Nike's (NKE 2.97%) fiscal 2023 third-quarter financial results showed revenue of $12.4 billion (up 14%) and diluted earnings per share of $0.79 (down 9%). Both of these headline figures exceeded Wall Street analyst estimates. This was an especially good showing given how difficult the operating environment has been over the past year or so. 

But what does this mean for investors? Should you buy, sell, or hold Nike shares right now? To find the answer, let's dive a bit deeper into this top apparel stock. 

Cracks below the surface 

To be clear, it was a positive sign for shareholders when they learned that Nike beat estimates. However, it wasn't all good news. The business has been dealing with ongoing inventory issues ever since supply chain bottlenecks rattled global supply chains. As of Feb. 28, Nike's inventory balance of $8.9 billion was up 16% year over year. This was lower than just three months earlier, but it's not where management wants it to be. 

As a result, Nike has been forced to implement unusually high markdowns and other promotional activity to spur sales and get rid of outdated merchandise. But this has the negative effect of hurting margins. In the most recent quarter, the gross margin of 43.3% was lower than the 46.6% it was in the year-earlier period. And management expects the gross margin to decline 2.5 percentage points in fiscal 2023. 

Additionally, the Greater China region, which is typically Nike's fastest-growing geography, continues to deal with a delayed pandemic recovery thanks to strict lockdown measures. These restrictions have ended, but sales in Greater China were still down 8% year over year, performing below analyst estimates. Nike's other three regions all posted double-digit year-over-year gains. 

Management still maintains its optimism about China over the longer term. "Bottom line is we feel good about our momentum in China," CEO John Donahoe said on the Q3 2023 earnings call. "We're going to continue to invest in China for China," he added. Playing the long game in a country with a burgeoning middle class seems like the right strategy, despite ongoing struggles from the pandemic.  

More recently, Foot Locker, a retailer that derives about 60% of its annual revenue from selling Nike products, cut its full-year earnings forecast thanks to weaker sales. The challenging macroeconomic environment is hurting consumers and their spending power when it comes to discretionary items. This means the difficult times will likely persist in the near term for Nike until inflation eases more and the economy is on better footing. 

Benefiting from a key competitive strength 

Over the past five- and 10-year periods, Nike shares have outperformed the broader index, as measured by the S&P 500. This has been driven by higher revenue and profits, as Nike continues its strong fundamental performance throughout its history. Key to this success is the company's brand strength, which I view as its most important competitive advantage. 

Nike's ability to transform what is otherwise a commoditized product into in-demand footwear and apparel items that consumers all over the world crave is a testament to the company's innovation and marketing prowess. Being associated with top-tier iconic athletes also helps bolster the brand image. This is a vital asset that will benefit Nike for decades to come. 

Investors have a choice to make 

It's hard to deny Nike's positive attributes, even with the near-term struggles the business has been dealing with. This is still a wonderful company that is a global leader in its industry, and therefore the stock could be a foundational holding for portfolios. I think investors who own the stock should remain shareholders. Once the economic situation improves, Nike's prospects should too. 

On the other hand, if you're someone who is looking to buy Nike shares for the first time, it's probably best to practice some patience. As of this writing, Nike's stock trades at a price-to-earnings ratio of 33. This is much higher than the S&P 500's P/E of 18, a premium I'm not comfortable with. Until the valuation improves, and there's much lower economic uncertainty, it's best to hold off on buying shares.