I'm going to go out on a limb here. In fact, I'll kick out a pair of Heelys wheels and race you to that limb. I predict that Heelys (NASDAQ:HLYS) is going to have a blowout fourth quarter.
Keep in mind that I'm fully aware that this will be a passing fad. This is a trainwreck in the making. I know it. You know it. I just believe that there are several stations to stop at on the way up before this train meets its grinded demise. Oh, and there's a chance this train may also be able to make the switch somewhere along the way and spare us the wreckage.
The very scary and oh, so unscientific mass appeal test
I spent most of last week in Disney World and Universal Orlando. From the beginning, I had set my mind to do two things -- count the Crocs (NASDAQ:CROX), count the Heelys. Unlike scouting regional amusement parks where you can get a good feel for local trends, Disney (NYSE:DIS) offers up the opportunity to gauge the tastes of affluent youth from across the country and around the globe.
A trip to Disney isn't cheap. Just ask any of the tens of thousands of guests at any of the Disney parks on any given day. Because Disney feasts on foreigners, your sample pool consists of some of the wealthier globetrotting trendsetters. If they're taking to a relatively new product, there's a fair chance that these early adopters will pave the way for a flow of followers in the coming months, and possibly years.
What did I find? I found that there's a whole lot of Heelys going on. I counted about two dozen pairs of Crocs sashaying about the park -- and that's good -- but there were even more kids skating down the slightly hilly park terrain or closing the gap in fast-moving queues in their Heelys.
Is this unscientific? You bet. However, this doesn't even include the kids wearing Heelys that weren't in motion. I was simply counting when I spotted the bright-colored hole-ridden Crocs or a pair of Heelys in motion.
I'm not naive. I realize that many of these young kids were sporting Heelys to gain an extra quarter of an inch or two to make it through some tricky height requirements. I also have to admit that there wasn't a single kid wearing the recommended protective gear. Safety issues -- and parental disregard in not pressing the issue when confronted with fashionable consequences -- may ultimately ding Heelys even before the fad has a chance to play itself out.
I get all that. I still get the feeling that a lot of these kids got their shiny set of Heelys over the holidays, and this is going to reflect kindly on the company as it raced to restock retailer shelves last month. As a company that relies on the United States for all but 14% of its sales, I also have to point out how I was impressed by the number of international kids rolling around the park. That is the kind of ambassadorship that will really make the company shine even if its patent-rich heritage has been tougher to enforce overseas.
Knowing when to hop off the fad
So let's assume that I'm right and that Heelys has a blowout fourth quarter. It has been the company's seasonally strongest period, but even the jaded may give the company its due if it's as solid as I expect. The stock inches higher on the news, buoyed by favorable analyst coverage of the companies that took it public back in December.
Jump off the train at that point? Not yet.
The first quarter is also the company's seasonally slowest. If I'm right about the brisk holiday sales, a lot of that will actually show up in the March quarter as retailers take inventory of new shoes with larger orders. The company may sense this happening by the time it posts its fourth-quarter results and reward investors with an upbeat outlook. But Heelys is no dummy. It will only tweak its first-quarter guidance slightly higher, knowing full well that it will be able to blow that target away, too.
Jump then? Not yet.
One wouldn't expect much of a surprise in the usually robust second quarter, but this is when Heelys will start to work its branding magic. The company is already selling T-shirts and caps in a noble attempt to diversify from its reliance on wheeled footwear (that has accounted for 99% of its revenue through the first nine months of 2006). The merchandise actually looks pretty cool. At least it's a more creative tack than how Nike (NYSE:NKE) simply rode its footwear brand into apparel without trying to push the envelope.
But it may be during this otherwise-sleepy period that Heelys begins to ramp up its distribution. Keep in mind that you can't get Heelys just anywhere. Nordstrom (NYSE:JWN) is one of the few department stores that stocks them, but you're usually down to specialty shoe stores and athletic superstore concepts to get your Heelys on.
Jump then? Not yet.
Heelys reminds me a bit of Jones Soda (NASDAQ:JSDA). Heelys was founded by a pro skater just as Jones Soda originally marketed itself to extreme sports enthusiasts. However, it wasn't long before Jones Soda discovered that retail distribution works better when you strike up exclusive deals with specific chains. Even if canned sodas didn't offer the same kind of premium markup as its flagship bottled fare, Jones Soda has been providing Target (NYSE:TGT) with exclusive and eclectic soda lines like its recent holiday dessert line (even though I have to admit that banana cream pie does not work well as a soft drink).
Later this year, if Heelys feels that it's losing momentum, I can see it brokering deals with larger chains like Target to provide exclusive lines. Heelys with Target logos on the side? Let's hope not. Instead, look for Heelys to cut deals with high-profile retailers to offer up special designs of shoe colors that will only be available through that particular outlet.
Jump then? Maybe. Yes, maybe. It's at that point when Heelys will have to dig deeper into its bag of tricks to impress investors. The risks will be higher at that frothy stage of the game, and I wouldn't blame you if you decided to snap off those retractable skating wheels and hotfoot it elsewhere.
The art of the jump
Sales growth has been accelerating at Heelys. The top line more than doubled in 2005 to $44 million, and the company has picked up the pace with net sales soaring 303% higher through the first three quarters of 2006. As heady as that all seems, profits have been speeding along even faster thanks to chunkier profit margins. Growth will have to slow in 2007. It just has to. If sales and earnings were to triple in the year ahead, you'd be laughing all the way to the bank -- with a little roll in your sole -- by snapping up shares of Heelys at a mere 10 times forward earnings.
The thing to watch for here is how deep Heelys can dig its claws to cash in on its 15 minutes -- or months -- of fame. Will there be a deal for Heelys accessories for Barbie, Bratz, or Build-a-Bear dolls? Is an amusement park tie-in possible? How about an animated series or a social networking site for tweens? When activist groups begin talking down the shoes, will Heelys be there to cash in again with stylish Heelys protective gear to sell? All of this may seem far-fetched, but it's all within the realm of reason. Will it extend the fad? Perhaps, yet what it will ultimately do is embed itself deeper into the tween psyche to the point where it can be there to catch the next wave.
Sure, you're welcome to jump the train anywhere along the way. Just make sure that when you land, you don't find yourself rolling downhill and regretting that you missed out on the rest of the ride.
Heelys is not a recommendation in any of the newsletters, yet Rick loves to spot early adopter trends and has singled out plenty of them for Rule Breakers readers. What makes them so special? A free 30-day holiday season trial subscription will help clue you in.
Longtime Fool contributor Rick Munarriz has two young sons, but only one of them likes to wear his pair of Heelys on certain outings. He does own shares in Disney, a Stock Advisor recommendation. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.
