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Heelys: A Chance to Get Off the Fad Rollercoaster

Posted by: Ben Steverman on August 14, 2008

What happens to a fad stock when the fad fizzles?

Maybe they just fade away. Or maybe they get acquired at an 85% discount.

Skechers (SKX) is offering to buy shoe company Heelys (HLYS) for $143 million, giving Heelys’ investors a chance to cash out of a company that is nothing if not a fad stock.

The firm makes kids’ shoes that contain hidden wheels in their soles. You’ve probably seen little ones rolling, not walking, down the sidewalk, through the mall, or even down subway platforms (yes, I’ve seen this, as dangerous as it sounds).

Driven by kids’ craze for their shoes, the company successfully went public in 2006. Shares rolled higher, and then thud. Last summer, the stock market realized what any parent or elementary school teacher already knows: Kids are fickle.

By now, the Heelys craze seems a little long in the tooth, and the company has the financial results to prove it. The firm recently reported revenues of just $18.2 million last quarter, down from $74.3 million a year ago. Last year’s profits of $12.8 million turned into a $394,000 loss. Shares are down about 85% in the past couple years.

Heelys’ plight reminds me of another shoe company (once) popular with the kids, Crocs (CROX). On Aug. 8, Crocs said it was laying off 4% of its work force, one day after reporting very weak financial results. Sales at the company mostly held steady, but domestic sales plunged 20% from a year ago, a sign of waning interest in Crocs’ super-comfortable, but super-ugly footwear.

Ron Snyder, Crocs’ president and CEO blamed a “difficult macro-economic environment,” and said he was “confident about the strength of the Crocs brand.” Crocs seems to be hoping new, more stylish shoes will reignite consumers’ interest, but investors have clearly lost patience.

Once a red-hot stock touted by analysts as the next Nike (NKE), Crocs shares are down 94% from their peak. (Here’s more on Crocs, which in May, in a post titled “Where were the analysts?”, I called “a classic tale of stock market hubris.”)

So why would Skechers be interested in Heelys if it represents a faded fad?

“At first blush we were scratching our head at this deal,” wrote Sam Poser, a Sterne Agee analyst.

But, reflecting its weak growth prospects, Heelys is cheap. And with $96.7 million in cash, the real purchase price would be about $48 million, Poser says.

Also, Skecher’s CEO said in a letter to Heelys he is impressed by “Heelys’ strong brand and proprietary technology.” The technology (Heely’s patents) may be the key ingredient here.

Skecher’s “kids’ business is strong, and [Heelys] could be a good addition, despite the recent slowdown.”

Initial reports suggested Heelys would reject the Skechers’ bid (as the firm rejected proposals earlier this year). Perhaps Heelys execs are holding out for a higher price or maybe, like Crocs, they think new products can revive the firm’s stock.

Both Heelys and Crocs have two advantages that might be attractive to larger acquirers: Lingering popularity (particularly abroad, where their fads haven’t completely played out) and some fancy technology.

Their shareholders have been on a crazy trip lately, and these advantages just might give them a chance to get off the rollercoaster ride.

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Bloomberg Businessweek’s Ben Steverman focuses on the latest moves in financial markets and emerging trends in stocks, bonds, and funds, always with an eye toward giving readers a better understanding of the sometimes confusing and often chaotic world of money. Standard & Poor’s senior index analyst Howard Silverblatt will also provide his take on companies’ finances and the markets. Voted one of the “Top 100 Finance Blogs” in 2007.

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