Heely's Drops a Heel After Strong Earnings

Heely’s just posted its highlights for the qaurter and for the fiscal 2006: Net Sales Increased 377% to $71.1 million versus $14.9 million a year ago;  Net Income Increased 700% to $11.5 million versus $1.4 million a year ago; Diluted Earnings Per Share Increased 633% to $0.44 versus $0.06 last year (estimates were only $0.29 on EPS).  FISCAL 2006 Highlights: Net Sales Increased 328% to $188.2 million compared to $44.0 million in fiscal 2005; Net Income Increased 571% to $29.2 million compared to $4.3 million in the prior year; Diluted Earnings Per Share Increased 582% to $1.16 compared to $0.17 for fiscal 2005.

Mike Staffaroni, President & CEO: "We are very pleased to have concluded a record year for our Company across the board with a fourth quarter in which we posted significant increases in net sales and earnings. Our results were fueled by robust demand for our portfolio of wheeled footwear here in the United States coupled with higher net sales in several key international markets. Over the past 12-months we have made progress increasing our brand awareness through additional advertising and marketing programs while at the same time expanding our manufacturing capacity in order to better serve our retail partners and position the Company to capitalize on the opportunities that lie ahead."

The Company does not offer specific guidance for quarterly or annual earnings, but does have a stated objective to provide annual net sales and net income growth of 20-25% over the next several years. As a reminder, the share count in 2007 will be higher than the reported 2006 share count as a result of the December 8, 2006 IPO.  If we were going to make a minimum target here based on objectives that would yield at least $35 million in net income (hard to calculate EPS because of share count increase) and revenues of $225.6 million if they both came in at 20% growth.  The company is still young and fresh, but it may want to address this"no guidance" policy since Wall Street tends to trust very fewcompanies that engage in this practice. 

Tomorrow we’ll get to see how the street covers this one, and that is far from known: J.P.Morgan and Bear Stearns both have outperform ratings, Wachovia is at a Market Perform rating, and CIBC is now at a Sector Perform rating.  All ratings went on back in mid-January, so there is really no history to go on and there is no way to see how they will react based on history.  Based on the numbers alone, it looks like it will be hard for the analysts to be negative unless they are severely unhappy about the "no guidance" policy keeping them a bit in the dark.

If you don’t think these shoes are popular, you haven’t hung around any young kids lately.  That makes this a fad stock and a potential cult stock if it ever implodes, but it sure sounds like we are a long ways off before speaking about either scenario.

This one looked originally like traders and investors who boughtyesterday were going to think the nick name was "Hell Yeah!’s" but thatwas before the "Sell the News" crowd came in.  Shares jumped initially by 3% after the report but are now down 1.8% at $35.00 in after hours trading; shares closed up 5.7% at $35.64 on the day and have traded between $30.00 and $40.09 since its December IPO.  As of February it had 2.445 million shares listed as being in the short interest, which is about 6.4 days to cover.  Its IPO and overallotment were only 7.388 million shares.

Jon C. Ogg
March 6, 2007

Jon Ogg can be reached at [email protected]; he does not own securities in the companies he covers.