For most public companies, a 140% increase in revenues and a tripling of quarterly profits would have been met with a standing ovation.  But for Heelys, Inc., those results fell on deaf ears as the market instead focused on the future, which is looking increasingly tenuous for the company that owns the wheeled footwear market.  HLYS shares fell more than 52% for the week last week, closing at $9.90 on Friday.  While the second quarter looked solid, it reflects a decelerating growth trend, but the real issue arose when management revealed that inventories are starting to back up at retail as sell-through slowed through June and July.


Based retail point-of-sale data compiled by SportScanINFO, the wheeled footwear category saw its first year-over-year weekly decrease in mid-July, a tend that has worsened over the last two weeks as the category failed to replicate the uptick in sales seen for the back-to-school period last year.   Management said they expect a re-evaluation of the retail inventory position at the conclusion of the back-to-school period.


Domestic sales increased 150.5% to $74.3 million in the second quarter.  Heelys management indicated that they had expanded their retailer door base as well, and boasted of a move into the urban market, including Downtown Locker Room, Underground Station, and increased doors at Hibbett.  They speculated that an increase in doors may also be cannibalizing some of the established account business.


Sales outside the U.S. increased 65.5% to $6.2 million in the quarter from $3.7 million in the year-ago period.  The U.K. was said to be the strongest market once again and demand there apparently continues to build momentum.  Mike Staffaroni, president and CEO of Heelys, Inc., said that the European market could become as big or bigger than the domestic business.


Looking ahead, the company currently expects net sales to range from $55 million to $58 million for the third quarter and diluted earnings per share are forecast to range between 28 cents and 30 cents.  Management said that there is “an over-inventoried position of product at many of the company's domestic accounts,” which will have a significant adverse affect on its fourth quarter 2007 results.  HLYS now expects net sales and net income growth of 10% to 15% for the year.


>>> At the recent WSA show, Sports Executive Weekly learned that a number of retailers may have misjudged (or ignored) the trend line for the wheeled footwear business and had stocked up with product through the spring… 


>>> POS data indicates that the brand has a mini-bump for back-to-school, but the brand has surged for the Holiday period.  Will it do so again this year?


>>> Perhaps part of the problem rests with the difficulty in classifying the wheeled footwear category.  Heelys management refers to the strength of the inline skate business when discussing the opportunity in Europe, but compares the brand to the skate footwear business in the U.S… 


>>> The reality check is that Heelys has had its biggest effect on children’s footwear in general, but has grabbed little to no share in the adult skate footwear category…