.

This is the right decision and an expensive one. Nike is choosing to destroy revenue it can see in order to recover control of price and presentation it had lost. It is the same logic as taking two billion dollars of Air Force 1s off the market, applied to a country. The consequence for an owner is simple and worth stating without decoration: China revenue pressure is now a fiscal 2028 story rather than a fiscal 2027 one, and our July test — a China that stops falling — cannot pass for at least another year by the company's own design.

This is the item nobody is discussing and it is the reason the management dial comes down.

Read that sequence again. Within four weeks Nike replaced its chief financial officer, lost its previous one entirely, lost its chief accounting officer, and had the brand-new arrival pick up the controller's job as well — going into a quarter whose largest single number is a receivable from the United States government that has not been collected.

None of this implies anything improper. Denton is a heavyweight and the board did not stumble into him. But a thin finance function at the exact moment the accounts contain a large, judgemental, uncollected item is a control-environment question, and the honest thing is to say so out loud rather than after the fact. It is also why we are not inclined to give the reported numbers the benefit of the doubt this quarter.

Two smaller items, for completeness. The annual meeting on 8 September re-elected all eleven directors, approved say-on-pay and defeated both shareholder proposals, so there is no governance revolt here. And the equal-employment agency's action to enforce a subpoena against Nike was dismissed on 13 August after the company complied; the underlying investigation into whether it discriminated in layoff selection has not concluded.

In July we treated the share loss to On and Hoka as a live and growing threat. Three things have happened since, and they point the other way.

The read-across matters more than any one of them. If On misses, Hoka slows to single digits and Lululemon cuts guidance in the same eight weeks, then what is happening is a slowdown across premium athletic rather than a queue of challengers walking off with Nike's customers. That is a materially better backdrop for the largest brand in the category than the one we described in July, and it is the strongest argument in this report for owning the shares.

It cuts the other way too, of course. A category-wide slowdown is not a reason to expect Nike's own numbers to improve quickly. It just means the damage is less specific to Nike than the share price implies.

Two numbers on our own page that we will not let you take at face value. First, our dividend feed returns an empty payment history for Nike — no payments, no trailing dividend per share — for a company that has raised its dividend for twenty-four consecutive years. The $1.623 per share used throughout this report was computed from the cash-flow statement divided by diluted shares, and reconciles to the declared $0.41 a quarter. Second, the trailing price-to-earnings of 17.3 shown on the company page is calculated on the tariff-inflated $2.10. On clean earnings it is 23.0. Both are arithmetically correct. Only one of them describes the business.

Notice the shape of that table, because it is unusual and it is the whole argument. The forward multiple is higher than the trailing one. That only happens when the trailing figure is flattered, and here it is flattered by fifty-two cents of tariff refund. Nike is not a fifty-percent drawdown trading at seventeen times. It is a fifty-percent drawdown trading at twenty-three times what it actually earned and about twenty-one times what the street thinks it will earn next year.

So on earnings, this is not cheap. What is genuinely cheap here is neither of those. It is the 4.05% free cash flow yield and the 4.51% dividend, on a brand with $46 billion of revenue, $9 billion of cash, flat inventory and a category where its nearest rivals have just stumbled. You are not buying a cheap earnings stream. You are buying a distressed multiple of a temporarily depressed margin, and the entire question is whether 8.2% operating margin is the floor or the new normal.

The honest answer is that we do not know, and neither does anyone else, until Nike tells us. It has given no fiscal 2027 guidance at all — only a rolling window to the second quarter — and the first full framework arrives at the Investor Day on 16 and 17 November. Anyone putting a fair value on this today is putting a fair value on a company that has declined to describe itself.