After surpassing analysts' low expectations for Q2 2025, NIKE (NKE, Financial) provided weak guidance for Q3 revenue and gross margin, highlighting that its turnaround will be a long-term effort. CEO Elliott Hill, who rejoined NKE on September 19 after retiring in 2020, aims to restore the company's innovative edge, which has been lost due to over-reliance on key products like Air Force 1, Dunks, and Air Jordans. This focus has also strained relationships with retail partners as the company directed customers to its digital channel.

Rectifying these issues will take time, with upcoming quarters expected to be challenging as NKE deals with outdated inventory and rebuilds partner relationships. The company forecasts a double-digit revenue decline in Q3, significantly missing expectations, with gross margin expected to contract by 300-350 basis points.

• Another revenue drop in Q3 would mark four consecutive quarters of year-over-year declines. In Q2, sales fell by 7.7% to $12.35 billion, with broad-based weakness. North America saw an 8% revenue drop, signaling that NKE is losing ground to competitors like On Holding (ONON, Financial), Deckers' (DECK, Financial) Hoka brand, and Skechers (SKX, Financial).
• In China, macroeconomic challenges have led to an 8% sales decline, worsening from a 3% decline in the previous quarter.
• Despite a focus on its direct-to-consumer (DTC) business, NIKE Direct Revenue fell by 13% to $5.0 billion, primarily due to a 21% drop in the digital channel. The reliance on key franchises and lack of new products have forced NKE to rely heavily on promotions, with about 50% of digital sales being promotional.
• Gross margin declined by 100 basis points in Q2 to 43.6%, with more pressure expected as NKE clears old inventory to transition to a full-price digital business model. The company may also need to offer better terms to regain shelf space at retailers like Foot Locker (FL, Financial) and Dick's Sporting Goods (DKS, Financial).

Heading into NKE's Q2 earnings report, expectations were low as the company navigates one of its worst losing streaks. While it exceeded Q2 estimates, weak Q3 guidance suggests a long road ahead for recovery. CEO Hill is focusing on innovation, sports, and retail partnerships to drive the turnaround, but progress will take several quarters.