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Jelly Roll Capital Equity Research |
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Market Analysis, Education, and Wall Street-Quality Stock Reports |
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Heely’s (HLYS) |
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Selected Analyst Coverage (Target): Wachovia — Market Perform ($39-42) CIBC World Markets — Sector Performer |
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HLYS Closed at $29.50 on 3-29-07 |
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Released 3-29-07 |
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Heely’s (ticker: HLYS) designs and markets dual-purpose wheeled footwear primarily to children ages 6-14, along with branded accessories. · Heely’s was taken public in December 2006. · The “lock up” period restricting when insiders can sell shares ends on June 5, 2007. This should add to the supply of shares as insiders sell some or all of their holdings, with the net effect equating to downward pressure on Heely’s stock price. · Total shares held by insiders is approximately 20 million; average daily volume for HLYS over the past 3 months has been approximately 400,000. At that rate, if insiders sell 20% of their shares (a conservative estimate in our view) then the selling pressure would equal 10 days of normal volume. · More than 90% of Heely’s current revenues come from the sale of one product (albeit with small variations), so if the recent popularity Heely’s sneakers have experienced should fail to continue to materialize, the company’s operating condition will be impacted in a significantly negative way. · Analyst estimates currently call for 20-25% annual increases in earnings for the next five years. Assuming that no erosion in gross margins take place, such assumptions call for 19 million in unit sales in 2011, a target we see as being extremely difficult to achieve unless Heely’s is able to successfully extend its brand reach beyond the current 6-14 age group, something it has struggled to do so far. · In addition to concerns over long-term growth, sequential quarter-over-quarter (QoQ) growth in the last fiscal period was negative. Whether this was due to difficult QoQ comps, as back-to-school shopping may have offset holiday purchases, is unclear. Regardless, the temporary stall in growth is a red flag because Heely’s are regarded as a trendy product, and this could be the first signs of a slowdown in this fad. · While overall earnings growth in FY2006 was strong, the inability of Heely’s to generate positive cash flow in that time period is troubling. Because the majority of the difference between net income and operating cash flow in FY2006 is attributable to changes in soaring accounts receivables and inventory, we cannot help but wonder if Heely’s is temporarily boosting the bottom line by extending overly generous terms to retailers. We will remain vigilant in watching for signs of faltering growth and weakness in the Heely’s brand popularity. · Given Heely’s anticipated earnings growth, its balance sheet position, cash flows, and business risk, our fair value target for HLYS is $8.22, putting HLYS shares as being overvalued by approximately 72.13% based of Thursday’s closing price of $29.50.
Disclosure: The analyst has no position in HLYS or its derivatives. |
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