Heelys Inc. swung to a fourth quarter loss on higher returns and markdowns, while sales tumbled 86% to $9.8 million from $71.1 million. The $5.5 million loss, or 20 cents a share, included $3 million to increase its reserve for marketing discretionary fund assistance, $2.7 million to increase its returns reserve and a $1.5 million write-down of inventory. Excluding these special charges, the net loss of $1.2 million, or 4 cents, compared with earnings of $11.5 million, or 44 cents, in Q4 2006. In November, the company had warned of break-even results.

On a conference call with analysts, interim CEO Ralph Parks, who took over after Michael Staffaroni resigned in February, said he was pleased with how HLYS’ retail partners ended the year with lower inventory levels than they originally expected.

“The downside to that is that during this holiday selling period, the inventory reductions were driven by a greater promotional pricing, including much steeper discounting at one retailer that we would have preferred not to have been that promotional,” said Parks.

Both Shoe Carnival and Famous Footwear, where the brand was just introduced in November, are apparently seeing higher selling prices.  International sales were up in the quarter and grew 13% for the year driven by gains in the UK, Germany, Spain, France and Belgium.
Heely's did not provide 2008 guidance, but expects domestic sales to be down for the year “with sales volumes increasing sequentially as we approach back to school and the holiday selling season.”