Recasts paragraph 1 with details on margin forecast, adds analysts comment in last paragraph

By Savyata Mishra and Akriti Shah

July 1 (Reuters) - Nike shares NKE.N rose more than 3% on Wednesday as investors welcomed early signs of profit margin improvement, even as some remained cautious about the pace of the sportswear giant's turnaround nearly two years after CEO Elliott Hill took the helm to revive growth.

While the company posted a modest beat in fourth-quarter revenue on Tuesday, sales in China slumped 17% and it expects overall sales to continue to decline in the first half of fiscal 2027, underscoring the uneven nature of its recovery.

"The Nike turnaround is progressing slowly," Telsey Advisory Group analyst Cristina Fernandez said, adding that sales trends remain weak in large parts of the business such as sportswear and in international markets, and are unlikely to rebound before fiscal 2028.

Nike has been struggling to regain momentum after losing market share to rivals such as Anta, Li Ning and Hoka. The stock has already fallen about 35% this year.

Its shares were up at $42.44 in morning trading, reversing premarket losses.

MARGINS LEAD CHOPPY RECOVERY

Hill is pivoting Nike back to its premium sporting roots, prioritizing tighter inventory, more full-price selling and rebuilding strained wholesale ties over chasing sales.

The company's quarterly gross margin, excluding a $986 million one-off tariff relief benefit, fell 10 basis points year-on-year to 40.2%. But it forecast a slight expansion in first-quarter gross margin.

Nike is also stepping up innovation, with more than a dozen new footwear launches planned for the back half of the current fiscal, though Hill cautioned that it will take time before they translate into sustained growth.

The company said stronger World Cup-related marketing, a faster pace of product launches and a rebound in soccer demand after a slowdown in April were proof of improving momentum.

"Sportswear and Jordan Streetwear remain an overhang and will take time to recover, but the core business is stabilizing," Jefferies analysts said.

The sportswear giant's fourth-quarter revenue fell 4% to $10.97 billion and it projected a low-to-mid-single digit percentage drop in revenue in the first half of fiscal 2027.

CHINA WEAKNESS PERSISTS

Nike expects sales in China to remain under pressure as it works with retail partners to clear excess inventory, outgoing finance chief Matthew Friend said.

Greater China, which accounts for roughly 15% of Nike's annual revenue, is its third-largest market after North America and Europe, the Middle East and Africa.

Still, some analysts said there were early signs that Nike's efforts to reset the business in the region were gaining traction, as evidenced by a smaller decline in fourth-quarter sales compared with the company's earlier forecast of roughly a 20% drop.

"Our concerns about declining sales in China and sportswear are offset by inflecting margins," BofA analysts said.