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Nike Inc. (NYSE:NKE) released earnings after the bell on Thursday, June 28th, missing expectations by twenty cents per share. EPS dropped 6% year-over-year on revenue that increased 12%, 14% excluding currency changes, to $6.5 billion. Nike blamed the earnings miss on lower gross margins, increased SG&A spending, an increase in the effective tax rate and a charge related to restructuring NIKE Brand Western Europe's operations. The stock responded sharply lower in the after-hours dropping over 10%.

Gross margins fell 150 basis points in the quarter, which the company attributed to high production costs and increased investment in Nike's digital business. Margins at Nike have been falling for some time now, and the company expects them to contract another 100 basis points in the first quarter. SG&A expenses increased 12%, the same as revenues, driving by a 23% increase in marketing for key product launches, the European Football Championships and the Olympics. Nike uses large events like the Olympics to launch new products, and increases spending on marketing as a result. It also uses these events to better connect with customers around the world. The Olympics this summer, and the start of the NFL season, with all teams having new Nike uniforms, could provide a much needed catalyst for this stock.

The company still believes by 2015 they will reach $28 to $30 billion in revenue even with the sale of the Umbro and Cole Haan brands. Nike saw significant growth in the running category, its second biggest business line with 31% year-over-year increase in fiscal year 2012. Nike's largest market, North America, accounted for almost 37% of revenues this year and saw growth of 17% year-over-year. However growth in North America decelerated some in the 4th quarter, falling to 13%.

Nike is a strong growth company, and the dominate player in their industry. However inventory growth was 23% year-over-year, and the company said it expects inventory growth to continue to outpace revenue through the first half of fiscal year 2013. This inventory build is likely contributing to downward pressure on margins as the company said it is using discount channels, like factory stores, to work through this inventory.

The chart above compares to Nike to key competitors Adidas Ag (OTCQX:ADDYY) and Under Armour, Inc. (NYSE:UA). Should Nike trade down to $80 per share its forward P/E would fall to under 14 times, at that point Nike would present a much stronger value proposition. Under Armour appears to be more overvalued than Nike, with a considerable higher PEG ratio. This means the market is paying more for Under Armour's growth and with Nike's much more dominate position in the market I do not believe this is justified.

Click to enlarge.

The white line shows an uptrend that Nike has been in since the lows in the beginning of 2009. The immediate move down after earnings took the stock below this trendline. I believe the sell-off from the earnings miss could take the stock down to support around $80 per share. With the stock breaking below the uptrend and selling off about 25% from the high on May 3rd I don't believe now is the time to get in the stock.

Data sourced from: Company filings, and Yahoo Finance. Chart from Freestockcharts.com.

Source: Analyzing Nike's Earnings