A Footrace to Zero: Heelys vs Crocs!

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Oh boy, this is one ugly race, with the finish line possibly being bankruptcy for both participants.  I never owned a pair of either Heelys or Crocs and never will.  Its not that I don’t get sucked into fads every now and then (I rocked a yellow LIVESTRONG bracelet throughout most of 2003-2004) its just that sneakers with wheels for an adult are ridiculous and unless you’re Chef Mario Batali, rubber clogs are straight-up fugly.

On to the stocks themselves…

Heelys, Inc. (HLYS) is  the perfect example of why one shouldn’t drink while underwriting an IPO.  From jump street, bringing a one-product concept public as a standalone company has always been a mistake, but a sneaker on wheels?  Really?  That’s a public company?  If the bankers at Bear Stearns and Wachovia (remember them?) that took this thing public in December of 2006 weren’t laughing their heads off, I’ll eat my hat.  Their giggles must have intensified to belly laughs when the initial pricing went from 16 to 21 per share and I’ll bet someone needed a time-out to catch their breath when the stock kissed $30 on the first day of trading.

The problem with HLYS is that according to the company’s latest quarterly filings, they have a ton of cash (almost $100 mil) and zero debt.  The stock currently trades at about a buck and a half, which unfortunately means that the company can linger around  forever, burning cash trying to restart the craze and launch new models into the face of Chinese knock-offs and a lack of interest from US consumers, who aren’t much in the mood for roller-frolicking these days.  It may not see zero, but one day, I think someone will buy this brand for next to nothing after years of frustration.

CROCS Inc. (CROX) is, by comparison, a much bigger company and way more screwed up.  The stock, currently just above a buck a share, has destroyed any investor who has gotten anywhere near it during a virtual free-fall since its summer ’07 high of almost 70 per share.  Plenty of shorts were dismantled during the first 18 months of Crocs’ existence at the stock rallied higher almost every month despite growing short interest and a tightening float.  Turns out the shorts were dead right, if way too early initially.  This is a fad and a one-trick pony and unlike UGG Boots, made by Decker’s (DECK), the brand just doesn’t translate to other iterations outside of the basic Croc.

OK, so that’s the bad news on Crocs Inc., want the even worse news?  Just the other day, their auditor, Deloitte & Touche, issued a “going concern” opinion, casting doubt on the compnay’s ability to survive.

OK, but here’s the really, really horrible news:

From Reuters:
Crocs, which had $51.6 million in cash and cash equivalents as of Dec. 31, is trying to extend its current credit facility, which matures on April 2, under which it has $22.4 million in borrowings.

Basically, Crocs has to get this extension by Thursday of this week, even if the terms are terrible or it uses some sort of asset-backed guarantee.  One way or the other, the prognosis is not pretty.

I’ve spilled a lot of ink here discussing two companies I couldn’t care less about, but for a good reason.  When they were initially trotted out, they looked nearly irresistible.  They also initially abused the short-sellers, defying gravity for way longer than they should have been able to.  The lesson here is to keep from getting caught up in the hype and to stick to your guns when everyone around you is being absurd.

Good luck, holders of CROX and HLYS, and don’t be shy about scalping the bounces that may come your way, they will likely be ephemeral.

Full Disclosure:  I am neither long or short any of the companies or stocks mentioned.  Please do not view the opinions expressed here as recommendations to buy or sell any securities.  The information presented in this post is a statement of my opinion only. Please see the Terms & Conditions of this site before taking action on anything you’ve read here.

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  1. Anal_yst commented on Mar 31

    Crocs was up there with LuLu Lemon when I decided to start shoring the ever-loving hell out of ridiculously-valued “hype” apparel/retail stocks back in late 2007. Wish I had a little more $ to play with, at the time I decided to stay disciplined and avoided the temptation to concentrate the majority of my PA on the trade.

    FD: up double digit % in 2008 shorting companies like ARO and LULU.

  2. Anal_yst commented on Mar 31

    Crocs was up there with LuLu Lemon when I decided to start shoring the ever-loving hell out of ridiculously-valued “hype” apparel/retail stocks back in late 2007. Wish I had a little more $ to play with, at the time I decided to stay disciplined and avoided the temptation to concentrate the majority of my PA on the trade.

    FD: up double digit % in 2008 shorting companies like ARO and LULU.

  3. Anal_yst commented on Mar 31

    Crocs was up there with LuLu Lemon when I decided to start shoring the ever-loving hell out of ridiculously-valued “hype” apparel/retail stocks back in late 2007. Wish I had a little more $ to play with, at the time I decided to stay disciplined and avoided the temptation to concentrate the majority of my PA on the trade.

    FD: up double digit % in 2008 shorting companies like ARO and LULU.