Most people like a good party once in a while. Although it may seem surprising at first, some companies are dedicated solely to providing the goods and services often needed to make a party the best it can be. One such company that happens to be publicly traded is a retailer and wholesaler called party town (PRTY). Although the company has had a checkered operating history in recent years and an operating history that has significantly worsened in the short term due to the COVID-19 pandemic, the overall situation for the company appears to be quite solid. . Stocks are trading at fundamentally attractive levels. But that doesn’t mean the company is currently a strong opportunity. Despite the low price at which the shares are trading, the company has a few issues. And those issues seem to be largely about management and what management is trying to do with the company versus what the company should be.
A valuable business; confused management
Today, Party City is a leading retailer and wholesaler of party products and related offerings. At the end of the company’s 2021 fiscal year, it operated 759 company-owned retail stores across North America. In addition to this, there were approximately 72 franchise locations. These stores operate under the names “Party City” and “Halloween City”, and the company also has its own e-commerce websites that provide the same products as their stores and more. Through these retail concepts, consumers can purchase a wide range of products. These include, but are not limited to, balloons, costumes, tableware, decorations, stationery, gift wrap, party favors, bouquets and more. On average, these locations each have around 25,000 SKUs, while their online platform provides 40,000.
Operationally, the company has two key segments. One of them is the Retail segment. This covers control of all of the company’s retail stores and all of the activities that go with them. In the company’s 2021 fiscal year, this particular segment accounted for 81.5% of the company’s overall revenue and more than all of its profits. The other segment that the company operates is the wholesale segment. Through this, the company provides products ranging from tableware to accessories, novelties to balloons and more to the various customers of the company. For the most part, customers include its own stores and websites, as well as its franchise locations and other national retailers. However, a small portion of revenue is attributable to domestic balloon distributors and retailers, as well as various international customers.
The last few years for Party City have been a little tough. Revenue fluctuated between a low point of $2.35 billion and a high point of $2.43 billion in the three years ending in 2019. Then, in 2020, revenue plunged to $1.85 billion before recovering to $2.17 billion in 2021. Some of this volatility is due to a change in the number of stores over time. Company-owned locations grew from 803 in 2017 to 866 in 2018 before finally falling to a low point of 746 in 2020. Then, in 2021, that number increased slightly to 759 stores. The company also suffered from volatility from a comparable store sales perspective. Same-store sales were negative in each of the three years ending in 2019, ranging from minus 0.7% to minus 3%. Then, in 2020, same-store sales were negative at 16.5% before turning positive at 34.2% in 2021 as the economy reopened.
Profitability has also been rather mixed over the years. After seeing its revenue fall from positive $215.3 million in 2017 to negative $532.5 million in 2019, it turned negative to the tune of $528.2 million in 2020. But in 2021, the company has saw its losses narrow, with net income totaling negative $6.5 million for the year. Cash flow from operations has been equally volatile, but the general trend has been for cash flow to weaken over the years. Even if we adjust for changes in working capital, the situation is tight, with cash flow dropping from a high of $226.3 million in 2018 to a low of $92 million two years earlier. Then, in 2021, it increased slightly to $33 million. Other profitability metrics, such as adjusted net earnings and EBITDA, have been equally volatile over the years.
Despite this volatility and pain, the management decided to resume the growth of the company. For example, in the company’s 2022 fiscal year, they hope to open between 100 and 125 new locations. It should be noted that this number includes renovations. As a result, combined with an increase in comparable brand sales of between 2% and 4%, the company expects revenue of between $2.275 billion and $2.35 billion for the year. In order to fund these additional sites, the company plans to spend between $120 million and $130 million. They forecast net income of between $64.2 million and $82.5 million for the year, with EBITDA of between $275 million and $300 million. Management has not provided any estimates with respect to cash flow from operations. But if we assume this metric will grow at the same rate as EBITDA for the year, then a reading of around $35.6 million isn’t unrealistic.
That’s fine and all, but the problem with the business is that management, after spending 2018 to 2020 closing many of its stores, is now looking to expand again. This is at a time when comparable store sales are weak (excluding the post-pandemic recovery period), when the company’s net leverage ratio, using the 2022 mid-term forecast EBITDA, is 4.83, and where the company consistently generates net losses year after year. Instead of focusing on increasing the number of stores when it had already spent a few years reducing it, the company should focus on improving its supply chains to reduce costs and it should seek further efficiencies and focus on debt reduction.
Management’s failure to do these things is reflected in the company’s weak stock price. In the graph above, you can see estimated pricing data for the company’s fiscal year 2022, as well as historical data based on financial data from 2021 and 2019. Using data from fiscal year 2021, the company is trading at a price-earnings multiple of 4.6. The price to adjusted operating cash flow multiple is 11. And the EV to EBITDA multiple is 6.6. To put that into perspective, I decided to compare the company to five similar companies. Based on the price-to-earnings ratio, four of the five companies had a positive reading, with a range between 3.6 and 9.8. Only one of the prospects was cheaper than Party City. Using the price/operating cash flow approach, the range was 3.2 to 30.5. Two of the five companies that had positive results were cheaper than our prospect. And using the EV to EBITDA approach, the range for the four companies with a positive reading was 1.7 to 4.5. In this case, Party City was the most expensive of the bunch.
|Company||Prizes / Earnings||Price / Operating Cash||EV / EBITDA|
|Big 5 Sporting Goods (BGFV)||3.6||3.2||1.7|
|The Container Store (TCS)||4.7||11.1||3.4|
|Build-A-Bear (BBW) Workshop||9.8||11.3||4.5|
|Sportsman’s Warehouse (SPWH)||6.4||30.5||4.0|
|Barnes & Noble Education (BNED)||N / A||7.7||N / A|
Based on the data provided, I can say that although Party City has had a shaky operating history, the company could offer investors a nice upside. That said, it seems to me that the management is not quite sure what to do. They seem to be too focused on growth at a time when they should be focusing on cost cutting and debt reduction. Doing these things will have a much more positive impact on the business, especially as the level of risk to it decreases in response to their actions. Generally speaking, I still find myself slightly optimistic about the company. But if management were to make the necessary changes, I think it could warrant a significant upgrade in terms of outlook.