Heelys Inc., perhaps representing one of the few “must have” items for Christmas this year out of the sporting goods industry, took the opportunity of Black Friday to issue a price range on its pending initial public offering of shares. The IPO will consist of 6.25 million shares estimated to be in the $16 to $18 per share range, with half the shares offered by the company and the balance sold by current shareholders. Bear Stearns & Co., Wachovia Securities, JPMorgan, and CIBC World Markets, the underwriters in the deal, will have the option to buy another 937,500 shares to cover over-allotments.
Heelys, who filed its initial documents for the IPO in September, plans to enter the public market under the symbol “HLYS” on the Nasdaq exchange. HLYS estimates that the net proceeds of the sale of the 3,125,000 shares offered by the company will be approximately $47.4 million, based on the IPO coming in at the mid-point.
The company also issued an amended S-1 with results for the third quarter indicating a still growing business that is working hard to keep up with demand, especially for the holidays. Sales growth has exploded in the back half from the trend in the first half of the year, with skyrocketing Q3 sales supported further by very strong order backlog levels at the end of September that may portend a very strong fourth quarter and spring.
Net sales for the third quarter were up nearly 460% to $72.5 million from $13.0 million in the year-ago period. Domestic sales were up 469% to $61.4 million from $10.8 million in Q3 last year and International sales jumped 413% to $11.1 million from $2.2 million in the prior year quarter, due primarily to the result of increased sales to distributors in Canada, the U.K., Ireland, and Argentina/Brazil/Chile, partially offset by decreased sales to distributors in Japan and Spain/Portugal. Canada, Japan, and Spain/Portugal were the three largest international territories in 2005.
Heelys was selling product to over 800 accounts in the U.S. at quarter-end, with product estimated to be in over 5,000 doors. U.S. sales represented 84.7% of total sales in Q3, compared to about 83.3% of sales in Q3 last year.
For the nine month YTD period, Journeys represented 11.6% of sales and The Sports Authority made up 11.0% of sales. No other retailers were at least 10% of sales.
Gross margins were up 120 basis points to 34.4% of sales versus 34.6% in Q3 last year; and, SG&A expenses got all the benefits of leveraging the large sales gain, improving by 840 basis points to just 9.0% of sales. Net income was up more than eight-fold to $18.4 million in the period, compared to $2.0 million in the year-ago quarter.
Order backlog at the end of September was pegged at approximately $69.0 million, up more than 430% from roughly $13.0 million at the end of Q3 last year. HLYS said that the fourth quarter represented approximately 29.8% of annual net sales in 2004 and 33.9% of annual sales in 2005.
HLYS has an exclusive worldwide license to use intellectual property related to the technology used in their grind-and-roll Heelys-wheeled footwear. They pay a royalty of 12.0% of their cost on certain products, $1.00 per unit on certain styles of footwear, and 25% of any sublicensed revenue of any non-footwear products, apparel, and accessories or similar items that, absent their license, would infringe the trademarks relating to such products under the license agreement. Provided Heelys makes the required minimum payments of $10,000 per month through January 2007, the company will see title to this intellectual property automatically transfer to them on December 31, 2008 without any further payment.
Upon completion of the IPO, Heelys indicated that executive officers, key employees, directors, and their affiliates will still own approximately 74.6% of the outstanding common stock. Capital Southwest Venture Corporation will own approximately 34.5% of total outstanding shares.
Heelys expects to use the net proceeds of the sale to repay the outstanding amount under its $25.0 million revolving credit facility, if any. The maximum amount available under their revolving credit facility, which expires on June 30, 2007, reduces to $10.0 million on January 1, 2007. At October 31, 2006 the amount outstanding under the facility was approximately $22.0 million.
The remainder of net proceeds will be used for “infrastructure improvements, including expanding and upgrading our information technology systems; hiring new employees; marketing and advertising; product development; working capital; and other general corporate purposes.”
On the downer side, Heelys made the list of this year's ten worst toys, according to U.S. consumer group World Against Toys Causing Harm. Heelys joined a bow and arrow set, a water balloon launcher, and a superman lamp at the top of the annual list published by WATCH.
WATCH warned that Heelys put children at risk of blunt impact, head and spinal injuries.
>>> Based on the backlog number, Q4 will probably contribute an even larger percentage of total sales this year and may well catapult the company over the $200 million mark for the year
>>> The backlog gain may not be enough to keep up with demand. Based on retail POS data compiled by SportScanINFO, sales of Heelys product was up more than 1,000% in the retail third quarter
>>> Dont think for a minute that mom and dad will heed the warnings of the Boston-based consumer advocacy group. With the other hot products for Christmas priced at more than a few hundred dollars, this gift will probably get a lot of traction
