Heelys, Inc. reported that net sales decreased5.2 percent to $8.3 million for the three months ended June 30 from $8.8 million for the three months ended June 30, 2010. Domestic net sales increased $517,000, from $2.2 million for the three months ended June 30, 2010, to $2.7 million for the three months ended June 30, 2011.
The increase in domestic net sales is primarily the result of increased unit sales of our HEELYS wheeled-footwear, which was partially due to first quarter orders of approximately $325,000 that we were unable to fulfill until the second quarter as a result of short-term delays from one of our sourced third-party manufacturers. International net sales decreased $979,000, to $5.6 million for the three months ended June 30, 2011, from $6.6 million for the three months ended June 30, 2010. This decrease in international net sales was primarily due to sales losses in Japan resulting from a drop in consumer retail spending triggered by the earthquake and tsunami-related events in the region. The decrease in international net sales was also impacted by changes in the buying patterns of our customers resulting from the transition from a third-party distributor to the establishment of our own sales office in that market, as well as a decrease in sales in our French and German markets, offset by significantly higher sales in our Italian market and to our independent distributor in Russia.
Consolidated gross profit margin increased from 42.2 percent for the three months ended June 30, 2010, to 46.9 percent for the three months ended June 30, 2011. The improvement in gross profit margin was primarily due to cost reductions resulting from changes in our product procurement processes which we implemented during the second half of 2010, which were offset by the impact the fluctuations in the exchange rate between the U.S. dollar and the Euro had on gross profit margins on international sales.
Selling and marketing expenses increased from $1.4 million for the three months ended June 30, 2010, to $2.1 million for the three months ended June 30, 2011. This increase was primarily the result of an increase in commissions on international sales attributable to an increase in sales in our Italian market, combined with an increase in marketing and advertising costs, primarily consumer related advertising in our European markets where we sell directly to retailers due to the timing of spring holidays, as well as costs directly attributable to the opening of our office in Japan.
General and administrative expenses increased $562,000, primarily due to increased shipping and handling costs primarily resulting from increased sales in our Italian market and handling costs of our inventory in Japan, increased general and administrative costs directly attributable to opening and operating our office in Japan and increased payroll and payroll related costs primarily due to accrued management incentive compensation. These increases were offset by a decrease in legal and other fees related to our intellectual property and associated enforcement efforts, which are the result of differing enforcement actions during the periods and an overall cost containment effort by management.
Loss from operations increased from a loss of $74,000 for the three months ended June 30, 2010, to a loss of $1.1 million for the three months ended June 30, 2011.
The company reported a net loss of $973,000, or (4 cents) per fully diluted share, for the three months ended June 30, 2011. The company reported net income of $473,000, or $0.02 per fully diluted share, for the three months ended June 30, 2010, which was primarily the result of the settlement of a potential patent and trademark lawsuit in April 2010, in the company's favor, in the amount of $750,000. This settlement is reported as other income in the company's statement of operations.
As of June 30, 2011, the company had combined cash and investments totaling $61.7 million, compared with cash and investments of $67.6 million as of December 31, 2010. The change in the company's cash position was primarily the result of inventory purchased from our former Japanese distributor, inventory purchased to support business operations and timing of the collection of trade receivables.
Tom Hansen, chief executive officer of the company, commented, “We continue to see positive momentum in the US with both sell thru's and door counts improving nicely. New models such as the Wave, Straight Up and Double Threat are moving very well. If we keep adding doors at our current pace we should be in between 2,100 and 2,400 doors for Holiday 2011, up from about 1,500 last year. The difficult economic situation has hit consumer spending very hard across Europe though we continue to do well in less mature markets such as Italy. The earthquake and tsunami in Japan and inventory hangover from our previous distributor have hurt sales in Japan though in visiting with our key retailers there, they believe that the impact of the natural disasters will begin to wane in Q4.”
