Question:
(Cost management; product life cycle; research; writing) In August 2007, Heelys, a Texas-based maker of wheeled shoes, reported quarterly profits that beat the street estimates by three cents per share. Upon receiving the news, the market price of Heelys dropped 48 percent. Why? Although the profit reported for the current quarter was better than the market expected, the company simultaneously informed the market that sales for the balance of the year were being revised downward because the company's shoes were piling up in retail stores.
a. Using Internet resources, identify the economic reasons cited by Heelys' management for the profit warning issued in August 2007.
b. Applying your understanding of product life cycle, explain why Heelys' stock price dropped so significantly following the profit warning.
c. Following the profit warning in August 2007, what specific actions did managers take to improve profitability? Do any of these actions suggest that Heelys had revised its strategy in August 2007?