From Heelies to Wheelies? (ok, manuals, for you youngsters!)

[skategeezer]

Ever since I saw Heely's (gawd, was it really 6 years ago?) I kinda thought - fad...but fun for kids.

The company went public and now people are speculating. I would love your thoughts on Heely's...and I wonder, can we move some kids from Heely's to skateboard wheelies?


Paul Simenauer submits: I believe that Heelys' (HLYS) business is unsustainable. I would recommend shorting their stock as Heelys shoes are a passing fad and the company is built around a single shoe product that is heavily reliant on the tastes of 6-10 year olds.
As Heelys were a popular gift for children this holiday season, it's not too surprising to see the company post 4th quarter earnings that beat Wall Street numbers handily. Net income for the fourth quarter of 2007 increased 700 percent to $11.5 million from $1.4 million the prior year, while earnings per share increased to 44 cents per share from 6 cents per share in the prior year period. The Street was looking for earnings of 28 cents per share.
The Short Case: Analyst’s estimates of growth are overly optimistic. According to Capital IQ, growth for this year is forecasted at 20.7% for this year and 22.5% for the next 5 years. Heelys is expected to have earnings per share of $1.67, with around 83% of their earnings coming from 4th quarter holiday sales in 2007. This leaves little room for error, and it is questionable if Heelys was creating shareholder value to begin with. Cash flow from operations in 2006 was -$2,180,000.00, and Free cash flow for 2006 was -$2,573,475.00.
Nor is Heelys business model anything to write home about. In their recent 10-k, management commented that they “depend primarily upon sales from a single product line and the absence of continued demand for our products would have a material adverse effect on our net sales and results of operation.” Management also is worried about not being able to enforce their patents on Heelys shoes, as they should be. It is not exactly a proprietary or revolutionary idea to attach a wheel to a shoe. This isn’t exactly like manufacturing the next breakthrough in nanotechnology, and I believe that roller skates and roller blades beat Heelys to this idea by three or four decades.
The company has struggled to get patent protection abroad, in Japan and Taiwan. Management brilliantly tell us in the risk factors section of their 10-k that “if consumer interest in HEELYS-wheeled footwear or wheeled sports activity products in general declines, we would likely experience a significant loss of sales and may be forced to liquidate excess inventories at a discount, which would have a material adverse impact on our business and operations."
Around 95%-98% of all of Heelys sales come from a single product. Retailers also seem to have little confidence in Heelys. Heelys retail customers purchase merchandise on a per order basis and have no long term contracts with Heelys. Retailers may also cancel their contract with Heelys with little notice and without penalty. In the coming quarters, it will be important to watch for revenue build up as a clue to how Heelys is doing.
The risks mentioned above becoming a reality seem highly probable, for the simple reason that the tastes of 6-10 year old consumers changes as the wind blows. It is unlikely that the same kids who asked for Heelys this year for the holidays will want Heelys again next year. It would be equivalent to asking for and getting a Tickle-Me-Elmo two holiday seasons in a row. This age group will quickly move on to the next hot product, whatever that may be. From a historical perspective, anyone who has followed fads in the United States knows that fad items don’t remain hot for too long. Does anyone remember Pet Rocks, Reebok Pumps, LA Gears, fanny packs, POGS, Power Rangers, the Macarena, Beanie Babies, Tomagachi, Pokemon Cards, Razor Scooters, and the Rachel hair cut? All were hugely popular items that sold well for a while, but eventually the novelty of these products wore off and the rapid growth in sales fell sharply.
The Bottom Line: With a business model that is built upon a single product that is marketed to a group that isn’t old enough to see PG-13 movies, Heelys' sales will suffer if this group has a change in tastes, which seems inevitable. Because of the weak business model and inability to generate cash flow, I don’t foresee Heelys looking attractive enough to get a buyout bid if its stock becomes extremely cheap.
For a rough estimate of the intrinsic value of Heelys stock, as I don't see Heelys remaining a going concern, I will use the amount of net tangible assets on their balance sheet, which is $93, 292,000.00 and divide this by the number of common shares outstanding of 27,005,000. This gives us a price target of $3.45 per share.

[skategeezer]

More on Heely's

Heelys have kids on a roll
Wheeled shoes are a blast, but some question their safety
By Jarett C. Bies
jbies@argusleader.com
Published: March 23, 2007
When Isaac and Zack King tire of walking, they lean back on their Heelys and glide. Walk the aisles of any store with tile on the floors in Sioux Falls and you might notice kids who appear to be walking, then suddenly gliding a few feet, their faces twisted, smiling at your slack-jawed glance. It's not magic, it's a simple machine, the wheel, in the heel of their shoe.

Welcome to Generation Heely. For Isaac and Zack, these combination shoe-skates are, in a word, fun.

"We just roll," says Zack, 9. "I saw them on TV, and I thought they'd be fun to use."
Now, before tae kwon do lessons, or in the mall, or out in the garage, Zack and his brother lean back, get their balance, and then ... they just roll.

"It's fun because you can go fast in them sometimes," says Isaac, 7. "We don't know how to do tricks, but we're learning."
Trend in transport

The King boys are among a growing wave of kids who glide and slide with their wheel-hiding shoes. Heelys are a hot seller at stores in Sioux Falls, where new shipments often are spoken for.

"They were tough to get a hold of," says Mike Quinlivan, manager at Sun N' Fun Specialty Sports in Sioux Falls. "We tried to get them about a year and a half ago, and it took seven months."

The store carries sizes 1 through 8, and Quinlivan says the $60 shoes are popular with the first-through-sixth grade set.

"The boss' kids smoke around the ceramic tile in here," he says. "It's not quite blading, but it is close."
Strange sightings

Zack and Isaac saved their money to buy their Heelys. They have seen some other kids in stores gliding about. Their mother, Tammy King, says it's funny to watch adults watch her kids "heel."

"It's like they're seeing a magic trick," King says. "We saw three kids at Wal-Mart wearing them, so they must be becoming more popular."
The contraptions are popular: At the close of 2005, Heelys was a $1.4 million company. By the end of the fourth quarter 2006, their sales ballooned to $11.5 million, a 700 percent increase.

Roger Adams invented the Heelys shoe-skate, and his Texas-based company has secured eight U.S. and international patents. The device was introduced in 2000.
Safe arrival

Heelys' arrival in Sioux Falls is welcome news to kids like Isaac and Zack, but school administrators question safety and restrict their use.

Teresa Boysen, principal at Harvey Dunn Elementary School, says Heelys are welcome, but kids have to take the removable wheels out of them before they come to class. "After Christmas we noticed a few kids with the shoes, and we talked as a staff," she says. "We want to make sure all kids are safe."
Finding guidelines

The Sioux Falls Public School system does not have a district wide rule on Heelys; their use is restricted on a building-to-building basis. But Boysen sees them in the same category as skateboards and scooters.

Zack, a student at John F. Kennedy Elementary School, says he never wears his Heelys to class and rarely gets grief from people in stores.
"Only one person said something. He said, 'Slow down,' or something, but he didn't even have a nametag or anything," he says. "My mom said, 'Who does he think he is?' "

Tammy King says her sons aren't grinding in their shoes, just goofing around. "I don't get too uptight," she says. "They are just gliding along."

Scrapes and bumps come from some falls, and Dave Rust, owner of Play It Again Sports in Sioux Falls, says the low speeds of the Heelys make for few worries.
"They're a little safer than skateboards or in-line skates," says Rust, who has seen brisk sales at his store. "I haven't seen too many worried parents. They can't fall too far."

[mojomuskrat]

I don't know about the long term company future, but I do know the stores can't keep them on the shelves at the moment. Your best bet is to go online. We're going to give them a try, looks like fun.

And the "They can't fall far" argument is kind of weak... but that is what you get when you ask a salesman if their product could be dangerous.

[bombsies]

Their large growth was due in part by the hype and increased popularity. If the popularity stops, the company will fail. It is very concerning to see that most of their revenues occur during the holiday seasons. Seasonal companies, sometimes, have difficulty meeting their liabilities.
Heely limits their target market and have no means of profiting from these kids after they outgrow the largest Heely's. They need to expand their market, M&A possibly. The brand is well known in the young community. With the right financing decisions they could be around for a while.

[pete..]

little kids love them, however they always seem to fly through stores and malls and such on them and i'm jealous i can't ride my longboard like that. it's hilarious to see them fall in public though.