Can Party City Survive Amazon?

Can Party City Survive Amazon?

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an outdated e-commerce platform, show the brand just might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.


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