Heelys' Right Turn

Sanity may finally be kicking in at Heelys (Nasdaq: HLYS  ) . The maker of the popular rolling footwear with pop-out wheels won't go through with its planned secondary offering.

Good call. It was dumb to announce a wave of defecting insiders -- all of the shares offered in the secondary came from insiders cashing out -- on the same day the company hosed down its near-term prospects.

Heelys had come on strong, obliterating Wall Street's profit targets in its first two quarters as a public company. Yet somehow, it decided to announce a morale-deflating secondary simultaneously with its first profit warning. Obviously, the company had to wait a few months after going public before clearing its second wave of stock selling. The timing was just terrible, though.

Investors fretted that a company would only do something so desperate if it thought that business might get worse in the near term. It did. An American Academy of Pediatrics study blasted the safety of skating shoes. The American Academy of Orthopedic Surgeons issued new safety guidelines, urging parents to make sure that their Heelys-coasting kids wear helmets, protectors, and pads. That's a cumbersome prerequisite for a fashion statement.

Heelys fought back, with studies vindicating the company's flagship footwear, but the damage to the company's public image was already done. Between financial warnings and safety concerns, Heelys' shares tumbled like a new skater coasting along a stick of butter.

The same stock that briefly topped the $40 mark back in February skidded all the way down to yesterday's close of $24.71. That's still better than last year's IPO price of $21 a share, but it's hard to promote a secondary offering of a stock that's tanking.

Now trading at 18 times trailing earnings, Heelys may seem cheap. Crocs (Nasdaq: CROX  ) , the other hot footwear maker to go public last year, is fetching 41 times earnings. The difference here is that Crocs continues to expand its shoe business, while Heelys remains a one-trick pony. Oh, and that pony should now be wearing a helmet, protectors, and pads.

Pulling the secondary won't change much. The company still has the same number of shares outstanding -- and the same problems. If anything, the stock future gains may be held in check by Wall Street's suspicions that insiders are hungry to get out at higher price levels. 

Pulling the secondary is better than going through with it. But at this point, that's a matter of choosing between dumb and dumber.

More Heelys skating action:

Longtime Fool contributor Rick Munarriz has seen his share of kids wipe out on wheeled footwear, but they always seem to get back up. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool's disclosure policy always wears a helmet.


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