Heelys plummets on 5 downgrades
Shares of specialty footwear maker Heelys Inc. (Nasdaq: HYLS) are plummeting today after five analysts downgraded the stock.
CIBC, Wachovia, Bear Stearns, Robert W. Baird & Co. and Brean Murray Carret downgraded Heelys after the company released second quarter earnings after the close Tuesday and revealed a dreary outlook for the remainder of the fiscal year.
For the second quarter ended June 30, Heelys reported EPS of $0.45, above the Street’s consensus of $0.42 and the company’s EPS of for the second quarter last year of $0.17. However, at the same time management issued disappointing guidance for the remainder of the year based on larger accounts that are reluctant to write orders for holiday products because they are currently overloaded with spring/summer inventory.
For the third quarter Heelys projects sales of $55 million to $58 million and EPS of $0.28 to $0.30. Three analysts polled by Thomson Financial had projected sales of $68.4 million, while six analysts polled by Thomson Financial had anticipated EPS of $0.38 per share.
For fiscal year 2007, Heelys said it now expects sales and net income growth of 10%-15%. Previously the company had anticipated that fiscal year 2007 results would come in above its long-term sales and net income goals of 20%-25%.
Heelys’ primary product is footwear incorporated with a wheel in the heel that allows one to transition from walking or running to skating by shifting weight to the heel.
After going public just late last year at $21 a share, investors are reacting harshly to the company’s newly feeble outlook, sending shares tumbling 45%, or $9.96, to a new 52-week low of $12.02. The 52-week high of $40.09 was established February 5.
Retailers placed big bets that Heelys footwear would be a blockbuster item this summer, only to be left with a pile of inventory. Management attributed the torpid sales pace to an overall slowdown in athletic footwear sales as well as a lack of freshness in product offerings.
Based on management’s guidance, Robert W. Baird analyst Mitch Kummetz said Heelys is gunning for fourth quarter sales of $28.3 million to $34.7 million and EPS of $0.10 to $0.14, compared with fourth quarter 2006 sales of $71.1 million and EPS of $0.44. Three analysts polled by Thomson Financial had projected sales of $85.4 million, while six analysts polled by Thomson Financial had anticipated EPS of $0.50 per share.
On a conference call Tuesday evening, management said it will take new steps to improve its long term positioning. Heelys plans to push forward some of its better-received product offerings, such as wheeled boots and non-wheeled footwear, to avail them earlier for the holiday season. In the near term Heelys will offer markdowns on staling items.
Kummetz says even if orders do pick up going forward, he expects retailers will be reticent to overload on spring orders given the recent inventory pileups which could weaken Heelys outlook for the beginning of fiscal 2008.
Kummetz, who drastically lowered his target price to $18 from $47 based primarily on EPS estimates, wrote in a research note, “…We do not believe that there’s much room for upside on the guidance.” He’s lowering his third and fourth quarter estimates. For the third quarter Kummetz is lowering his EPS estimate to $0.28 from $0.32; while he is also lowering his fourth quarter EPS estimate to $0.10 from $0.53.
Brean Murray Carret analyst David Meyer, who today downgraded Heelys to a rating of “hold” from “buy,” is suspending his target price at the moment, saying that Heelys’ shares are fairly valued at the current time. “… [We] would point out that this is a very dangerous situation for the brand and, at best, will take several quarters to be fully rectified.”
Based on management’s guidance Meyer says Heelys’ fourth quarter will be “ugly,” with total revenue down 50-60% year-over-year. Meyer too does not see a lot of upside to the company’s guidance and also expects retailers to air on the side of caution when ordering Heelys’ products in the future.
“We don't believe that the HLYS story is broken, but we do believe that it has been damaged,” wrote Baird’s Kummetz.
