Heelys Ready to Roll in Public Market with IPO…

Hot trend at retail? You bet. Captures the attention of the youth consumer? Absolutely. The next hot IPO from the active lifestyle sector? We’ll see. Volcom has been an absolute success; Under Armour continues to please; Zumiez is growing rapidly and providing solid returns; and Crocs, Inc. has baffled the market with its resilience in the public arena and has continued to add top-line growth through 2006. So why not Heelys? Why not now?

That may have been part of the reasoning behind the move last week by Heelys, Inc. when it filed S-1 documents with the Security & Exchange Commission, signaling its intent to enter the public market. Heelys hopes to raise around $115 million in the IPO, based on papers filed with the SEC, but did not provide the number of shares to be offered or a proposed price range for the shares.

Heelys intends to use approximately $4.0 million of the net proceeds of the IPO to repay the outstanding amount under its $5.0 million line of credit note with JPMorgan Chase Bank, N.A., which matures on April 18, 2007. It is required to be repaid upon consummation of the IPO. The company had borrowed funds under this line of credit note to repurchase shares of stock owned by two of its directors. The company also plans to use the proceeds to repay any outstanding amount under its $25.0 million revolving credit facility with JPMorgan Chase Bank, N.A., which expires on June 30, 2007. As of June 30, 2006, there was only $2.8 million outstanding under the revolving credit facility.

The remainder of the net proceeds will be used for infrastructure improvements, including expanding and upgrading information technology systems, hiring new employees, marketing and advertising, product development, working capital, and other general corporate purposes.

Heelys Inc. net sales for the first half increased 177.2% to $44.6 million from $16.1 million in the year-ago period. Sales of Heelys-wheeled footwear increased nearly 175% to approximately 1.4 million pairs for the six-month YTD period, compared to roughly a half million pairs in the year-ago period, and about equal to the 1.4 million pairs sold for the entire 2005 year. Wheeled footwear makes up about 95% of total sales.

Domestic retail customers comprised about 88.0% of sales for the six-month YTD period, versus 79.2% in the same period last year. Domestic sales increased 207.9% to $39.2 million for the first half from $12.7 million in the 2005 first half. U.S. retail sales accounted for 1.3 million pairs of Heelys-wheeled footwear in the first half, compared to 380,000 pairs in H1 last year.

The Sports Authority accounted for approximately 15.1% of total sales in the first half and Journeys delivered 12.9% of total net sales. No other retailers accounted for more than 10% of sales.

International sales increased 59.5% to $5.4 million in the first half from $3.4 million for the year-ago period, an increase Heelys said was due primarily to increased sales to distributors in Canada, the U.K., and Ireland, partially offset by decreased sales to distributors in Japan and Spain/Portugal.

Net income was $5.9 million, or 13.2% of sales, for the six months ended June 30, a 262% increase from net income of $1.6 million, or 10.1% of sales, in H1 last year.

Sales accelerated a bit in the 2006 second quarter, increasing 190.2% to $30.9 million from $10.7 million in the year-ago quarter. Gross margins improved 30 basis points to 34.3% of sales and net income jumped 272.7% to $4.2 million, compared to $1.1 million in Q2 2005
For 2005, Heelys saw net sales more than double to $44.0 million, a 106.3% increase from $21.3 million in 2004. Wheeled footwear increased 102.4% to 1.4 million pairs in 2005 from 697,000 pairs in 2004. Domestic retail customers made up 83.2% of total net sales is 2005, compared to 64.9% of total sales in 2004. Domestic net sales increased 164.4% to $36.6 million in 2005 from $13.8 million in 2004, with sales of wheeled footwear increasing 170.1% to 1.1 million pairs for the year. International net sales decreased 1.3% to $7.4 million in 2005 compared to $7.5 million in 2004, a decrease Heelys attributed to competing counterfeit and knock-off products in Asia, partially offset by increased sales to independent distributors in Canada, the U.K., Ireland, and Spain/Portugal.

For the 2005 fiscal year, Big 5 Sporting Goods represented 12.3% of total net sales, while Journeys contributed 11.3% of sales, and The Sports Authority comprised 10.6% of total net sales.

Net sales in Asia had already decreased from $12.1 million in 2003 to $5.4 million in 2004 due to the low-price knock-offs. Heelys said the validity of their Japanese patent was challenged in May 2004 and the Japan Patent Office issued an opinion in February 2006 that Heelys’ Japanese patent was invalid. They have filed further lawsuits in Japan in an attempt to overturn the prior opinion. Additionally, a third party recently commenced a proceeding to invalidate Heelys’ patent on the “Roller Shoe” in Taiwan.

Single-wheel footwear represented approximately 80.4% of total net sales in 2005, while two-wheel footwear, which includes two detachable wheels, represented approximately 9.9% of total net sales in 2005. The grind-and-roll category represented approximately 4.9% of net sales in 2005.

Special make-up products represented approximately 17.9% of total net sales in 2005.

Heelys said the 230 basis point jump in GM in 2005 was due primarily to changes in the mix of products sold, lower royalty costs, a decrease in inventory reserve accruals based on actual experience, cost efficiencies derived from higher unit volumes, and an increase in the quantity of products shipped directly to retailers.

Heelys’ net income was $4.3 million, or 9.9% of sales in 2005, compared to $803,000, or 3.8% of sales, in 2004.

Open order backlog was pegged at approximately $97.2 million at the end of the 2006 first half, or an increase of about 417% compared to the $18.8 million backlog at the same time last year.

The company was originally incorporated in the state of Nevada in May 2000, and since that time has operated through a wholly-owned limited partnership organized in the State of Texas. On August 25, 2006, they reincorporated as a Delaware corporation pursuant to a merger of Heeling, Inc., a Nevada corporation, into Heelys, Inc., a Delaware corporation.

Heelys expects to be listed on the Nasdaq exchange under the symbol “HLYS.”

The IPO is being underwritten by Bear, Stearns & Co. Inc., Wachovia Securities, JP Morgan, CIBC World Markets.

>>> These guys were obviously encouraged by the success of the Crocs IPO and its ability to keep on giving…