Nike on Thursday said it expects sales and profit declines to moderate ahead, after the sneaker giant took its biggest financial hit yet from its turnaround plan during its fiscal fourth quarter.

While the worst could be behind the company, it has new challenges like tariffs to face, making a tough turnaround that much more difficult. On a call with analysts, finance chief Matt Friend called the duties a "new and meaningful" cost. 

"With the new tariff rates in place today, we estimate a gross incremental cost increase to Nike of approximately $1 billion" in its current fiscal year 2026, Friend said. 

He added that the company intends to "fully mitigate" that cost over time as it tweaks its supply chain, works with its factory and retail partners and implements price increases. 

Currently, about 16% of its supply chain is in China and it expects to reduce that to the high single digit percentage range by the end of its current fiscal year, which is expected to end next summer. 

"Despite the current elevated tariffs for Chinese products imported into the United States, manufacturing capacity and capability in China remains important to our global source base," said Friend. 

Friend said the company will consider cost cuts but its highest priority remains stabilizing its business, which requires investment. 

Once those efforts are implemented, Friend said the financial impact to fiscal 2026 gross margin is expected to be 0.75 percentage points, with a greater impact expected in the first half.

While Wall Street's expectations were low coming into the report, Nike beat estimates on the top and bottom lines.

Here's how the company did for the three-month period ended May 31, compared with estimates from analysts polled by LSEG:

• Earnings per share: 14 cents per share vs. 13 cents estimated
• Revenue: $11.10 billion vs. $10.72 billion estimated

The company's reported net income for the quarter was $211 million, or 14 cents per share, compared with $1.5 billion, or 99 cents per share, a year earlier. 

Sales dropped to $11.10 billion, down about 12% from $12.61 billion a year earlier.  

Last quarter, Nike warned that its fiscal fourth quarter would be the low point of its turnaround but in the months since, conditions worsened, leaving investors wondering if more pain was still to come.

In a press release, Friend confirmed that the fiscal fourth quarter will see the "largest financial impact" from its turnaround and headwinds are expected to moderate moving forward. 

On a call with analysts, CEO Elliott Hill said it's time to "turn the page."

"The results we're reporting today in Q4 and in FY25 are not up to the Nike standard, but as we said 90 days ago, the work we're doing to reposition the business through our 'Win Now' actions is having an impact," said Hill. "From here, we expect our business results to improve."

For the current quarter, Nike expects sales to decline by a mid-single digit percentage, in line with expectations of down 7%, according to LSEG. It expects its gross margin to be down between 3.5 and 4.25 percentage points, including 1 percentage point from the tariff rates currently in place today.

Nike shares initially dropped after its report was released but moved about 10% higher during the company's conference call.

During the quarter, Nike's profits fell by a staggering 86% as it worked to clear out stale inventory, woo back wholesale partners and reset its digital business. The largest hit to margins came from Nike's use of discounts and clearance channels to offload inventory, coupled with its shift back to wholesale, which is a less profitable channel than selling directly on its website and stores.

The company has warned the strategy would lead to lower near-term profits, but would leave the business in a healthier position in the long term. 

During the quarter, Nike Direct revenue, representing stores, wholesale and its website, fell 14%, led by a 26% drop in digital sales and a 9% decline in wholesale. 

Nike stores, however, were a bright spot. During the quarter, sales at Nike stores rose 2%. 

Foot traffic data at Nike stores has been declining since October, but those figures also indicate that conditions could be improving, according to Placer.ai, an analytics firm that uses anonymized data from mobile devices to estimate overall visits to locations. 

Monthly visits to Nike stores dropped 10.2% in April compared to the previous year, but that decline narrowed to 3.2% in May, according to Placer.ai. 

Revenue fell in all regions during the quarter, but came in a bit better than expected in North America, Nike's largest market. Sales fell 11% to $4.70 billion in North America, better than the $4.42 billion analysts had expected, according to StreetAccount. 

Still, China revenue came in at $1.48 billion, just below the $1.50 billion analysts had expected, according to StreetAccount. 

Hill told analysts that the sales recovery in China will take longer "due to the unique characteristics of the marketplace." It now has more competition in the region and said it has more work to do to clean up inventory. It's also testing new retail concepts with a local approach.

Since Hill took over as Nike's CEO in October, a lot of his work has focused on unwinding the strategy his predecessor John Donahoe implemented. He's worked to win back wholesale partners, after Donahoe pursued a direct selling strategy, and he's also bringing Nike back to its sports focus.

Under Donahoe, Nike moved away from its sport segmentation and instead broke up its business into women's, men's and kids. Some critics say that's part of the reason why Nike's innovation pipeline fell apart because the business was more focused on lifestyle products geared to a wide range of consumers, instead of being directed at athletes. 

On a call with analysts, Hill said the company is realigning teams to focus back on sports.

"Nike, Jordan and Converse teams will now come to work every day with a mission to create the most innovative and coveted product, footwear, apparel and accessories for the specific athletes they serve," Hill said. 

On the wholesale front, Nike is moving into more retailers and highlighted fresh efforts with brands like Aritzia and Urban Outfitters. Hill also discussed the decision to come back to Amazon and start selling on the platform for the first time since 2019. Beginning this fall, Amazon will begin carrying a "select assortment" of shoes, apparel and accessories and Nike will have a featured brand store on the platform focused on running, training, basketball and sportswear, Hill said. 

The decision to partner with brands like Aritzia and come back to Amazon highlights the scrappy approach Nike is taking to wholesale. It also highlights the success Amazon has had in winning over big brands. In the past, few brands were willing to sell on Amazon over concerns it could dilute its image. These days, it's seen as an essential channel for many businesses.

The company is still seeing declines in its performance category for Nike products, but it said it saw strong sales for new launches in running and training in North America. 

During the quarter, it released a new sneaker and collection for A'ja Wilson, a star center with the Las Vegas Aces. 

The first drop sold out in three minutes and the company plans to double the amount of pairs in the coming seasons, Hill said. 

During Nike's conference call, its delayed partnership with Skims wasn't discussed or asked about.

The first product launch with Kim Kardashians intimates line was supposed to go live during the quarter, but now that's been delayed to later this year, CNBC previously reported. That partnership is a key strategy in Nike's efforts to win over more female shoppers, who are estimated to represent about 40% of its business.

This gender gap is not ideal for discretionary retailers because women tend to spend more on clothes than men. Nike has lost market share to athletic apparel competitors like Lululemon and Alo Yoga, which cater to a similar customer but are more geared toward women. 

Sneakers are still the most important part of Nike's business, but apparel is a growth area for the company, representing about 28% of Nike brand revenue in fiscal 2024.