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Heelys Inc. (HLYS) Management in Tune with Youth

The simple pleasure of a quick and unobtrusive shift from walking on the street to skating, or even to gliding over a railing is hardly likely to appeal to a serious stock investor. However, it is a profitable business with almost unlimited growth potential. Why does putting wheels on footwear make such good business sense?

The art of branding is taught extensively in business management schools, but true successes are rare. Niches have natural growth limits, while a poorly defined customer segment can reduce a proprietary business to the generic level of profitability. This stock is an excellent example of the business benefits of creative clustering, because footwear with detachable wheels will always appeal to young people everywhere.

The company offers a plethora of choice, which fits very well with the demanding and changing decision-making of young people. Novices at skating can opt for two wheels, before they grow older and are able to balance with just a single wheel. There are also models with plastic plates for gliding over railings.

Anyone can theoretically make footwear with detachable wheels and plates. The company brand name is memorable and appropriate, but its real business strength derives from the fact that about a quarter of all revenues come from specialized products designed in collaboration with retail chains: competitors will find it nearly impossible to break such an entry barrier to continuous innovation.

The management has produced more than 16% net profit margin and over 50% returns on average equity during the last four quarters. It has only skimmed the US and UK markets, though the brand has world-wide potential.

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