Just for Feet

(FEET)

expected a layup when it bought a small chain of specialty stores last summer. Instead, the company, considered an innovator in the athletic retailing business, finds itself scrambling back on defense.

For a time, it seemed not even the slump in sneaker and apparel sales -- which hit manufacturers and retailers alike -- would hurt Just for Feet's stock. From March 1997 through June 1998, as

Nike's

(NKE) - Get Report

shares declined 27% on fears of a sneaker glut, Just for Feet's stock jumped 32%.

Run by charismatic Chairman and Chief Executive Harold Ruttenberg, Just for Feet pioneered a way of selling sneakers and athletic apparel in superstores that, in addition to having hundreds of brands and styles, lured customers with basketball courts and big-screen TVs. Competitors are still playing catch-up.

Then, in June 1998, Just for Feet said it would buy the 39-unit, privately held

Sneaker Stadium

chain, which operates in the Northeast. Just for Feet, of Birmingham, Ala., wanted a beachhead in the region. The strategy: Convert the Sneaker Stadium stores to Just for Feet emporiums and use them to build customer awareness.

"Sneaker Stadium should've been a no-brainer," says Gary Dennis, an analyst with

J.C. Bradford

. "Harold knew they weren't well run, and he thought he could run them much better. And he needed an infrastructure" in the Northeast. Dennis rates Just for Feet a buy. His firm hasn't performed underwriting services for the company.

But investors worried that Sneaker Stadium, which had most of its stores in malls, was a departure from Just for Feet's strategy of locating its roughly 315 stores in places like strip centers. There was good reason for concern:

Venator

(Z) - Get Report

, which operates the

Foot Locker

and

Champs Sports

chains, controlled the malls. And those stores were struggling.

Yet even prescient investors were unaware of just how thorny the deal would prove.

The process of converting the Sneaker Stadium stores magnified a glitch in Just for Feet's accounting software that has made it difficult for the company to pay suppliers. And Just for Feet's inventory grew distended as it stocked the new stores.

For instance, investors were spooked when Just for Feet's inventory climbed 103% in the fiscal third quarter ended Oct. 31, while sales lagged, rising 72%. Another nagging concern was the declining ratio of payables to inventory, often a sign of stale merchandise.

Eric Tyra, Just for Feet's chief financial officer, says it's misleading to look at total inventory because that figure fails to take into account the newly opened Sneaker Stadium stores. He says, on a per-store-basis, inventory was flat at $2.1 million. And Dennis, the analyst, says the payable-to-inventory figure is an inaccurate gauge of the company's true position because the new stores skew year-over-year comparisons.

In January, Just for Feet warned that fourth-quarter earnings would likely fall below analysts' estimates because sales were softer than expected and expenses related to the Sneaker Stadium acquisition were higher than anticipated. The

First Call

consensus now calls for earnings of 9 cents per share for the January quarter, compared with an earlier projection of 25 cents per share. The company earned roughly $6 million, or 20 cents a share, a year earlier. Just for Feet is expected to report earnings on March 23.

Tyra defends the acquisition, saying: "Sneaker Stadium got us into the Northeast. We can fill it in and almost immediately get economies of scale."

With the stock down 62% from its highs around 29 seen last July, investors are left wondering if the strategy will ever pay off. The deal was expected to add to earnings in the fiscal year ending in January 2000, but that now is less certain.

"I didn't like the Sneaker Stadium acquisition," says Bob Bacarella, portfolio manager at

Monetta Financial Services

, a Just for Feet shareholder. "It takes away from their underlying concept of megastores. I wish they hadn't gotten into mall locations." The deal could keep the stock from getting the premium it received in the past, although he adds that the selloff has been overdone. His 12-month target is 18, or nearly 50% over the current price of 12 1/16.

Trouble started last fall when Just for Feet converted 21 Sneaker Stadium stores.

"We had all this merchandise coming into our system in November," says Tyra, the CFO. "The sheer volume overloaded the system."

That exacerbated a defect in Just for Feet's accounting software, which failed to match receipts to invoices. At a trade show in February, Just for Feet asked suppliers for a 60-day grace period to sort out the mess. A report by

Global Credit Services

, a New York research firm, called Feet's move to suspend payments "curious," and noted that the company was past due in paying some of its largest vendors. Global Credit declined to comment beyond the report. Just For Feet's largest suppliers include Nike,

Reebok

(RBK)

and closely held

New Balance

-- none of which would comment on their relationship with the retailer.

Suspecting a liquidity crisis, short-sellers pounced, pushing the stock to a 52-week-low of 9 13/16 on Feb. 26.

But, Tyra says, with $180 million available on its revolving credit facility, Just for Feet had the cash. The difficulty was figuring out how much to pay each supplier given the mangled accounts. Tyra resorted to writing checks for estimated amounts. At one point, Just for Feet suspended all payments for an entire week when it shut down the system for debugging.

"It's like paying your

Visa

bill in advance," before you see your itemized statement, says Paul Mickelsen, president and chief executive of

Island Pacific Software

, which installed the accounting software and has since worked out most of the bugs. Mickelsen says it will take months to unravel the mess of paperwork from older orders.

Now, Just for Feet will have to get its new mall stores up to speed. By the company's own admission, progress is trailing expectations. Tyra says a typical Sneaker Stadium store of 17,500 square feet will do just $4.8 million in annual sales the first year of its conversion. Although that number is higher than the $4.1 million those stores generated under Sneaker Stadium's management, it's far from the $6 million a Just for Feet store of the same size generates.

"There are near-term issues," admits Dennis, the analyst. "But step back and look at the potential for this company to dominate."

But, until Just for Feet starts scoring points with Sneaker Stadium, investors seem inclined to take a more short-range view.