Heelys Q1 Revenues Slide 7.6 Percent

Domestic net sales decreased $263,000 to $1.7 million for the three months ended March 31, 2011, from $1.9 million for the three months ended March 31, 2010. The decrease in domestic net sales resulted from sales during the first quarter of 2010 to a discount retailer at lower average price per pair, which did not occur during the three months ended March 31, 2011.

U.S. sales were also impacted by $0.5 million in orders that were pushed to the second quarter as a result of short-term delays from one of our sourced third-party factories. 

International net sales decreased $286,000 to $4.4 million for the three months ended March 31, 2011, from $4.7 million for the three months ended March 31, 2010. This decrease in international net sales was primarily due to sales losses in Japan resulting from our takeover of distribution in Japan and the March 2011 earthquake and tsunami-related events in the region, as well as a decrease in sales in our French and German markets, offset by significantly higher sales in our Italian and Russian markets.    

Consolidated gross profit margin increased to 49.3% for the three months ended March 31, 2011, from 47.9% for the three months ended March 31, 2010. The improvement in gross profit margin was primarily the result of sales in the first quarter of last year to discount retailers in the United States at a lower average price per pair, combined with cost reductions resulting from changes in our product procurement processes, which we implemented during the second half of 2010.

Selling and marketing expenses increased from $1.4 million for the three months ended March 31, 2010, to $1.5 million for the three months ended March 31, 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, offset by a decrease in marketing and advertising costs, primarily consumer related advertising due to timing.

General and administrative expenses decreased $203,000, primarily due to 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 $1.0 million for the three months ended March 31, 2010, to a loss of $1.1 million for the three months ended March 31, 2011.

The company reported a net loss of $1.2 million, or ($0.04) per fully diluted share, for the three months ended March 31, 2011 and 2010.

Balance Sheet

As of March 31, 2011, the company had combined cash and investments totaling $62.6 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 inventory purchased from our former Japanese distributor, inventory purchased to support business operations in the second quarter of 2011 and timing of the collection of trade receivables.

Tom Hansen, chief executive officer, commented, “Positive momentum from improved sell through at retail during the holidays was countered by extreme delays in getting new product out of China and shipped to our retailers. Delays pushed some sales back and caused us to take a different direction in our sourcing operations. The events in Japan also had a major impact on our sales and operations there, though things seem to be settling somewhat now. We continue to find new efficiencies in operations and we are excited about the new programs we have put in place for back-to-school and holiday 2011.”