We've gotten used to slam dunks from Nike (NKE 0.45%). Even through most of the pandemic, Nike has managed to grow revenue and profit. But two elements in the most recent earnings report prompted a big reaction from investors. And it wasn't positive. The stock fell more than 12% in one trading session.

The maker of athletic apparel and shoes disappointed investors last week when it reported high inventory levels and a decrease in gross margin. Like many retailers, Nike faces higher costs and supply chain troubles. And the challenges aren't over. Considering this, is this market leader still a buy? Let's find out.

Gross margin falls

The bad news first. Nike struggled in two particular areas in the fiscal 2023 first quarter. We'll talk about gross margin first. It fell 220 basis points to 44.3%.

One reason behind that was higher transport and logistics costs -- a result of rising inflation that's been hurting companies and consumers. A strengthening dollar also weighed on gross margin. When the dollar gains against other currencies, Nike's foreign revenue is worth less when brought back home.

Markdowns to move out extra inventory also hurt gross margin. And speaking of inventory, that was Nike's second problem in the quarter. Inventory rose 44% from the year-earlier period. Problems with transit times and an intentional move to buy items earlier are two factors that pushed inventory higher.

Nike says inventory in North America probably hit its highest point -- and we should expect improvement from here. That's great. But elements such as rising inflation and a stronger dollar may stick around for a while. The coronavirus situation remains a risk. Any peaks in infection rates could close factories or shut stores in a key market -- such as China.

So, there's no guarantee Nike's gross margin or net income will recover overnight. But before this sounds too discouraging, let's move on to the good news.

Brand strength

First, it's important to note that Nike's troubles are due to external and temporary issues. The economic situation will improve -- as it has in the past following downturns. Nike has the brand strength, strategy, and general financial health to keep it moving forward until the economic situation improves.

So, let's take a look at some of these positive points. First, brand strength. Nike continues to be a favorite brand in both North America and China. And Nike's Jordan brand reported its strongest year ever in the last fiscal year.

Nike's strategy to sell directly to consumers and focus on digital is working. The company launched the initiative back in 2017. The digital business has almost tripled since the 2019 fiscal year to top $10 billion in revenue. In the fiscal first quarter, Nike digital revenue climbed in the double digits in North America, Europe, Asia, and Latin America. And it was Nike digital's highest revenue quarter ever.

As for financial strength, Nike has a track record of profit, revenue, and free cash flow growth over time.

NKE Net Income (Annual) Chart

NKE Net Income (Annual) data by YCharts

In the recent quarter, Nike reported $11.9 billion in cash, equivalents, and short-term investments. That's higher than Nike's long-term debt of $8.9 billion. This is positive because it shows Nike has the cash needed to invest in its business -- and reward investors. Nike has lifted its dividend payments over 20 consecutive years.

Considering all of this, Nike shares are a steal today. They're trading at 27 times forward earnings estimates. That's down from more than 45 earlier this year. At the same time, revenue continues to rise.

NKE PE Ratio (Forward) Chart

NKE PE Ratio (Forward) data by YCharts

Is Nike a buy? As mentioned, Nike's troubles may not be over -- because of the ongoing economic turmoil. But Nike's long-term picture remains extremely bright. It's impossible to scoop up a stock at its very lowest point. That's why it's best to buy at any point when valuation looks attractive considering earnings prospects down the road. For Nike, right now is one of those moments.