THE DAY AHEAD: Don''t believe Nike''s "blame i2" excuse

COMMENTARY--Nike may have just started the latest fad on Wall Street--the old 'blame it on the software' trick. Any inventory problem can be explained away by blaming your supply-chain management system.

Sounds a bit silly, but investors seemed to buy Nike's blame-the-software routine on Tuesday. Shares of i2 Technologies (Nasdaq: ITWO) got a 22 percent haircut because Nike said i2's software led to excess inventory and order problems.

And oh by the way, footwear sales in the U.S. were sluggish too.

Athletic shoe and apparel company Nike (NYSE: NKE) said it expects third-quarter earnings to fall at least 24 percent from its previous forecast to a range of 34 cents a share to 38 cents a share. Analysts had been expecting Nike to report earnings of 53 cents a share.

It would have been nice to have known in percentage terms how much of Nike's problems were related to the sluggish U.S. economy and what could be pinned on i2. Nike did say its problems were "largely because of weakness in our U.S. footwear revenues."

That subtlety was lost on i2 investors, who bailed on the e-business software company faster than you could say Air Jordan.

For a little perspective here, these software problems aren't anything new. In fact, the Nike thing sounds a lot like what happened to chocolate giant Hershey Foods back in 1999. Hershey said in September of 1999 that it would miss estimates because it had problems installing new enterprise resource-planning software. The implementation didn't go well and Hershey couldn't deliver enough Kisses to meet Halloween demand.

No one said this supply-chain management software stuff was easy--that's why there are only a handful of companies focused on that market. Supply-chain management software helps manufacturers plan and schedule production and related operations such as raw materials procurement and product delivery. When problems occur implementing new software systems, things get ugly.

The i2 bloodbath was an overreaction to say the least, especially when you consider no one had the facts behind the mix-up. Those details are just starting to emerge. Dresdner Kleinwort Wasserstein analyst David Garrity said Nike may have screwed up by not entering orders.

Analysts said it's rare that a software provider shoulders all the blame for a botched installation--we have no idea if Nike followed specifications or devoted the right amount of resources to the project. "We do not believe i2 is solely to blame for Nike's disappointment," said Salomon Smith Barney analyst Gretchen Teagarden. "i2 has only installed a few modules at Nike so we find it extremely hard to believe these modules were the sole contributors to Nike's poor inventory scheduling."

Teagarden also noted that i2 only recently won the Nike footwear business from Manugistics (Nasdaq: MANU). That means that i2's software wasn't installed when Nike forecasted current demand last summer. If Nike screwed up its projections can you really blame the software?

In addition, Nike works with a series of software vendors including Manugistics and SAP (NYSE: SAP), a situation that increases the risk of integration problems. Teagarden said Nike has an older version of SAP's software, which gave i2 a tough integration task in the first place.

Longer sales cycles may be the one real threat to i2 following this Nike fiasco. According to CS First Boston analyst Brent Thill, Nike will run i2 parallel with its old supply-chain system just to make sure everything works. That means Nike will stick with i2, but remains wary. Analysts also reckoned that there was a slight chance that Manugistics could push i2 out of the Nike account. i2 won the Nike business from Manugistics, which was struggling with management upheaval when Nike was taking bids.

The bad publicity may indeed hurt i2's efforts to take on massive e-business projects for the likes of Siemens and Caterpillar. But keep in mind that i2 has a long list of major customers who seem to be happy. i2 faced a public relations embarrassment on Tuesday--but in the long run it's nothing more than a little egg on the face.

In a week, you may forget this episode anyway. i2 will be holding its analyst meeting March 6-7 and you can expect more upbeat chatter just like you heard on the company's earnings conference call.

And speaking of analyst meetings

Business-to-business software player Ariba (Nasdaq: ARBA), which has a rumored-to-be shaky partnership with i2, will hold a big shindig at Radio City Music Hall today in New York City.

Here's what you can expect: