Heelys, Inc.

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Heelys, Inc.

CHILDHOOD MEMORIES LEADING TO INSPIRATION

Roger Adams’ invention of wheeled athletic shoes stemmed from a lifelong love of skating which began in the family business. His parents owned and operated several roller skating rinks, including the largest in the Pacific Northwest, Adams-Tacoma Roller Bowl. Adams could skate at the age of nine months, before many children even walk, and he is listed in the Guinness Book of World Records as the youngest person to roller skate. Yet while other members of his family pursued skating-related business opportunities, Adams became a clinical psychologist. The invention of Heelys occurred during a midlife crisis. For higher income Adams had taken a position as a mental health supervisor, work he disliked, particularly as it required him to be on call 24 hours a day. The stress of a divorce exacerbated his unhappiness. The idea for Heelys occurred while Adams vacationed in Huntington Beach, California, in 1998, and reflected on the happier times of his life. Sitting outside, watching people go by—walking, rollerblading, bicycling—Adams thought there must be some new way to move. Then the idea for a gliding shoe came to him. As Adams described it, according to Michael E. Ross of MSNBC, “I had the idea of a shoe that could roll on command by just shifting your body weight. It was like a flash; the hair stood up on the back of my neck.”

Adams had always loved to tinker with different technologies, such as light sensors, hydraulic jacks, and automatic door openers, so it did not take long for him to create a prototype of the wheeled shoe. Adams spent two days in his garage creating the first pair of Heelys out of a pair of Nike running shoes. He applied a hot butter knife to the heels to make room for the wheels. A rod through the heel and a skateboard wheel bearing allowed for the placement and movement of the metal wheels. He tinkered with the shoes, working with local teens and falling to the ground himself many times as he tested them, before a final prototype emerged.

Initially, Adams thought he would produce and market sneaker-skates by licensing the invention to a major footwear company. Sketchers rejected the idea. He then obtained $2.4 million in venture capital from Capital Southwest, an opportunity that gave Adams greater control over the product. Adams established Heeling Sports Limited (HSL) in May 2000. He hired his consultant, Mike Staffaroni, former vice-president of the global Rollerblade division at Benetton Group, as vice-president of marketing. In September, just in time for the Christmas shopping season, Adams introduced Heelys skate-shoes to retailers at a trade show. He offered limited distribution of 30,000 pairs to skate shops and specialty footwear stores, such as Gadzooks and Foot Locker. The first retailer to carry the product sold its entire inventory in a matter of hours, and other retailers sold out within a few days. Sales tripled every month afterward and within nine months, the company sold 500,000 pairs nationwide as a full-scale, spring launch broadened distribution.

Staffaroni, who became chief executive officer of HSL in January 2001, chose to stimulate interest in Heelys through public exposure to the product as a unique footwear phenomenon. The company hired young enthusiasts to demonstrate “heeling” as sport. The group, called Team Heelys, traveled to shopping malls, skate parks, and other public places and performed a variety of tricks, such as backwards skating, spins, and aerial stunts. Moreover, the wheels allowed those wearing Heelys to travel up to 30 miles per hour. The novelty of Heelys stunned and fascinated people who had not seen the sneakers with hidden wheels. Moreover, HSL further stimulated excitement over the footwear by sending Team Heelys to places where distribution had not begun. In other words, HSL teased audiences in order to make Heelys even more desirable, especially among trend-setting teens. The sneaker-skates attracted the attention of sports and fashion magazines, which touted Heelys as the latest, must-have thing. Also, HSL touted practical usage of the wheeled shoes, as workers at Home Depot and Office Max wore them in order to negotiate the large sales floor very quickly. University students liked Heelys for crossing campus quickly between classes.

Adams continually improved his invention to create a faster, smoother ride. He experimented with soft urethane polymer, but the material did not hold up well. He resolved that problem by layering hard urethane around a soft urethane tire, then applying a coat of soft urethane for the outer layer. Also, by summer 2001, in time for back-to-school shopping, HSL offered Heelys in a variety of styles and colors, using names attractive to teens, such as Stealth, Rage, and Predator. In late 2001, the company introduced a lighter weight shoe, called Slick 9016, which included a wider wheel for more effective clearance over the rough texture and cracks in pavement that can hinder a smooth ride. Other features included a 45-degree heel for braking, and reinforced bearings and axle.

COMPANY PERSPECTIVES

What are Heelys? Shoes that roll!

In late 2001, just before the holiday shopping season, HSL launched its first major advertising campaign, with the intention of broadening Heelys position from the skater market into the mainstream market. The campaign included a 30-second television spot to air on MTV, a three- minute video for in-store use, newspaper ads, and promotions at street fairs. The television commercials showed walking feet that convulse as they were digitally transformed into gliding feet. Posters for in-store and other print advertising replicated the commercials by picturing swaths of blurred color and snippets of details. The Dallas agency in charge of the campaign, Pyro Brand Development, created the tagline “Freedom is a wheel in your sole.”

Heelys gained media exposure from entertainers who danced in the lightweight Slick 9016s in music videos and public performances. Of particular influence, the R&B/hip-hop star Usher walked, rolled, and danced in a pair of Heelys in a video for his successful 8701 CD. In the video, Usher dances with friends in a crowded room when he unexpectedly glides in the direction of the camera, then makes a dance move whereby he drops to the floor to show the audience the wheel in the heel. Little X featured Heelys for dance in the video “U Don’t Have to Call,” another chart-topping song. Flo-ology, a California street dance company, discovered Heelys at a trade show for action sports retailers in Long Beach and incorporated the sneaker-skates into some of their dance performances. Flo-ology founder Odie liked Heelys because they provided forward movement but carried the body in a stable state. The advent of the Heelys dance movement surprised and delighted Adams.

The acquisition of other footwear companies in 2002 provided HSL with athletic shoe technology to further improve the Heelys product. Axis brand athletic shoes featured air-shock technology, and Soap “grinders,” used in a manner similar to skateboards, held plates on the sole that allowed one to ride down a rail without a skateboard. Adams combined Soap and Heelys’ apparatus to create the Grind-and-Roll shoe, capable of movement similar to and distinctive from skateboarding and inline skating. Other product developments included a pair of two-wheeled Heelys, to make the product easier for children to use. In 2003 the company launched a selection of Heelys in colors and styles attractive to girls. The introduction of Sole Saver heel plugs provided customers with the option of a finished footwear look when the wheel is removed.

EXPERIENCING RAPID WORLDWIDE SUCCESS

From the beginning, Adams and Staffaroni intended to introduce Heelys into international markets. They contracted with distributors who had exclusive rights to defined areas. In February 2001 the company made its first international shipment to Japan, where Murasaki Sports, a 60-outlet chain of sporting goods stores, sold 30,000 pairs of Heelys within the first six months. During 2001, HSL initiated distribution in Canada and the United Kingdom and, by the end of the year, in Germany, France, Sweden, Iceland, and elsewhere in Europe. Because of the density of populations in Hong Kong and South Korea, Heelys quickly became a broadly popular item in those countries. Several large retailers carried the product in Korea and within about two years 37 Heelys stores operated in the country. By early 2004 HSL distributed Heelys in 50 countries, expanding worldwide by the end of 2005. Markets included Mexico, Australia, and countries in Central America, South America, the Caribbean, and Eastern Europe.

Abroad, as in the United States, entertainers became enthusiastic about the possibilities of Heelys, particularly in Korea. There, pop singer Seven danced in Heelys in a music video, while JTL and other well-known dance groups integrated Heelys into their dance routines.

KEY DATES

1998:: Adams invents sneakers with wheels hidden in the heels.
2000:: Limited distribution of Heelys sneaker-skates begins.
2001:: Full-scale national distribution and limited international distribution begins.
2002:: Adams obtains patent on wheeled footwear design.
2006:: Initial public offering raises $135 million in capital investment for future growth.

Due to the popularity of Heelys in Asia, counterfeit copies produced in China emerged in stores in Japan and China. The counterfeit manufacturers gave the fake products similar names, such as Heatys and Neo Heel, and produced exact replicas of the original Heelys, including box and tags. The knock-offs were priced at 25 to 50 percent below the price of authentic Heelys; hence, sales of these items cut deeply into sales of Heelys. In 2005 HSL responded by hiring attorneys in Hong Kong to represent HSL to government agencies. However, slow, unsatisfactory results led the company to file a suit so the problem could be addressed through the court system. HSL held a patent and a trademark file in China, but given the difficulty of safeguarding intellectual property rights in China, the company did not expect good results. Moreover, the company was concerned that the poor quality of the knock-offs might damage Heelys’ reputation if children hurt themselves falling down in the counterfeit shoes. To counter the competition, Heelys distributors emphasized the quality and safety of the authentic sneaker-skate.

PREPARING FOR FUTURE GROWTH

Though still a small company, HSL expected to generate a critical mass of customers in the United States during the 2006 holiday shopping season. Heelys experienced solid sales growth in 2005, with $44 million in revenues, a 106 percent increase over 2004. During the first six months of 2006, sales of $44.6 million matched those of the entire previous year. This represented a 177 percent increase over the first six months of 2005, at $16.1 million in sales. By mid-2006, Heelys were available in more than 7,400 stores nationwide. These included outlets of the major sporting goods chains, such as The Sports Authority, Dick’s Sporting Goods, Modell’s, Journeys, and Big 5 Sporting Goods, as well as certain department stores, such as Nordstrom and Mervyn’s. Zappos.com sold the shoes via the Internet.

To promote the product to a mainstream audience as the holiday season approached, Heelys initiated a partnership with Subway restaurants in the United States and Canada in November 2006. With the purchase of a Kid’s Pak meal, customers received a free toy, such as a Heelys dog tag, a backpack hanger, or a set of stickers. Once again the best advertising occurred through word-of-mouth buzz among teens. Fans of Heelys footwear made videos of themselves and their friends doing tricks with the sneaker-skates, then uploaded the videos onto Youtube.com, an enormously popular web site.

The expectation of continued high growth prompted HSL to seek capital investment through an initial public offering (IPO) of stock; HSL registered the offering in September. The company addressed a number of concerns before continuing the stock offering. First, Staffaroni hired executives capable of effectively managing growth, including a vice-president of marketing and a vice-president of design and development. Also, the company took the name of its product and reincorporated as Heelys, Inc., in Delaware. One problem involved the company’s limited product line, an issue that made the company something of a risk to Wall Street analysts. Heelys wheeled footwear accounted for 95 percent of revenues, with the balance stemming from the sale of protective gear, replacement wheels, and heel plugs, as well as revenue from the two sport shoe companies that HSL acquired in 2002. To address this concern, the company introduced a limited line of apparel, screen-printed T-shirts and hats; shipments began in August 2006. Heelys intended to use the IPO capital to transform the company into an action-sports lifestyle company through the acquisition of similar companies and new product development.

Heelys’ stock debuted on the NASDAQ in early December 2006, at the price of $21 per share. The stock rose quickly, opening at $30.30 per share and closing at $32.60 per share, a 55 percent increase in the course of one day of trading. With an offering of 6.425 million shares, the company raised $135 million. The offering ranked seventh among all IPOs during 2006 and second for the apparel or footwear industry.

Mary Tradii