In the 90s, party's used to look like this.
And this.
People focused on decorating a room.
But now, wearables are king.
The biggest change in our business really has been the development of
wearables. Party City customers want hats, funny glasses, ugly
sweaters and clever costumes.
That's especially important during Halloween, which makes up 20 to 25
percent of Party City's annual sales.
But in 2019, the company's offerings didn't resonate with shoppers.
Halloween is Party City's most important season.
Its financial results for October are eagerly anticipated by
investors. In 2019, Party City said its October results were
disappointing. Party City's revenue for the fiscal month was $432
million, seven percent less than 2018.
The stock crashed 67 percent in one day.
The went down
so much it was shocking and I think that partly was a reflection of
them telling the world how bad Halloween had been and everybody
knowing that if you can't win in a party business on Halloween, it's
hard to win, right? Retail analysts say weak Halloween sales are part
of a larger trend as consumers pick big one-stop shops and online
retailers over specialty stores.
They're facing a challenge because consumers are not going to
destination shopping venues.
They are consolidating their shopping, they're making it easier,
they're doing more online.
Party City says it can improve Halloween sales but there are more
challenges facing the company.
Some aren't within their control, like trade tensions and a global
helium shortage. But others, like an outdated e-commerce platform,
show the brand just might not resonate with consumers anymore.
In 2019, the company plans to close 54 of its roughly 900 locations
in the U.S. Consumer patterns are changing.
Can Party City change to?
Party City is both a retailer and a supplier, so it produces most of
what it sells in stores.
That's rare in retail.
In addition to operating about 900 stores, Party City also claims to
be the world's largest designer, manufacturer and distributor of
party goods. Through its wholesale business, over 40,000 retail
locations worldwide sell its products, including some of its biggest
competitors. Right now, that's really the healthy part of the
business, right? That's where they're making their money and that's
what's keeping them in the game.
And that's why people aren't too worried about them going broke
before 2023 or someplace out there.
On the other hand, yeah, you're competing with yourself.
Party City actually started out as just a retailer.
In 1986, entrepreneur Steve Mandell dreamed of opening a store, and
he saw a big opportunity in the party goods market.
At the time, there were lots of independent family-owned shops
selling party supplies, but no major retailers.
Mandell scraped together $125,000 and opened the first Party City in
East Hanover, New Jersey, in 1986.
Early on,
Mandell saw huge potential in Halloween.
By his second year of business, he turned a quarter of his stores
into a Halloween costume warehouse.
By 1993, Party City had 58 stores and revenues of $2.4
million. One year later, in 1994, Party City's net profits more than
doubled. And Mandell's ambitions grew, too.
He envisioned a chain of a thousand stores and decided to take the
company public to achieve that growth.
Investors saw potential for Party City to become a category killer.
That's when a store or chain absolutely dominates a specific category
by offering lots of products at a competitive price.
Some past examples of category killers are Toys R US, Best Buy, and
Home Depot. I think that what Party City found, especially when they
started, was that they could be a category killer.
And so if you think about Halloween, it's the eighth biggest holiday
in the United States. There's not a great reason for someone else to
jump in that market and try to be another category killer with them.
Party City went public in March of 1996, selling 1.7
million shares at $10 each.
At the time, U.S.
party supplies were $3 billion a year business, growing at 10 percent
annually. 1996 and 1997 were years of strong growth for Party City,
but the party ended in '98 when Party City missed its third quarter
financial goals.
The stock price fell below $10.
1999 was another hard year for the company.
Its inventory tracking system hadn't kept up with the company's
growth, so Party City couldn't conduct a year-end inventory of its
stores or an audit, a violation of SEC rules.
The Nasdaq suspended trading of Party City stock and delisted it in
July 1999.
Over the next few months, Party City tried to avoid bankruptcy.
The company had borrowed $58.6
million dollars against a $60 million line of credit.
The new CEO, James Shea, redesigned stores, adding brighter lights
and organizing merchandise by category.
Party City recovered and its stock returned to the Nasdaq in 2001.
The company's performance was lackluster and the company's profits
were unimpressive. Party City's board of directors accepted a buyout
offer in 2005.
Party City became a private company again.
This is when Party City first got into the business of making the
products it was selling.
As a vertically integrated company, Party City rose to the top of the
party goods market.
In 2011 profits jumped 55 percent to $76.4
million. In 2015, Party City again went public.
In its filings to go public, Party City said it was the leading party
goods retailer in North America.
Shares rose more than 20 percent when the company went public after
pricing its IPO at $17.
That interest didn't last long.
In its first year of trading, shares of Party City fell nearly 12
percent. Since 2015, shares of Party City have fallen close to 90
percent. But, by the numbers, it's a pretty healthy company.
These guys still make money all the time and most of their stores
make money. The company's annual revenue has grown six out of seven
years since 2012.
Despite Party City's profitability its retail business has shown
signs of a struggle.
Sales at stores open more than a year have been negative for seven
out of the past nine quarters.
The company also carries high debt of about $2 billion, which
analysts say might have spooked some investors.
And I don't think Party City is really doing very much wrong.
I think the world has passed them by and I think we're starting to
see that in their numbers.
You saw just how bad it's been recently.
Some of the problems facing Party City are outside of their control,
but other missteps show that the company hasn't caught up.
In the past, Party City has bounced back from some major challenges,
including near bankruptcy, lawsuits and a de-listing.
Right now, the company is in another tough spot.
Ever since its second year in business, Halloween has been the most
important time of year for Party City.
Each season, the company opens hundreds Halloween pop ups, hiring
seasonal workers to guide customers through picking the perfect
costume. Sales for the holiday have been weak for the four years
since 2016.
Halloween is a pretty significant holiday for Party City and to fall
short four years in a row, that's creates a lot of pressure and it
creates a lack of confidence in investors.
The National Federation of Retailers estimated shoppers would spend
$8.8 billion on Halloween in 2019, 200 million less than the 2018
projections. Competition steps up for Party City around Halloween.
It opens hundreds of Halloween pop up stores called Halloween City.
In 2019, sales at the temporary store decreased 20.8
percent from the year prior.
Party City said an industry wide dip in sales contributed to its
lousy October sales numbers.
The company also claimed it hadn't lost Halloween market share, but
analyst Joe Feldman said competitors were better positioned and
better priced. Party City's Halloween competitors include Spirit
Halloween, Walmart and Target.
Halloween and third quarter results in 2019 sent
Party City's stock tumbling 67 percent in one day, from $6.10
to $2 a share.
Party City executives said the weak results were due to a shortage of
helium and weaker consumer spending over Halloween.
Executives said more people were also opting to make their own
costumes. I bet there's a grain of truth to that, that maybe that
costume game is getting upped, people are maybe doing some more
creative things. That doesn't get you off the hook for being the
source where people can put together great costumes.
In order to stay competitive retail stores need a solid online
presence. If you've shopped at Party City recently, you might have
noticed it doesn't have a designated desk for customers who buy
products online to pick up in-store.
That, plus the absence of self-checkout can cause huge lines at Party
City. I think when you walk into an environment and there's 50 to 100
people in line, you probably just shake your head and think, why
would I have to deal with this?
Changing shopping habits are one risk factor that led credit rating
agencies to downgrade the company in 2019.
Party City also carries high debt.
Analysts say that makes investors wary.
They do need to reduce debt.
I think there's some concern from investors that there's a high
amount of leverage. Party City has taken steps to reduce debt by
selling off some assets, including manufacturing facilities.
It sold its Canadian retail operations, which was about 65 stores in
August 2019.
and used some of the proceeds from the $131 million sale to pay down
debt. Party City is taking steps to mitigate
debt and improve Halloween performance.
But there are some headwinds the company just can't control.
Party City is cited a helium shortage as a potential risk to its
business. Its helium business helps differentiate Party City from
e-commerce platforms.
You would exactly want two day shipping for helium balloons, but due
to a global shortage of helium in 2019, Party City lost some of its
competitive edge.
The balloon is a big driver of party sales because if a customer is
going to go in for a helium balloon, they'll often then buy the other
party supplies around it.
Party City didn't run out of helium completely, but its supply was
well below capacity.
And analysts say sales took about a two percent hit in each of the
first three quarters of 2019.
As of October 2019, the company's helium was back to full supply.
Its dependence on helium is a unique business challenge for a
retailer. But one challenge that's been felt by companies in nearly
every sector. the trade war.
Party City said tariffs on Chinese imports caused "temporary
operation disruptions" in the second half of 2018 due to increased
freight costs. Importing its products made in China was more
expensive for Party City.
As of August 2019, about $50 million worth of Party City products
were subject to tariffs of 25 percent.
Analysts say the company dealt with tariffs by moving production to
other countries and raising retail prices on certain products.
Party City said China's tariffs hurt Halloween 2018 sales but one
analyst told CNBC the tariffs didn't make much of an impact on its
2019 Halloween sales.
Party City has done a very good job mitigating a lot of the tariff
pressure, but there is some bit of tariff pressure and it was
weighing on the company's business for the past year.
Retail experts say Party City is losing relevance with some
consumers. On earnings call with analysts, executives are trying to
figure out how to get it back.
I believe Party City has some strategies in place to turn around the
business, to have more dedicated sales associates, to help plan
parties when you're in the store and just really make it a more
exciting and invigorating experience.
Party City has the advantage of low competition in wholesale.
The party goods they make are sold in 40,000 retail stores.
In this day and age, they have to do a very serious look at are we
going to be a wholesaler, are we going to be a retailer,
are we going to be both?
In order to compete with Amazon?
Analysts say Party City needs to sell a unique shopping experience
customers wouldn't find online.
Those are long term problems that question the very structure of the
business. And they don't have an easy answer.
But, there are some upsides for the company in the short term.
Investors are still cautious about Halloween results, but in 2020,
the holiday falls on a Saturday, that indicates consumers will spend
more. Although analysts warn the November third presidential election
could put a damper on spending.
Party City's helium supply is back to full capacity, which may help
drive sales for the entire retail business.
And Party City appointed an industry veteran as CEO of the retail
business in July 2019.
They're just not a business that the investor looks at and goes,
yeah, this is the future because you know what?
This is not the future.