I believe that Heelys' (HLYS) business is unsustainable. I would recommend shorting their stock as Heelys shoes are a passing fad and the company is built around a single shoe product that is heavily reliant on the tastes of 6-10 year olds.
As Heelys were a popular gift for children this holiday season, it's not too surprising to see the company post 4th quarter earnings that beat Wall Street numbers handily. Net income for the fourth quarter of 2007 increased 700 percent to $11.5 million from $1.4 million the prior year, while earnings per share increased to 44 cents per share from 6 cents per share in the prior year period. The Street was looking for earnings of 28 cents per share.
The Short Case: Analyst’s estimates of growth are overly optimistic. According to Capital IQ, growth for this year is forecasted at 20.7% for this year and 22.5% for the next 5 years. Heelys is expected to have earnings per share of $1.67, with around 83% of their earnings coming from 4th quarter holiday sales in 2007. This leaves little room for error, and it is questionable if Heelys was creating shareholder value to begin with. Cash flow from operations in 2006 was -$2,180,000.00, and Free cash flow for 2006 was -$2,573,475.00.
Nor is Heelys business model anything to write home about. In their recent 10-k, management commented that they “depend primarily upon sales from a single product line and the absence of continued demand for our products would have a material adverse effect on our net sales and results of operation.” Management also is worried about not being able to enforce their patents on Heelys shoes, as they should be. It is not exactly a proprietary or revolutionary idea to attach a wheel to a shoe. This isn’t exactly like manufacturing the next breakthrough in
