Here's How Tariffs Could Affect This Industry Giant. Should Investors Be Worried?

Nike (NYSE: NKE) is still regarded as the leader in the sportswear industry, but investors know that it's been a rough few years for the Swoosh.

Nike stock recently hit a seven-year low as a combination of declining sales and profits, concerns around a trade war, and a weakening economy have pummeled the stock.

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However, there is reason to hold out hope for Nike. The company brought in longtime company veteran Elliott Hill as its new CEO last fall and Hill seems to be making the right moves, rebuilding relationships with retail partners that his predecessor had backed away from, controlling inventory to return to a pull marketing strategy, investing in new product to reclaim the mantle of innovation, and putting sport back at the center of the company.

While those initiatives aren't yet visible in the overall results, there are some green shoots that look promising. For instance, the company has returned to growth in running, a sign that it's doing a better job of competing against industry upstarts like On Holding's offerings and Deckers' Hoka brand.

If Nike's self-inflicted wounds weren't bad enough, the company is now facing tariffs that are unprecedented in its history. Though it's diversified its manufacturing base away from China, making Vietnam its primary production hub, China is still a major production center.

Image source: Nike.

How tariffs are impacting Nike

The footwear industry is already vulnerable to tariffs as essentially all production takes place outside of the U.S., and it would be cost-prohibitive to bring that production back to the U.S.

While President Trump has paused "reciprocal tariffs" on most trading partners, there is currently a 145% tariff in effect on goods from China. In fiscal 2024, 18% of Nike brand footwear and 16% of its apparel came from China.

Nike's earnings call in March came before the escalating trade war with China, but management acknowledged that tariffs would have an impact on the business, noting that it included costs from tariffs in its forecast of a gross margin decline of 400 to 500 basis points in the fiscal fourth quarter.

According to Motley Fool Research and an analysis from the Budget Lab at Yale, a nonpartisan research center, footwear and apparel products are particularly vulnerable to tariffs. The study found that based on tariffs in effect as of April 15, apparel prices would rise 65% in the short run and 25% in the long run. The study didn't single out footwear as a category, but said that prices for leather products, including shoes, would rise 87% in the short run and 29% over the long run, faster than any other category.

There's another factor weighing on Nike in the trade war. China represents a significant market for the company and one where sales are already falling sharply down 15% on a constant currency basis in the most recent quarter. If the trade war impacts the Chinese economy or the reputation of American brands, Nike's China sales could take a hit as well.

What Nike is doing about tariffs

Nike already moved much of its factory production out of China to mitigate the risk of a trade war, so in some way it's better prepared for it than investors might think. Since the company sells its products in China, it can ensure that China-made product is sold there and it already does that to an extent.

The detente with Vietnam also favors the company, but over the long term, Nike is unlikely to dramatically rearrange its supply chain. It may be forced to pass along any tariffs along to its customers, though it will do its best to remain competitive, meaning it could absorb costs if that's what its peers do.

What tariffs mean for Nike

Overall, tariffs are likely to impact Nike, but not as much as some investors expect as its China product can be sold in China and the reciprocal tariffs on Vietnam are currently paused.

However, the trade war seems likely to delay the recovery plan Nike was implementing and will slow its return to growth, especially as it could lead to a recession.

Still, Nike's competitors face the same set of challenges, meaning the sportswear giant isn't at a competitive disadvantage here.

While there's still a lot of uncertainty around the trade situation, Nike stock deserves some patience especially as it's fallen so far. Hill seems like he has the right strategy, though with the trade war disruption, it will take some time to see the results. Despite its recent weakness, Nike's brand is still strong enough for the business to return to steady growth, regardless of the tariff situation. A recovery will take time, but Nike should get there eventually.

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Jeremy Bowman has positions in Nike. The Motley Fool has positions in and recommends Deckers Outdoor and Nike. The Motley Fool recommends On Holding. The Motley Fool has a disclosure policy.