Heelys, Inc. reported sales dropped 23.3% in the third quarter, to $8.2 million from $10.7 million in the year-ago quarter. The company reported a net loss of $69,000, or less than 1 cent a share, versus a net loss of $1.1 million, or 4 cents, a year ago.
International and domestic sales were $6.9 million and $1.3 million, respectively, for the third quarter of 2010, compared with $8.2 and $2.5 for the third quarter of 2009.
The fall in international sales for Q3 was the result of a decrease in sales to its German and French markets, where it sells direct to retailers. The company attributed the decrease to slower than anticipated spring and summer consumer sales with certain retailers in those markets.
The drop in domestic sales was the result of a combination of lower sales to discount channels compared to prior year and what the company believes to be retail customers' caution in taking inventory risk.
Gross profit was $3.3 million, or 39.7%, compared to gross profit of $3.7 million, or 34.1%, for the third quarter of 2009. International gross profit margin dropped to 40.0% in the third quarter of 2010, compared to a gross profit margin of 42.1% for the same period in 2009. This decrease was the result of a drop in the average sales price per pair caused by changes in mix of product sold directly to retailers versus pairs sold to third-party distributors.
Domestic gross profit margin increased to 38.0% in the third quarter of 2010, compared to gross profit margin of 7.8% for the same period in 2009. The increase in domestic gross profit margin is a result of a higher average price per pair sold as a result of a decrease in sales to discount retailers and a decrease in material costs.
Selling, general and administrative expenses, excluding litigation settlements and related costs, were $3.5 million compared to $4.1 million in the third quarter of last year. Litigation settlements and related costs were $258,000 for the third quarter of 2009. Litigation settlements and related costs incurred during the third quarter of 2009 were related to the class action lawsuit (filed in August 2007), the shareholders' derivative lawsuit (filed in October 2007) and the individual lawsuit (filed in May 2008). These lawsuits were settled during the third and fourth quarters of 2009.
Sequential Quarterly Comparisons
Net sales for the third quarter of 2010 were $8.2 million compared to net sales of $8.8 million in the second quarter of 2010. Gross profit was $3.3 million, or 39.7%, compared to $3.7 million, or 42.2%, for the second quarter of this year. Selling, general and administrative expenses were $3.5 million compared to $3.8 million in the second quarter of 2010. The Company reported a net loss of $69,000, or ($0.00) per fully diluted share, in the third quarter of 2010, versus net income of $473,000, or $0.02 per fully diluted share in the second quarter of this year.
Balance Sheet
As of September 30, 2010, the company had combined cash and investments totaling $65.9 million compared with cash and investments of $66.5 million as of December 31, 2009. The company had inventory of $7.9 million as of September 30, 2010 compared with inventory of $6.0 million at December 31, 2009. The decrease in cash from year end was primarily the result of the investment in additional inventory during the third quarter to support Holiday 2010 sales.
Tom Hansen, chief executive officer of the company, commented, “We continue to see reluctance among some domestic retailers to commit to significant inventory. At the same time, we've seen an increase in consumer interest in the brand and requests for information on where to buy, new styles and new products such as our two-wheeled HX2. We've also seen renewed interest among retailers that have not carried Heelys recently as well as positive sell thru with key retailers in small door programs with hopes of expanding in 2011 based on these results. We credit our PR program and social marketing for rekindling interest in the brand and we believe that as we launch holiday marketing efforts for both Heelys and Nano we'll see consumer interest and inquiries continue to grow. We also continue to become more efficient in our operations reducing costs and refocusing spending on core categories like marketing and new product development that will drive brand awareness and sales.”
HEELYS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(amounts in thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
2010 2009 2010 2009
--------- ---------- --------- ----------
Net sales $ 8,248 $ 10,751 $ 23,704 $ 32,402
Cost of sales 4,972 7,084 13,530 21,259
Gross profit 3,276 3,667 10,174 11,143
--------- ---------- --------- ----------
Selling, general and
administrative expenses 3,461 4,105 11,463 13,647
Litigation settlements
and related costs -- 258 -- 4,087
Loss from operations (185) (696) (1,289) (6,591)
--------- ---------- --------- ----------
Other (income) expense,
net (266) (239) (956) (724)
Income (loss) before
income taxes 81 (457) (333) (5,867)
--------- ---------- --------- ----------
Income tax expense
(benefit) 150 645 445 (1,865)
--------- ---------- --------- ----------
Net loss $ (69) $ (1,102) $ (778) $ (4,002)
========= ========== ========= ==========
Net loss per share:
Basic $ (0.00) $ (0.04) $ (0.03) $ (0.15)
Diluted $ (0.00) $ (0.04) $ (0.03) $ (0.15)
