Monday February 26 7:51 PM ET Nike Blames Shortfall on Software Woes

By Tim McLaughlin

BOSTON (Reuters) - Sports shoe and apparel giant Nike Inc. on Monday said it expects third-quarter earnings to fall at least 24 percent from its previous forecast, blaming software problems for too much inventory and order delays.

Nike shares fell as much as 18 percent in after-hours trading on Instinet, down to $40.50 from their Monday closing price of $49.17 on the New York Stock Exchange (news - web sites).

Nike executives said demand and supply planning software implemented last year had not performed as expected, causing inventory to swell and preventing the company from meeting retail customer orders.

``My immediate reaction is, This is what we get for our four hundred million dollars, huh,'' Nike Chairman Phil Knight said during a conference call with analysts.

As a result of the software problems as well as a slowdown in U.S. footwear sales, Beaverton, Ore.-based Nike (NYSE:NKE - news) said it now expects to earn between 34 cents and 38 cents a share for the third quarter ending Feb. 28, which is down from its previous guidance of 50 cents to 55 cents.

The consensus third-quarter estimate among analysts polled by First Call/Thomson Financial was 53 cents per share.

``The supply chain issues resulted in significant amounts of excess inventory of some footwear models while other models have been in short supply or delivered late,'' Nike Chief Financial Officer Donald Blair said.

Richard Babson, chairman of Babson-United Investment Group, which has $1.8 billion in assets under management, said he rates Nike stock as a speculative purchase. But he said sales of Nike's Presto and Shox shoes should bolster domestic footwear sales.

As Nike works through its inventory problems, it expects third-quarter revenues will be off as much as $100 million. In addition, its margins will suffer from steeper discounts and air freight costs necessary to move the excess inventory through its system, Blair said.

``It will likely take us six to nine months for the full effect of the spring and 2001 issues to work their way through our system,'' Blair said.

But the company reaffirmed its previously announced earnings per share guidance for the fourth quarter, ending May 31, of 60 cents to 65 cents per share. Analysts polled by First Call expect the company to earn 63 cents a share in the fourth quarter.

For the full year, Nike expects positive earnings growth, but not the mid-teens growth it projected previously.

Nike's inventory problems have fallen mostly on its U.S. business because it operates on tighter timelines than the rest of the world, Blair said.

Nike has too much inventory in some models and not enough in others. Some shoe models were ordered by customers, but Nike didn't place the order with its factories, Blair said.

This caused the company to lose sales or to resort to discounting to keep the business, Blair said. Nike also racked up air freight charges to ship products more quickly, he said.

``This came as a bit of a tidal wave during the last month of quarter (February),'' Blair said.

The company said it is working with its software supplier to work out the problems. It is not replacing the system, which executives said had stabilized.

Charlie Denson, general manager of Nike's U.S. region, said the company had made some progress prior to what he described as a ``self-inflicted misstep.'' He said he expects the company to be ``cleaned up and back where we need to be'' sometime in the first half of its fiscal year 2002. http://dailynews.yahoo.com/h/nm/20010226/bs/manufacturing_nike_dc_4.html

-- Carl Jenkins (somewherepress@aol.com), February 26, 2001

Answers

A 24% dump in earnings is a huge one, for a company of that size. And, the reason?

Shades of y2k?

-- Uncle Fred (dogboy45@bigfoot.com), February 26, 2001.

Seems to me like all those expensive Y2K upgrades were indeed Year 2000 compliant...... Unfortunately not Year 2001 compliant! The word 'BODGE' springs to mind. If you want to know if your Y2K software is going to last, see if the company that made it still exists. If it doesn't - worry!

-- clivus nondog (clivus@ibm.net), February 27, 2001.

<< all those expensive Y2K upgrades were indeed Year 2000 compliant >>

One cannot assume even that. This sort of widespread inventory and billing problem seems to take a long while to be recognized as systemic, at least by the executives (want to bet the lower-level workers in sales, and many customers, knew there were big problems many months ago?) and then a while longer to surface in news reports and warnings to shareholders.

This Nike problem is exactly the sort of thing experienced by Hershey Foods, Royal Doulton, Whirlpool, the list is very long. Does anyone know whether Nike was using SAP? Or Peoplesoft? as their ERP software provider.

-- Andre Weltman (aweltman@state.pa.us), February 27, 2001.

A recent editorial on the God Eagle web site reveals ways in which financial problems in y2k could have been postponed/covered up. Although written as a fictional political exchange and aimed at the investing crowd, it contains some very sobering facts. It reveals five ways in which major companies "cooked the books" to deceive investors. These same tricks which hid poor earnings on operations could also have covered back room problems they were having with software! What think?

-- Warren Ketler (wrkttl@earthlink.net), February 27, 2001.

Oops! That's Gold Eagle. Every time I try to use two fingers, I make a mistake.

-- Warren Ketler (wrkttl@earthlinlk.net), February 27, 2001.

Nike blames ebiz software on earnings shortfall

Nike has blamed i2 Technologies' e-commerce software for messing up its earnings.

The sportswear company has claimed problems with the $400 million implementation of its supply chain management system caused major order delays and inventory stockpiles.

Philip Knight, Nike's chief executive, told analysts: "My immediate reaction is 'So this is what we get for our $400 million?' But this is a process that we've begun. It will, in the long term, bring competitive advantage."

i2's stock plunged nearly 16 per cent on the Nike announcement.

So Nike's problems were nothing to do with the sweatshop email conversation being punted around the Net. This details the attempts made by one Jonah Peretti to get the word 'Sweatshop' stitched onto his trainers as part of the Personalize your Nikes promotion. ®

Here's the conversation.

From: "Personalize, NIKE iD"
mailto:nikeid_personalize@nike.com>>
To: "'Jonah H. Peretti'"
Subject: RE: Your NIKE iD order o16468000
Your NIKE iD order was cancelled for one or more of the following reasons.
1) Your Personal iD contains another party's trademark or other intellectual property.
2) Your Personal iD contains the name of an athlete or team we do not have the legal right to use.
3) Your Personal iD was left blank. Did you not want any personalization?
4) Your Personal iD contains profanity or inappropriate slang.

If you wish to reorder your NIKE iD product with a new personalization please visit us again at www.nike.com
Thank you, NIKE iD

---

From: "Jonah H. Peretti"
peretti@media.mit.edu >
To: "Personalize, NIKE iD"
> >
Subject: RE: Your NIKE iD order o16468000

Greetings,
My order was cancelled but my personal NIKE iD does not violate any of the criteria outlined in your message. The Personal iD on my custom ZOOM XC USA running shoes was the word "sweatshop."
Sweatshop is not:
1) another's party's trademark,
2) the name of an athlete,
3) blank,
or 4) profanity.

I choose the iD because I wanted to remember the toil and labour of the children that made my shoes. Could you please ship them to me immediately.

Thanks and Happy New Year, Jonah Peretti

---

From: "Personalize, NIKE iD"
nikeid_personalize@nike.com
mailto:nikeid_personalize@nike.com>>
To: "'Jonah H. Peretti'" peretti@media.mit.edu >
Subject: RE: Your NIKE iD order o16468000

Dear NIKE iD Customer,

Your NIKE iD order was cancelled because the iD you have chosen contains, as stated in the previous e-mail correspondence, "inappropriate slang".
If you wish to reorder your NIKE iD product with a new personalization please visit us again at www.nike.
Thank you, NIKE iD

---

From: "Jonah H. Peretti"
peretti@media.mit.edu >
To: "Personalize, NIKE iD"
mailto:nikeid_personalize@nike.com>>
Subject: RE: Your NIKE iD order o16468000

Dear NIKE iD,
Thank you for your quick response to my inquiry about my custom ZOOM XC USA running shoes. Although I commend you for your prompt customer service, I disagree with the claim that my personal iD was inappropriate slang. After consulting Webster's Dictionary, I discovered that "sweatshop" is in fact part of standard English, and not slang. The word means: "a shop or factory in which workers are employed for long hours at low wages and under unhealthy conditions" and its origin dates from 1892. So my personal iD does meet the criteria detailed in your first email. Your web site advertises that the NIKE iD program is "about freedom to choose and freedom to express who you are." I share Nike's love of freedom and personal expression. The site also says that If you want it done right...build it yourself." I was thrilled to be able to build my own shoes, and my personal iD was offered as a small token of precaution for the sweatshop workers poised to help me realize my vision. I hope that you will value my freedom of expression and reconsider your decision to reject my order.
Thank you, Jonah Peretti

---

From: "Personalize, NIKE iD"
nikeid_personalize@nike.com
mailto:nikeid_personalize@nike.com>>
To: "'Jonah H. Peretti'"
peretti@media.mit.edu >
Subject: RE: Your NIKE iD order o16468000
Dear NIKE iD Customer,
Regarding the rules for personalization it also states on the NIKE iD web site that "Nike reserves the right to cancel any Personal iD up to 24 hours after it has been submitted". In addition it further explains: "While we honour most personal iDs, we cannot honour every one.
Some may be (or contain) others trademarks, or the names of certain professional sports teams, athletes or celebrities that Nike does not have the right to use. Others may contain material that we consider inappropriate or simply do not want to place on our products. Unfortunately, at times this obliges us to decline personal iDs that may otherwise seem
unobjectionable. In any event, we will let you know if we decline your personal iD, and we will offer you the chance to submit another." With these rules in mind we cannot accept your order as submitted.
If you wish to reorder your NIKE iD product with a new personalization please visit us again at www.nike.com
Thank you, NIKE iD

---

From: "Jonah H. Peretti"
peretti@media.mit.edu >
To: "Personalize, NIKE iD"
nikeid_personalize@nike.com
mailto:nikeid_personalize@nike.com>>
Subject: RE: Your NIKE iD order o16468000

Dear NIKE iD,
Thank you for the time and energy you have spent on my request. I have decided to order the shoes with a different iD, but I would like to make one small request. Could you please send me a colour snapshot of the ten-year-old Vietnamese girl who makes my shoes?

Thanks,
Jonah Peretti The Register

-- spider (spider0@usa.net), February 28, 2001.

Headline: How Not to Spend $400 Million -- Nike’s supply chain management system has spun out of control. But other companies don't need to suffer the same fate.

Source: CFO.com, Mar 05, 2001

URL: http://www.cfo.com/Pge_Channel_Article_Detail/1,2908,87|92|AD|2197,00. html

You could be next.

At least that’s what some experts say about the potential for more companies to meet the same fate as athletic footwear maker Nike, which last week said the problems it had implementing i2 Technologies' supply chain management software would cause it to miss third-quarter forecasts.

One Wall Street analyst said the i2 project was part of a larger effort that has cost Nike $400 million during the past year.

The software is supposed to cut costs by helping companies forecast purchasing requirements from suppliers and orders from customers. However, Nike says the software has so far failed to properly match its inventories with customer demand. Instead, Nike is left with excess inventory of some product lines and shortages in others. After revealing its problems during a conference call with analysts, Nike officials made few additional public comments. But a Nike spokeswoman said late Friday, "We see these software issues being resolved by the end of the calendar year, if not sooner."

The scary part is that this type of event is part of a trend that will likely get worse. “I don’t think this is going to be an isolated event of any of the vendors,” says Karen Peterson, an analyst with market research firm Gartner Inc. “We’re going to see a lot more failures in the future. That’s not necessarily knocking i2. We saw this with ERP.”

For example, CFO’s January 2000 article "Blaming ERP" described the problems several companies had implementing enterprise resource planning (ERP) systems.

Peterson believes that technology, functionality, and the resistance some companies have to changing their business processes, will continue to plague installations of complex systems, such as those for supply chain management.

“We’re in a hype cycle,” she says. “There are a lot of people claiming a lot of things, but functional maturity of the applications has not caught up. So we have immaturity of processes and technology.”

At least there’s time to figure out where things went wrong at Nike and learn from the mistakes.

For starters, retail is inherently a complex industry to implement supply-chain management software, whether i2’s or that of Manugistics, an I2 rival. That's because of the many product variations such as size and color that each need to be managed.

And the execs know it. “I don’t want to claim that we’re 100 percent responsible,” says i2 CFO Bill Beecher. “Both companies knew [the implementation] was going to be complex. Both companies put a lot of resources against it.”

Among those resources was an i2 consulting team that Beecher acknowledged could have done better: Problems arose because Nike “didn’t follow standard methodology,” he says. Specifically, it chose not to use a template for the apparel industry, and the customized implementation “put the software under strain.”

In hindsight, Beecher says i2 could have been more forceful in directing the implementation, echoing comments i2 CEO Sanjiv Sidhu made in an interview with Bloomberg Radio.

But clearly, Nike has its own issues. “They underestimated the kind of talent that they needed,” says Wilson Rothschild, senior analyst for applications-delivery strategies at Meta Group and former i2 employee. There wasn’t a “joint ownership” from both sides as there should have been.

Nike's technology staff was already stretched to the limit by two other projects. At the same time the company was installing the i2 product for supply chain management, it was implementing SAP's ERP system and Siebel Systems' customer relationship management software.

Wells Fargo Van Kasper analyst John Shanley estimates that Nike spent $400 million during the last year on the installation of the three systems.

Inadequate Data?

Nike was trying to shift all the data from its existing systems, including some that it had written. In addition, analysts say the data Nike was entering into the system was inadequate for the forecasts it was trying to make.

“If you don’t fuel i2 with the right information, it’s not going to have the right information for you,” says Credit Suisse First Boston analyst Brent Thill, who says he's been talking with people inside Nike. “I think that’s been the biggest issue behind the scenes."

Thill adds, "It was like a pipe that had a leak in it. Unless you capture every drop of water, it doesn’t play right.”

To be fair, Meta Group's Rothschild says, it’s not unusual to make tradeoffs in the data used when some is not available. It’s just that in the pressure to go live, Nike may have used data that didn’t reflect the business as well as the company had thought.

It may also be that Nike was trying to do too much, too soon with the software, says Rob McClellan, senior project manager for TaylorMade- adidas Golf’s E-business. Nike’s problem was that they “drilled down to an extraordinary level of detail for the forecasting model” by “requesting too much history and trying to forecast too far out ahead.”

How does he know? McClellan says the same i2 consultants that worked with Nike are working with TaylorMade's own implementation of i2's software and told him about the Nike project. Maybe, as Beecher says, the consultants could have been more forceful with Nike and prevented the company from making the implementation more complicated than it was.

But that may also reflect a disconnect between the vendor’s rosy scenario and the actual implementation, says Rothschild. While i2 has some 1,000 customers, the retail business processes are still relatively new to the company. “Not everything that Nike wanted to do was available in the software,” he adds.

TaylorMade’s has had its own bumps along the way. McClellan says the company wound up spending slightly more for network servers than i2 had estimated. But he’s happy with the overall implementation.

“They’ve been nothing but responsive to our needs,” he says. He adds that suggestions by TaylorMade are being included in the next software upgrade.

Despite Nike’s problems, installing a supply chain management system need not be a nightmare.

“It’s like crossing the street. If you look both ways, crossing is not at all risky," says Tom Harwick, research director for supply chain management at Giga Information Group. "However, if you just step out there, it’s a very risky activity.”

Among the precautions: Companies need to budget time and resources properly and structure the needed business process. “If you install the software without changing the process, you’re going to have problems,” Harwick adds. “Best practices are well known in the industry. You have to willfully ignore best practices to screw up.”

-- Andre Weltman (aweltman@state.pa.us), March 06, 2001.