Heelys Controls Expenses to See Income Outpace Sales Gains in Q1

Heelys, Inc. reported a 262% jump in net sales for the first quarter to$49.4 million from $13.7 million for the year-ago period. Net income increased 399% to $8.5 million versus $1.7 million last year, with diluted earnings per share increasing to 30 cents from 7 cents.

Mike Staffaroni, president and CEO of Heelys, Inc. commented, “Our positive momentum from last year continued into 2007 which allowed us to exceed both internal and external expectations for the first quarter. We grew our top line by approximately 262%, with strong sell-through across all channels of distribution, and increased earnings per share more than fourfold. We are very pleased with our recent financial performance, as well as our efforts to further heighten our brand recognition and increase our presence at retail.”

For the first quarter ended March 31, 2007, gross profit was $17.5 million, or 35.4% of net sales, compared to $4.9 million, or 36.0% of net sales for the first quarter ended March 31, 2006. Total selling, general and administrative expenses for the first quarter of 2007 were $5.2 million, or 10.6% of net sales, compared to $2.3 million, or 16.9% of net sales in the first quarter of last year. Operating income was $12.2 million, or 24.8% of net sales for the first quarter of 2007 versus operating income of $2.6 million, or 19.1% of net sales in the corresponding period a year ago.

Outlook

For the second quarter of fiscal 2007, the company currently expects net sales to range from $65 million to $70 million and diluted earnings per share to be between 37 cents and 40 cents. When comparing quarterly results in 2007 to quarterly results in 2006, the company believes that the second and third quarters should be analyzed on a combined basis. For the combined second and third quarters of 2007, the company currently expects net sales and net income growth of approximately 20% to 25% over the same combined quarters in 2006. In 2006, the company estimates that approximately $20 million of net sales shifted from the second quarter to the third quarter due to late shipments as the company tried to meet the surging demand for its products. In addition, the company believes some of its customers are placing back-to-school orders for earlier delivery in 2007 than they did in 2006. It should be noted that the company's fully diluted outstanding share count is projected to be 28.3 million shares for the full year 2007, compared with 25.1 million for 2006.

“Mr. Staffaroni concluded, “Looking ahead, we are confident that the growing popularity of our brand and products combined with our portfolio of patents affords our Company clear opportunities for the future. While we have grown rapidly over the past 12-months, we believe significant growth prospects still lie ahead. We are committed to leveraging the strength of our brand and our expanding infrastructure to further build our unique position in the marketplace and increase value for our stockholders.”

                   HEELYS, INC. AND SUBSIDIARIES
           Condensed Consolidated Statements of Operations
                             (Unaudited)
          (amounts in thousands, except for per share data)


                                              Three-month period ended
                                               March 31,    March 31,
                                              ------------  ----------
                                                  2006          2007
                                              ------------  ----------

Net sales                                      $   13,669      49,428
Cost of sales                                       8,749      31,952
                                              ------------  ----------
   Gross profit                                     4,920      17,476

Selling, general and administrative expenses        2,312       5,239
                                              ------------  ----------
   Income from operations                           2,608      12,237

Other expense (income), net                             1        (766)
                                              ------------  ----------
Income before income taxes                          2,607      13,003

Income taxes                                          912       4,552
                                              ------------  ----------

Net income                                     $    1,695     $ 8,451
                                              ============  ==========

Net income per share:
   Basic                                       $     0.12     $  0.31
   Diluted                                     $     0.07     $  0.30
                                              ============  ==========

Weighted-average shares:
   Basic                                           13,989      27,045
   Diluted                                         25,353      28,351
                                              ============  ==========