How Heelys CEO Michael Staffaroni Plans to Get the Shoemaker Back on Top

The first time adults saw heelys, they were baffled. One second, a kid was walking beside his mom in the mall; the next, he was skimming across the floor like it was made of ice. But no matter how confused the adults were, the kids got it, and millions of them had to have it.

WHEEL OF FORTUNE: Heelys CEO Michael Staffaroni foresees big growth for his company, despite a recent stock tumble.

For good or ill, that’s remained the Heelys story to this day. While youngsters remain devoted to the product, investors have been divided and confused. Are Heelys a toy fad, a shoe fad, or a new sporting goods niche that’s here to stay?

Only time will tell, but one sign of this uncertainty was Heelys’ precipitous stock decline Aug. 8, when it lost nearly 50 percent of its value in a single day, falling from $21.99 to $11.42 per share. And until everyone can figure out exactly which box to put Heelys into, the Carrollton company’s stock will likely continue to experience as many ups and downs as a kid at a skatepark.

Heelys, for those who haven’t previously run across (or been run into by) them, are athletic shoes with a wheel tucked into the heel. Wearers can walk normally or, when the wheel is engaged, glide as if on an invisible skateboard. Roger Adams, 53, is fond of describing his invention as having a “stealth nature,” which is a large part of its appeal. And while Heelys are understandably popular with youngsters, they are beginning to make inroads into pop culture, as well. Hip-hop star Usher has been spotted “heeling” across the concert stage, and the company claims to have made six pairs for Shaquille O’Neal.

Adams himself seems to have taken on the stealth nature of his invention since the company went public at $21 a share in December 2006. After raking in $26.3 million in the IPO, the previously ubiquitous Adams seems to have gone on permanent vacation. Calls to his home on the shores of Lake Lewisville are unreturned, and when asked for help in contacting him, Heelys CEO Michael Staffaroni says, “I’ll try,” but his chuckle betrays the unlikelihood of success. Adams’ absence is so complete that one cannot help wondering whether he—like so many other inventors before him—has been forced out by the financiers and MBAs. After all, Adams’ title was downgraded from president to director of research and development in May 2006, and he no longer even keeps up the fiction of maintaining an office at Heelys’ Carrollton headquarters.

“We never tried to tie him to a desk,” explains Staffaroni, who took on the additional title of president when Adams vacated it. “He just doesn’t like the day-to-day business environment.

“There was never any real tension between us, because Roger realized early on that my skill set was different. The first time we went to a trade show and he started hearing about terms, discounts, and marketing support, he was fine to step aside and let me deal with the customers.”

Still, Adams’ absence seems particularly odd at this crucial juncture in his creation’s history. At a time when Heelys is fighting to establish itself as a viable brand rather than a flash in the pan, the man who was once the public face of the company suddenly has gone missing in action. It never looks good when the inventor himself appears uninterested in what will become of the baby he brought into the world.

Even Staffaroni admits that the company received a lot of positive publicity simply because of the human-interest angle of Adams’ story. “People hear his story and are enviable,” he says, “because he totally changed his life, and it worked out for him.”

Although heelys is currently located in prosaic Carrollton—specifically, a warehouse off Midway Road behind Ducky Bob’s Party Rentals—the product itself had a more inspired beginning.

Adams grew up in Tacoma, Wash., where his parents owned a skating rink. He worked his way through Pacific Lutheran University designing sound and lighting systems for skating rinks, but that looked to be the end of his association with wheels. He married his college sweetheart, earned a graduate degree in psychology, and went to work as a mental-health counselor in Oregon. But after 21 years, his marriage began to unravel, and after being promoted into management, he became disenchanted with his career.

“If there was one thing that started it, it was a midlife crisis,” Adams told MSNBC in 2004. “I was a mental-health supervisor in Oregon, and I hated it with a passion. I enjoyed working with people one-on-one, but when I moved into management to make more money, it was a miserable time. I was going through a divorce after a 21-year marriage; I was on call 24 hours a day; and I was totally burned out.”

Adams quit his job, left his wife and three young children, and went to stay with a friend who lived on Venice Beach in Southern California. His fairly typical midlife crisis then took a turn, however. Sitting on the beach watching the skaters and skateboarders roll past, Adams remembered his days at the skating rink, lifting his toe and rolling on the rear wheels alone. Suddenly he had an epiphany: a shoe that could roll on command when body weight was shifted. He recalled that the moment “was like a flash. The hair stood up on the back of my neck.”

He retreated to his friend’s garage workshop and began cutting up Nikes with a hot butter knife. Running a rod through the heel to support a skateboard bearing and roller-skate wheel, he came up with several prototypes, but all had the same problem—balance. Turns out, the problem was with Adams, not his invention. When he accidentally discovered the proper stance of placing one foot in front of the other, he was off and running, er, rolling.

Adams’ next problem was funding, the green giant that kills most new product ideas. He didn’t have a rich uncle, but fortunately for him he did have a rich first cousin—Richard Middlekauff, the owner of Middlekauff Ford in Plano.

Together, they contacted patent attorney Rob Ward, who estimated it would take $20,000 to $25,000 to complete the patent process. About $150,000 later, Adams had exhausted his personal savings and was reduced to selling cars at his cousin’s Ford dealership to make ends meet, but he had his patent and a handful of prototypes. With the help of Middlekauff, Ward, and attorney Alex McGeough, Adams was able to get his prototype in front of seven shoe companies and six sporting goods manufacturers, but despite interest, none offered a deal.

Then fate stepped in.

One of McGeough’s neighbors in the Park Cities was Patrick Hamner, at the time a senior vice president of the venture capital firm Capital Southwest Corporation. McGeough simply dropped off a video at Hamner’s house of kids heeling down a driveway in Plano. When Hamner’s own children—who were 10, 7, and 4 years old at the time—viewed it, he was swamped by cries of “Daddy, Daddy, you’ve got to see this!”

SPIN OFFS: Heelys plans to release a branded clothing line, as modeled by these children, by year’s end.

Hamner, an engineer by training, later called Adams. “I peppered him with questions about how he did it,” Hamner says. Adams was well-prepared with answers, so Hamner asked him to deliver a prototype for his kids to try out.

“My kids tried the prototypes,” Hamner recalls, “while I watched their reactions, and the neighbors’, too.”

The prior year, Hamner had reviewed a business plan for a company that wanted to stage auditions for toy inventors. The criteria they proposed for judging the worth of the inventions was dubbed the “double-wow factor.”

“The first time you see it,” Hamner explains, “your reaction is ‘Wow!’ And after you examine it and see how they did it, you say ‘Wow!’ again. Heelys rang true with that. The kids loved it, and I gave it a double-wow. Still, for a conservative firm like Capital Southwest, this was way out in the weeds. If not for my kids’ reactions, I don’t think anybody there would’ve gone for it.”

To stack the odds even higher against a deal, all this happened in May 2000, when the dot-com bust was draining capital markets dry. But with Hamner championing the project, Capital Southwest and Adams quickly reached an agreement. The firm would contribute $2.5 million in start-up capital for 45 percent ownership and install Hamner as chairman of the board. Adams would contribute his intellectual capital, his patents, and become the company’s president. Heelys had been born.

While Roger Adams moved into the Capital Southwest offices to formulate a strategic plan, the venture capitalists set out to find someone with the industry experience to turn Adams’ plan and patents into an actual business. The person they came up with was Michael Staffaroni.

At 50, married, and with three children, Staffaroni still retains the athletic appearance and easy smile befitting the CEO of a youth-driven corporation. He quit taking classes full-time while an English major at the University of Wisconsin-Milwaukee in 1976 and went to work for Weyco Group, the parent company of Nunn Bush and Florsheim shoes. After about eight years, he left to join Converse, then Keds, and later LA Gear before hiring on as head of R&D for Rollerblade. When that company was acquired by the Benetton Group, he moved to Italy for two years and returned to the states as vice president of the Rollerblade division. With his ideal combination of footwear and skate experience, Staffaroni was a natural for Heelys, and Capital Southwest recruited him as a full-time consultant in August 2000, eventually installing him as CEO in January 2001.

Shortly thereafter, the core of the Heelys management team was in place when CFO Michael Hessong and senior vice president of sales Charles Beery joined the company.

“Charlie Beery had the industry contacts and credibility, and Mike Hessong took on all the financial ‘blocking and tackling’—insurance, banking, facilities, etc.—to allow me to focus on sourcing and product development,” Staffaroni says. “The three of us fit nicely together. We refer to ourselves as ‘working executives.’ Any one of us will jump on a plane and do what it takes to keep the ball moving down the field.”

Although Heelys might appear to be tracing the classic boom-and-bust pattern of all fads, appearances can be deceiving. Most fad products expand their distribution indiscriminately in an attempt to keep up with demand. Staffaroni, on the other hand, has built Heelys’ distribution slowly and always with an eye on the company’s future.

“Our first year,” he says, “we focused on specialty retailers, not the big-box stores. We have no intentions of going through the mass-market channel—Kmart, Wal-Mart, Target. The next opportunity that I see for us is mid-tier retailers, like Penneys, Kohl’s, Shoe Carnival.”

In order to grasp that opportunity, Staffaroni will borrow a page from Nike’s book by creating specific products sold exclusively at each of those retailers.

“Distribution strategy is the toughest,” Staffaroni continues. “There are no clear-cut answers as to when to expand and who to include in that expansion. We have made some mistakes, but we’ve been able to overcome them. For example, we went into Dick’s Sporting Goods way too early, toward the end of 2001. Our sell-through wasn’t good, and it took us four years to get back in there.”

Heelys’ slow but steady expansion resulted in solid, if unspectacular, sales growth its first four years, when the company built its sales volume into the $20-$25 million range, which is where it remained until nearly doubling to $44 million in 2005. In 2006, Heelys caught everyone’s attention when sales vaulted 328 percent to $188 million.

In the midst of that run-up, the decision was made to take Heelys public. Everything seemed to be going the company’s way: a phenomenal growth rate, a high-visibility product, market acceptance, a solid base of retailers, and patent protection until 2020. Even Hamner, a 24-year veteran of Capital Southwest, was sold on the deal, deciding to become a full-time Heelys employee.

“With Capital Southwest being a publicly traded company, I saw a chance to add value in helping take Heelys public,” Hamner explains. “I felt I could take them to the next level in ramping up public governance.”

And, of course, in a successful IPO, there’s always the money, as in “show us.”

“You have to consider the investors,” Hamner says. “Capital Southwest had been in the deal six years. There was also the founder and some angel investors. Some of these people want liquidity and some don’t. And we could always use the additional capital to fund growth and build the business.”

SPINNING WHEEL:  Heelys shoes come in a variety of styles and colors, but all have the trademark wheel.

On that scale, Heelys’ December 2006 IPO was an undoubted success. (See sidebar at left.) Besides Adams’ $26.3 million payday, Middlekauff sold stock worth $12.4 million, Capital Southwest Chairman William Thomas cashed in for $33.4 million, and Staffaroni made $4 million. Heelys itself benefited to the tune of $61 million, only $8.5 million of which was needed to retire outstanding debt. The remainder went to working capital and funding the company’s future expansion plans.

Of course, at the moment, there are those who would say Heelys shouldn’t bother to make such plans. After hitting a high of $40 a share in February, nearly double the $21 offering price of the IPO, the company soon announced a second offering, news which led many on Wall Street to sell off the stock. Faced with a share price tumbling back down to the original offering price, Heelys’ management backed off and eventually withdrew the secondary sale, but the damage had been done. The company’s stock has been dogged by naysayers and short-sellers ever since.

Tyler Mayoras, an investment director with Vestopia, represents the opinion of many stock pros when he labels Heelys a fad. He began warning investors against the stock several months prior to its August tumble.

“Much of what I view as fads fall into two main categories: clothing and toys,” he says. “Heelys is a combination of both clothing and a toy. Consumers in both of these categories are quite fickle. When so many people have a product that it is no longer ‘cool,’ it becomes mainstream. I believe that is what is happening with Heelys. The tipping point usually manifests itself in inventory problems at the company because, frankly, fewer people are buying the product.”

During Heelys’ conference call on Aug. 7 to announce second-quarter results, the company warned that its fourth-quarter sales would be harmed by “overinventoried” product at the retail level. Investors who were already closely watching the company’s inventory levels heard the “sell” signal loud and clear, and the stock began dropping from the opening bell the next day.

Naturally, Staffaroni disagrees with their analysis of the situation. “I think it was an overreaction,” he says. “We are still anticipating year-over-year growth in ’07 versus ’06, and we expect to continue our history of annual profitability. Most athletic brands and retailers saw soft sales in June-July this year. Heelys is not immune to a general slowdown of this nature.”

There are also those who believe that Heelys will bounce back from its troubles. Markos Kaminis, a financial blogger at www.WallStreetGreek.com, financial editor of www.Newspapers.com, and frequent contributor to the financial Web site Seeking Alpha, says, “I view the product as revolutionary, not a trend. I expect it will achieve deep penetration into the children’s market.

“I think the problem here is a subtle miscommunication between management and analysts and investors,” he adds. “Management indicated inventories have built too sharply at retailers, who had to have the product on shelves for the back-to-school season. That’s a good thing! They over-ordered. Now they are waiting to see how sales go before ordering more. There’s a good chance this product will sell through very well, and retailers will be coming back to Heelys for more. Heelys expects this, and even indicated so during the conference, but the skeptical analyst community is viewing the presentation as a cover. It seems the market suspects the wheels trend is getting old. I think it’s very young, in fact, especially in Europe.”

So, is Heelys a revolutionary product idea, or a simple shoe fad? At the moment, the answer depends upon whom you ask. Stock pickers are divided. Hamner—who was moved from Heelys’ chairman to senior vice president on Aug. 21 and replaced by Gary Martin, the CEO of Capital Southwest—says that he’s watched his own kids skate on them for six or seven years. Staffaroni, who had his own experience with a fad shoe product during his stint with LA Gear, says he’s “always mindful of the f-word,” but he believes the antidote lies in managing the Heelys brand.

“We want Heelys to stand for more than just a shoe with a wheel,” he says. “We want to understand and nurture the emotion attached to the brand, which is difficult to disrupt.”

To that end, the company is in the process of launching lines of logoed shirts, hoodies, backpacks, and “wheel-less shoes,” all set to debut before the end of the year.

Will Staffaroni’s grand plan unfold as he hopes? Unfortunately for Heelys’ management, the only opinion that really counts comes from the one group that adults can’t understand or predict: kids.