Analyzing NIKE's Q1 2026 10-Q: Margin Pressure & Converse Struggles

Global athletic apparel and footwear giant NIKE, Inc. recently filed its quarterly report for the period ending August 31, 2025. This document gives us a fresh look under the hood at the company's financial health. Let's break down the key numbers from their income statement to see what's driving their performance. You can find the full details in their official 10-Q filing with the SEC.

While total revenue eked out a small gain, a closer look reveals a significant squeeze on profitability, pointing to a challenging quarter for the Swoosh.

A Tale of Two Brands

At first glance, NIKE's top-line performance seems stable. Total revenues for the quarter were $11.7 billion, a modest 1% increase from the $11.6 billion reported in the same period last year. However, this figure masks diverging fortunes within the company's portfolio.

• The core NIKE Brand saw revenues grow by 2% to $11.4 billion. Growth was driven by North America (+4%) and Europe, Middle East & Africa (+6%). However, a key growth engine, Greater China, sputtered with a 9% decline in revenue.
• In stark contrast, Converse revenues plummeted by 27% to $366 million. This significant drop was attributed to declines across all territories, with wholesale revenue down 31% and direct-to-consumer sales falling 25% on a currency-neutral basis.

Interestingly, the NIKE Brand's growth came from its wholesale partners, with sales to wholesale customers increasing 7%. Its high-margin NIKE Direct channel, which includes company-owned stores and digital platforms, actually saw sales decrease by 4%. This shift away from direct sales, combined with the struggles at Converse, set the stage for profitability challenges.

Visualizing NIKE's Financial Flow

The following flow diagram illustrates how NIKE's revenue is transformed into profit, breaking down the major costs and expenses along the way.

You may notice the "Corporate" lines in the diagram, which represent revenues and costs not allocated to a specific brand segment. In this quarter, these amounted to a negative revenue of $8 million and a negative cost of sales of $17 million. These are typically inter-company transactions and other accounting eliminations that are reconciled at the corporate level.

The Margin Squeeze

The real story of the quarter lies in the company's shrinking profitability. Gross profit fell 6% to $4.9 billion, and the gross margin—the percentage of revenue left after accounting for the cost of goods sold—dropped by a hefty 3.2 percentage points, from 45.4% to 42.2%.

According to the company, this decline was primarily driven by:

• Higher discounts and a less favorable mix of sales channels.
• Increased product costs, including higher tariffs in North America.
• Lower margins from the struggling Converse brand.

While NIKE managed to keep its Selling and Administrative expenses flat at $4.0 billion, the steep drop in gross margin flowed directly to the bottom line. Income before taxes fell 29%, and Net Income saw a sharp 31% decline, landing at $727 million compared to over $1 billion in the prior-year quarter. This translates to diluted earnings per share (EPS) of $0.49, down from $0.70 last year.

A More Cautious Stance

This pressure on profits appears to have influenced the company's capital allocation strategy. While NIKE returned approximately $700 million to shareholders, the composition was telling. The company paid $591 million in dividends but repurchased only $126 million of its stock. This is a dramatic reduction from the nearly $1.2 billion spent on buybacks in the same quarter last year, suggesting a more conservative approach to deploying cash amid the current headwinds.

In summary, NIKE's first-quarter results paint a picture of a company navigating a complex market. While the headline revenue figure held steady, significant weakness at Converse, challenges in China, and margin pressure from discounts and costs have taken a heavy toll on the bottom line. The path forward will depend on NIKE's ability to reinvigorate its struggling segments and restore the profitability of its core brand.