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. Applying your understanding of product life cycle, explain why Heelys' stock price dropped so significantly following the profit warning.