Party City (PRTY) seems to be a relic of an age long gone by. A single concept and somewhat undifferentiated (i.e. generic) store in a relatively narrow niche. Like most retailer’s Party City’s stock is down about 30% since the beginning of the year and around half its high in 2018. However unlike other specialty retailers of old such as Sport’s Authority, Barnes and Noble and Toys R US who have gone bust or are tethering on the edge of bankruptcy, Party City’s revenue and Net income have been growing at a modest pace with trailing twelve month revenue and Net Income at $2.4 billion and $113.8 million respectively. Is the company an underappreciated/ heavily discounted retail gem? Let’s analyze to find out.
Via https://newsapi.org online business online marketing online business opportunities Introduction
Party City is a decorated party goods superstore retailer with 960 stores (franchised and non-franchised) in the US and Canada and, a vertically integrated supplier of decorated party goods. Party goods being Balloons, costumes for kids, tableware, decorations, party favors such as hats, noisemakers, etc. and other supplies typically used for birthday parties, Halloween and other occasions. Party City is vertically integrated in the sense that it also designs and manufactures its products and makes these available to mass merchants, grocery retailers, eCommerce merchandisers (including Amazon) and dollar stores. The company has two operating segments, Retail and Wholesale. According to the company’s 10-K, in 2018 79% of the product that was sold by Party City’s retail operations was supplied by its wholesale operations while 23% of the product that was sold by Party City’s retail operations was self-manufactured. Party City generated 74.7% of its total revenues from its retail segment and 25.3% of total revenues from the wholesale segment.
Source: Party City’s October 2018Investor Presentation
Via https://newsapi.org online business online marketing online business opportunities Retail Operations as a past competitive advantage
While being vertically integrated is an advantage for Party City, we must not forget that retail is the glue that holds it all together. In other words, Party City is able to leverage its retail stores in order to sell its manufactured and wholesale goods. In fact, excluding the intercompany piece, the company’s wholesale operations are not really that exciting.
Source: Author’s calculations based on info fromcompany’s 10-K
Using data from 2016-2018, we can see that Wholesale operations less the intercompany piece (i.e. the goods sold by the wholesale segment to the retail segment) on average have an operating margin of 11% and constitute roughly a quarter of total operating income while the retail segment has a more consistent operating margin and constitutes a larger portion of income. Given the fact that having a retail network had been a key advantage of the company in the past, the currentnegative trendsin retail has given me pause when reflecting about the company’s long-term strategic advantage.Party City’s 2019 second-quarter results weren’t too bad given that total revenues increased 0.5% and retail sales increased by 2.9%. Brand comparable sales decreased 2.1% during the second quarter due to approximately 200 basis points of headwinds from the helium shortage which from the looks of things has beenpartially resolved. Helium is important as it is the element that makes Balloons float and can only be dispensed from a tank this is one of the main reasons a customer would opt to go to a Party City store as opposed to ordering from Amazon.
Source: Business Insider
And this leads me to an important point, In order to continue growing and thrive, the company needs to start leaning more on developing a unique customer experience and making the necessary investments. However, the company seems to be going in the opposite direction as it instead starts to focus more on its wholesale segments. This can be seen in its sale of Canadian stores to Canadian Tire (TSE: CTC A) as well as its partnership with Amazon.
Canadian Tire has announced that it has reached a deal to purchase Party City Canada for $174.4 million. A press release said the iconic Canadian retailer’s addition of the party supply company makes it a one-stop destination as ‘Canada’s Fun Store.” After buying up the Canadian subsidiary of the troubled party supply company, Canadian Tire will soon begin selling Party City’s “unique product assortments” online and in its existing 500 retail stores across the country, as part of a ten-year wholesale agreement.
Party City (PRTY) has joined the hit parade of retailers deciding to be pragmatic aboutAmazon.com(AMZN). The company said on Thursday it would begin selling Halloween costumes on Amazon’s mammoth marketplace, the first time it will sell Party City items outside of its fleet of 900 stores and its own website. And if that works out, Party City said in a statement, Amazon will later sell its Christmas and New Year’s merchandise. Party City also manufactures much of what it sells.
Via https://newsapi.org online business online marketing online business opportunitiesParty City has a lot of Debt
Party City’s somewhat defensive strategy may have something to do with the company’s debt level. As I’ve discussed in the past having a substantial amount of corporate debt generally limits a firm’s strategic options. Debt paydown has been cited as themain use of fundsfor the proceeds used in its sale of Canadian branches to Canadian Tire. Party City’s Debt to Equity ratio for 2018 and Q2 2019 are 2.5 and 3.7 respectively (with the large jump due to the inclusion of capital leases due to anaccounting regulation change).
The other factor to consider is that the majority of the company’s assets are tied to Goodwill and Intangibles (63% and 51% based on 2018 and Q2 2019) acquired during the company’s many acquisitions. Using the interest coverage ratios paints a similar picture with interest expense representing 30 – 40% of operating income.
Source: Author’s calculations based oncompany financials
Source: Author’s calculations based oncompany financials
Via https://newsapi.org online business online marketing online business opportunities Conclusion
Party City is trading at a significant discount and there is a reason for that. It is highly leveraged in an industry that is facing disruption and headwinds. In fairness to company management though, they have been playing well with the cards they have been dealt with. The partnership with Amazon, right-sizing its retail footprint as well as leaning more on its wholesale business shows that management is ready to steer the company through this challenging time. My issue is it is a business set to survive and not really thrive. While I am not a fan of the stock as something I would hold on a minimum 5-year basis, the bearishness of the stock can create some trading opportunities.
Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure:Caveat emptor! (Buyer beware.) Please do your own proper due diligence on any stock directly or indirectly mentioned in this article. You probably should seek advice from a broker or financial adviser before making any investment decisions. I don’t know you or your specific circumstances, therefore, your tolerance and suitability to take risk may differ. This article should be considered general information, and not relied on as a formal investment recommendation.