1.0 IntroductionSome businesses take time to explain. Nike isn’t one of them.But the chart below, well, that deserves some explanationHow does a company with such a strong brand fall over 75% in 5 years? What’s going on? Let’s get started.2.0 The business model (and slicing the data)The company designs footwear/apparel, and the manufacturing is outsourced. Adidas, Puma, and Under Armour all do the same. In the case of Nike, the manufacturing is mostly done in Vietnam, Indonesia, China, and Cambodia.The revenue data should be sliced 3 different ways:By sales channelBy product categoryBy geographical region2.1 The sales channelThe sales channels are grouped into two categories:Wholesale (Foot Locker, JD Sports, distributors, e-Commerce)NIKE Direct (own stores and Nike Digital)This is where it went wrong, although the chart requires a bit more explanation.*The reporting year ends May 31st, so 2026 means the 12 months ending May 31st, 2026.Between 2020 and 2024, direct revenue went up 73%. COVID was here, and like everyone else, Nike benefited from selling online (cutting the middleman, higher margins).During the same time, wholesale revenue went up 20%, which is quite impressive.Higher revenue and better margins. What more can someone ask for?Naturally, the investors got excited, added the new growth numbers in the projections, and the share price went up from ~$90 pre-COVID to almost $180 at the peak. So, to be fair, part of the decline of 75% can be explained by being significantly overvalued to begin with.So, what did the investors miss? Well, in 2017, Nike launched “Consumer Direct Offense“ and in 2020, it escalated to “Consumer Direct Acceleration”, which was Nike’s focus on selling more directly, owning the customer relationship, and capturing the margin. In theory, it sounds amazing! But there are consequences. This meant pulling items from wholesale and pushing customers to their own stores/app. This meant:More overhead. You cannot do more without incurring more costs. Yes, the gross margin would go up, but so would the operating expenses.Filling the empty shelf. When Nike reduced its wholesale inventory, it opened space for other competitors to fill that shelf space (Hoka, On, and New Balance).Relationship destroyed. Reducing shelf space means Nike’s reputation is not the same as it was. The wholesale partners now do not see Nike as a reliable partner.Yes, Nike has a strong brand, but the experience of going into a store and trying out shoes is something that customers value. When Nike’s products were in stores, customers could walk in and compare the price and quality of its products with those of its competition. But once the products were no longer there (or fewer of them), the comparison was no longer possible. The question became: would I buy these shoes from the competitor that I can see and try to see if they fit, or should I go online and order ones that might be a good fit, or walk to a specialized Nike store that might be someplace further?Focusing on online is important, but not by sacrificing wholesale.The CEO at the time, John Donahoe, who took the company through the acceleration, left in 2024 and was replaced by Elliott Hill, who started as an intern at Nike and retired in 2020.By the way, how beautiful is this:His plan? Reverse the damage.Clear up the inventory, reduce the classic franchises, repair wholesale relationships, and take the margin hit now.Next to that, there’s the “Sport Offense“ operating model introduced, which reorganizes the company around sport categories, rather than channels, with cross-functional teams. Much better. 2.2 The product categoriesThere are 4 categories, and to best illustrate the change, it makes sense to show the numbers in absolute $ amounts and change vs. the previous year.*Revenue numbers exclude ~$50m related to Global Brand Divisions and Corporate, so that the comparison is cleanerNike footwear - 2025 was the clean-up year, and it is stabilizingNike apparel - Same as footwearNike equipment - Held really well throughout the years, but is a low % of the total revenueConverse - Disaster, a one-product brand, no innovation, seen as a commodity, doesn’t fit Nike’s strategy, and Nike stopped advertising it.2025 decline was brutal. But 2026? Pretty much flat. Not great, but not terrible.2.3 The geographical splitThe last piece is very important.Nike footwear, apparel, and equipment is divided into 4 geographical segments, while there’s no split for Converse.North America and EMEA are back to growth. APAC is close.Greater China is where the pain is. The market in China grew over this period, yet Nike’s sales shrank. This is not a demand problem, but pure market loss.Subscribe now3.0 Historical Financial PerformanceThis is a good example of how the strategy went wrong. Yes, revenue went up. But the operating margin didn’t follow.Selling directly to consumers is great for the gross margin, but once all the operating expenses are taken into account, the full picture looks ugly.The operating margin decreased from 13% to 8%. Ouch. Even the 8% is overstated, as there were one-time tariff adjustments.Chasing higher gross margin, ending up with lower operating margin.The guidance provided for next year is limited. An investor day will take place in November, and more details are expected.Here are the relevant questions that I’ll be asking in the coming 4 quarters:Is the revenue coming from Greater China stabilizing?Is the direct-to-consumer revenue at least flat, while wholesale grows?Is the operating margin increasing?4.0 Capital allocationThe capital allocation has been relatively simple, although I’d argue, not smart.The good news: All the free cash flow generated is returned to the shareholders and risks aren’t taken.The bad news: 1/3 of the returned cash is via dividend, 2/3 via buybacksThe buybacks were almost constant at significantly higher prices, and aren’t there in 2026, when the price is much lower.Nike has increased the dividend for over 20 years, and the payout ratio has been around 30-40%. With the recent decline, the payout ratio has jumped to almost 80%. Is the dividend sustainable? For now, yes. But when the share price is at this level, buybacks make more sense.There’s ~$9 billion in cash and short-term investments, so I do expect this capital allocation to continue. The debt is at $11 billion, which is acceptable, even for its current profitability.Thank you for reading the deep dive; I hope you find it valuable. Consider subscribing, so you get the next ones in your inbox.Subscribe now5.0 ValuationThere are many ways to value Nike, and it all comes down to the conviction in the recovery (both revenue and operating margin).This is a low-capex company, so growing doesn’t require significant cash outflows, other than in inventory.Here’s a matrix of the fair value (per share) depending on the recovery.As I’m writing this, the share price is $41 and comes with a 4% dividend yield.The market doesn’t believe that Nike will grow its top line above 3%, while having an above-10 % operating margin. Personally, given the history behind Nike, I think this is a low threshold to beat. The fair value is likely closer to the $55-$60 range.But there are two people who are also making a bet that Nike is undervalued, that I’m quite sure you’ve heard of:First, the CEO, Elliott Hill, has purchased ~$3 million over the last 9 months.The second one is Tim Cook, yes, Apple’s CEO. He’s been on Nike’s Board of Directors since 2005 and purchased $4m of Nike shares too.Lastly, worth mentioning, there’s a new CFO in place, and part of his compensation is tied to the margin growth. Incentives matter.Lastly, I’ll end with one of the latest videos that Nike produced, which, as a football fan, I think is a masterpiece. It got millions of views, and it deserved them all.This is NOT investment advice. Everything above is for entertainment, informational, and educational purposes. Do your own due diligence.