Yesterday, I wrote about Crocs Inc. (NASDAQ: CROX) and the problems the company is having in Japan. The government there has asked the company to consider changing the design of its footwear after reports that children were getting hurt wearing its rubber sandals on escalators.
What's interesting is that the reports about Crocs' safety issues have all come from the media, not the company's SEC filings. Back in 2006, ABC reported that Crocs can pose a danger on escalators. Some hospitals have even banned the shoes citing safety concerns.
But Crocs' latest 10-K is devoid of any references to the concerns about the safety of the shoes.
A similarly struggling fad shoe company, Heelys (NASDAQ: HLYS), has also dealt with issues surrounding the safety of its footwear. From the risk factors section of the company's latest 10-K:
Someone had to pay for the extremely disappointing downturn in the stock of Heelys Inc. (NASDAQ: HLYS), the children's shoe company that builds wheels into its footwear. The company's CEO was pushed out on Friday.
The stock has fallen from a 52-week high of $40.09. The shares now change hands just above $6.
After a huge run in revenue that moved from $21 million in 2004 to $188 million in 2006, more recently sales have fallen off to $50 million after hitting $75 million in the June quarter.
Like other specialty shoe companies, including Crocs Inc. (NASDAQ: CROX), Heelys has not been able to follow its first big hit with other items.
Changing CEOs is not going to alter that.
Douglas A. McIntyre is an editor at 247wallst.com.
The resignation of a board member at once high-flying skate-shoe manufacturer Heelys (NASDAQ: HLYS) could be a harbinger of a managerial shake-up at the company.
On December 21st, Heelys filed an 8-K announcing that on December 17th, board member James Kindley had resigned in protest to a board resolution "relating to Michael G. Staffaroni's, the Company's President and Chief Executive Officer, handling of certain operational matters".
In a letter to Staffaroni filed with the 8-K, Kindley explained his resignation:
As you know, I strongly support your vision for the company and your strategy for realizing it. Regrettably, a majority of the directors voted at the November meeting for an ultimatum expressing dissatisfaction with your performance, an action I openly opposed (that is not reflected in the minutes) and one that I feel signals an unjustified lack of confidence in you and your strategy. I am unable and unwilling to support the majority's alternatives and directives.
Given that a majority of the board has expressed dissatisfaction with the CEO -- and saw fit to hold a vote to formalize that disappointment -- his days with the company could be numbered.
Heelys has had a rough time since its IPO. Its stock has fallen from a high of $40.09 to its current price under $6.25, which was accompanied by a slew of shareholder class action lawsuits. A change at the top could be a short-term catalyst for a recovery in the share price and, with the board's dissatisfaction with the CEO now plastered over an SEC filing, that could come soon.
MOST NOTEWORTHY: Heelys, Citigroup, Alvarion, UBS AG and Alcatel-Lucent were today's noteworthy downgrades:
CIBC downgraded Heelys (NASDAQ: HLYS) to Underperformer from Sector Performer. The analyst has little confidence sales will recover following the recent drop.
CIBC also downgraded Citigroup (NYSE: C) to Sector Underperformer from Sector Performer, as they believe the company may have to cut its dividend, raise cash or sell assets in order to raise $30B over the near-term; the firm believes such a move would pressure shares significantly.
Merriman downgraded shares of Alvarion (NASDAQ: ALVR) to Neutral from Buy after the in-line results as they now believe increased competition will pressure gross margins and minimize operating leverage in FY08.
Merrill downgraded shares of UBS AG (NYSE: UBS) to Neutral from Buy to reflect the potential of further write downs.
Banc of America lowered its rating on Alcatel-Lucent (NYSE: ALU) to Neutral from Buy to reflect poor execution of the company's turnaround strategy.
OTHER DOWNGRADES:
Goldman removed Vimpelcom (NYSE: VIP) from its Pan European Buy List and downgraded shares to Neutral from Buy.
Heelys Inc. (NASDAQ: HLYS) makes sports equipment directed at children in the 6 to 14 year-old age bracket. The firm's primary product is footwear that features a removable wheel in the heel. Users can transition from walking to skating, by shifting weight to the heel. The company sells footwear, protective gear and apparel items through such retailers as Nordstrom (NYSE: JWN). Nike (NYSE: NKE) is a competitor.
The stock fell sharply in August, when the firm said it faced excess inventory at many U.S. retail outlets, but it popped late last week, when Heelys introduced a broad new line of wheeled-footwear colors and styles. The move boosted the share price through 30-day and 50-day moving average resistance curves into a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside. The catalyst for such a move may prove to be Wednesday's announcement that the company plans a November roll-out of a non-wheeled footwear line, featuring a sole that resembles a video game controller. Four video games will come free in the shoe box. The stock has a very high short ratio and a short-squeeze may be developing.
Brokers recommend the issue with six "holds." Analysts expect a 14% average annual growth rate, through the next five years. The HLYS P/E ratio (6.30), Price to Sales ratio (1.03), Price to Book ratio (2.36), Price to Cash Flow ratio (6.11), Sales Growth rate (140%), EPS Growth rate (191%), Operating Margin (25.34%), Net Profit Margin (16.65%), Return on Assets (56.53%), Return on Investment (70.06%) and Return on Equity (70.06%) compare favorably with industry, sector and S&P 500 averages. Institutions hold about 44% of the outstanding shares. Over the past 52 weeks, the stock has traded between $7.65 and $40.09. A stop-loss of $8.50 looks good here.
A few weeks ago, I wrote about the class-action lawsuits being filed against Heelys Inc. (NASDAQ: HLYS):
I could swear securities lawyers have invented a sophisticated computer program capable of seeking out public companies to target with class-action lawsuits. A company reports a bad quarter, the stock tanks, and then for the next few weeks, press releases seem to come out daily announcing a class-action lawsuit "commenced ... on behalf of purchasers of ... stock issued pursuant or traceable to the false and misleading Registration Statement filed with the Securities and Exchange Commission in connection with the Company's ... initial public stock offering.
While I certainly support the right of shareholders to collect damages in instances of real fraud, it seems that every time a stock price drops, multiple firms file lawsuits. These suits divert management's attention from the business and burn up resources on legal fees. All of this would be fine, except that these suits very rarely go anywhere. And even when they do, shareholders rarely collect anything.
I'm not sure what the solution to this situation is, or even if there is one, but it's an important issue for the SEC to be looking at.
I could swear securities lawyers have invented a sophisticated computer program capable of seeking out public companies to target with class-action lawsuits. A company reports a bad quarter, the stock tanks, and then for the next few weeks, press releases seem to come out daily announcing a class-action lawsuit "commenced ... on behalf of purchasers of ... stock issued pursuant or traceable to the false and misleading Registration Statement filed with the Securities and Exchange Commission in connection with the Company's ... initial public stock offering."
The press release will then mention some important dates and vague accusations of securities fraud.
Heelys Inc. (NASDAQ: HLYS) the maker of the annoying skate shoes that so many young kids are wearing is the latest target of these lawsuits. Take a look:
These firms put out the press releases in an effort to find plaintiffs, and then hope to get the cases to discovery so they can fish for signs of wrongdoing.
One of my colleagues at BloggingStocks is Georges Yared, a great growth stock picker who is well-known throughout the investing world. But from reading Mr. Yared's posts, I've found several issues with his thinking as of late.
While he does show discipline to buying below his price targets, I think that some of his ideas don't make sense for long-term investors and he neglects to explain the risks involved in the potential investments. In a recent post, Yared spoke about two of his favorite ideas: Apple (NASDAQ: AAPL) and Crocs (NASDAQ: CROX).
Apple is indisputably a great company with incredible product momentum. In a recent post, I discussed why I believed Apple is quite exposed to a correction but I had no disputes with the strength of the underlying company. On the other hand, I think that Apple was, and remains, 'priced to perfection.' This simply implies that any earnings report or guidance figure which Wall Street interprets negatively will kill the stock. Analysts will be forced to cut earnings per share estimates, thus cutting price targets. To compound the problem, the multiple will be forced to contract due to 'less operating visibility' and 'signs of slowing momentum.' While this certainly isn't a definite or easily predicted event, the risk remains very viable.
Crocs is a whole different story. The creator of overpriced and ugly rubber beach shoes has been on fire in the last six months, during which it has doubled. While Crocs is similar to Apple in one regard -- it's lofty expectations from the street which it needs to exceed to justify its current price -- it's also very different. Unlike Apple, whose products will do well in any season, especially during Christmas, Crocs remains a one-hit-wonder for the summer months. Although Crocs bulls such as Mr. Yared will argue that Crocs is "the next Nike" and that the company's new winter shoes will carry the company through Q407 and Q108, I think this is probably wishful thinking.
Similar to every other fad product, proponents argue that this is not a fad and that this product is different. But as Sir John Templeton once said, "This time is different" are among the most costly four words in market history. One needs to look no further than Heelys Inc. (NASDAQ: HLYS) to see a stock that once wore the 'this time is different' fad hat.
Unfortunately for Crocs shareholders, when this company breaks it will sink ever-so-quickly. When Crocs buyers realize that their hideous, overpriced beach shoe is no longer the popular thing they will all neglect their Crocs just like they've recently done to their sneakers with wheels which were mass produced by Heelys. This problem will be compounded by the fact that Crocs has become increasingly reliant on "Jibbitz" -- plug-like themed inserts for Crocs shoes (no, I'm not joking) -- for growth. No one will want new Micky Mouse Crocs plugs when their deformed rubber shoes are collecting dust just as quickly as their fanny packs.
Story stocks and growth stocks are fun to invest in and even more fun to write about. It's nice to know that you are cashing in on the hottest trends in America. But oftentimes there's the unspoken side story to it all -- you're overpaying for this potential and when these companies cough up you stand to suffer immensely.
MOST NOTEWORTHY: Radian Group (RDN), Heelys (HLYS), Sonus Networks (SONS), Leap Wireless (LEAP) and MetroPCS (PCS) were today's noteworthy downgrades:
Radian Group (NYSE: RDN) was downgraded to Hold from Buy with a $23 target at Citigroup on concerns over the company's potential merger with MGIC Investment (MTG).
Heelys (NASDAQ: HLYS) was downgraded to Neutral from Outperform at Baird, to Hold from Buy at Brean Murray, to Neutral from Overweight at JP Morgan, to Sector Performer from Outperformer at CIBC and to Market Perform from Outperform at Wachovia following the company's FY07 guidance which was well below the consensus.
Sonus Networks (NASDAQ: SONS) was downgraded to Sell from Neutral at Merriman, as the firm believes there are a number of concerns that are not reflected in shares, including a flat N-T revenue outlook, a cut in 700bp in gross margins and a sharp uptick in receivable days, among other things.
LeapWireless (NASDAQ: LEAP) and MetroPCS were both downgraded to Hold from Buy at Citigroup, as they believe the break in subscriber momentum will last for 6-9 months. Wachovia downgraded Leap Wireless to Market Perform from Outperform citing mixed Q2 results and weak Q3 guidance.
OTHER DOWNGRADES:
UBS removed Coca-Cola (NYSE: KO) and Coach (NYSE: COH) from its Strategic Stock Selection List.
Jones Apparel (NYSE: JNY) was downgraded to Sell from Neutral at Merrill Lynch.
Shares of Heelys Inc. (NASDAQ: HLYS), makers of those god-awful and potentially dangerous wheeled sneakers, plunged more than 45% this morning after the company warned that its earnings would be nowhere close to what Wall Street analysts had expected.
The company expects profit of 28 cents to 30 cents and revenue of $55 million to $55.8 million. Analysts had expected profit of 38 cents on revenue of $68.4 million, according to Reuters.
I have one thing to say to all of the people who bought this stock when it traded at a ridiculous multiple: hah hah. You should have known better. Fads eventually end. Anyone who thought this stock wouldn't crash and burn was either naive or delusional
The only question I have now is whether Crocs Inc. (NASDAQ: CROX) is next. My colleague Georges Yared is super bullish on this stock. I don't share his enthusiasm. Whenever I see a Crocs display lately, it always looks like it hasn't been touched for a while.
Remember, you investors can be bulls or bears. Pigs get slaughtered especially those wearing sneakers with wheels on them.
MOST NOTEWORTHY: Heelys (HLYS), Audible (ADBL) and Response Genetics (RGDX) were today's most noteworthy initiations:
Baird believes Heelys (NYSE: HLYS) is poised to report strong results through FY07, which is not reflected in current valuation, and started shares with an Outperform rating and $47 target.
JMP Securities believes a growing number of consumers will opt to acquire books and physical CD audio books digitally over the internet and started shares of Audible (NASDAQ: ADBL) with an Outperform rating and $12.50 target.
Caris believes Response Genetics' (NASDAQ: RGDX) diagnostics opportunity may represent a significant long-term growth driver and initiated shares with a Buy rating and $7.50 target...
Research in Motion was upgraded to Outperform from Market Perform at Morgan Keegan. RBC Capital upgraded shares to Top Pick as they see continued upside from product momentum. Banc of America upgraded to Buy from Neutral following the company's Q1 results and announced stock split. JMP Securities upgraded to Market Outperform from Market Perform, saying confidence in demand and recent checks indicate very strong backlog and forecasts.
Komag was upgraded to Neutral from Underweight at JP Morgan following the buyout offer from Western Digital.
Western Digital was upgraded to Strong Buy from Buy at Needham, as the firm believes Western Digital's acquisition of Komag is a strategic positive and that accretion will likely be significantly better than guidance.
By the power vested in me by AOL, its corporate parent Time Warner Inc. (NYSE: TWX), and those associated with the above entities, I declare the Heelys Inc. (NASDAQ: HLYS) fad to be over.
Mr. and Mrs. America, you will no longer be forced to dodge hordes of tweens flying around the mall in their God-awful and unsafe wheeled sneakers thanks to my sinister and cunning plan. I am urging my fellow thirty-something suburbanites to buy Heelys and roll on them in public. Once kids see how dorky we look "heelying," they will surely give up their expensive, trendy footwear, which they will grow out of sooner rather than later.
Perhaps the market is anticipating my plan. Shares of Heelys, which was one of the most highly touted IPOs last year, have slumped about 3% this year. Parents everywhere should rejoice. The company, unlike Crocs Inc. (NASDAQ:CROX), is a one-trick pony, and fads do eventually end.
Credit Suisse upgraded shares of Cox Radio Inc (NYSE: CXR) to Neutral form Underperform on valuation following the stock's recent pullback. Bear Stearns also upgraded Cox Radio to Outperform from Peer Perform on valuation.
Merrill Lynch upgraded shares of Autoliv Inc (NYSE: ALV) to Neutral from sell.
OTHER UPGRADES:
Wachovia upgraded Heelys, Inc (NASDAQ: HLYS) to Outperform from Market Perform following positive channel checks, which could lead to upside to the Street's Q1 EPS estimate of 18c, and valuation.
Stifel upgraded VistaPrint Ltd (NASDAQ: VPRT) to Buy from Hold with a $43 target. The firm said risks from taxes and non-transaction revenue have been diminished to levels that allow them to focus on the core printing business.
BloggingStocks writer Georges Yared wrote an excellent piece yesterday in which he wondered whether Crocs Inc. (NASDAQ:CROX) is the next L.A. Gear. If it is, that is not good news for CROX shareholders. As Yared writes, L.A. Gear rose to prominence in the mid- to late-1980s, and faded into oblivion during the 90s (although it is currently working on a comeback). Clothing, particularly when marketed to the teen demographic, is probably the most fickle industry on the planet. As Jerry Reed sang, "When you're hot you're hot ... when you're not you're not."
Investors should tread extremely carefully when investing in hot clothing products. If the popularity of the product wanes, so will the earnings, and so will the stock price. Predictably, many of these companies attract the attention of that much maligned group of investors known as short-sellers, who seek to profit by betting on a declining stock price.
Here's a list of some of what I consider to be the top "Retail Fad" stocks going right now. As a word of warning, I am not saying all these products will turn out to be fads:
Yesterday, I wrote about Crocs Inc. (NASDAQ: CROX) and the problems the company is having in Japan. The government there has asked the company to consider changing the design of its footwear after reports that children were getting hurt wearing its rubber sandals on escalators.
The resignation of a board member at once high-flying skate-shoe manufacturer .gif){kind=logo}
late last week, when Heelys introduced a broad new line of wheeled-footwear colors and styles. The move boosted the share price through 30-day and 50-day moving average resistance curves into a bullish "flag" consolidation pattern. Prices frequently exit flags moving in the same direction they were traveling when they entered them. In this case, that would be to the upside. The catalyst for such a move may prove to be Wednesday's announcement that the company plans a November roll-out of a non-wheeled footwear line, featuring a sole that resembles a video game controller. Four video games will come free in the shoe box. The stock has a very high short ratio and a short-squeeze may be developing.
I could swear securities lawyers have invented a sophisticated computer program capable of seeking out public companies to target with class-action lawsuits. A company reports a bad quarter, the stock tanks, and then for the next few weeks, press releases seem to come out daily announcing a class-action lawsuit "commenced ... on behalf of purchasers of ... stock issued pursuant or traceable to the false and misleading Registration Statement filed with the Securities and Exchange Commission in connection with the Company's ... initial public stock offering."
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