Photos: Party City
Will bankruptcy enable Party City to succeed for years to come?
Party City Holdco, the parent company of Party City, on Tuesday filed for Chapter 11 bankruptcy protection. The retailer also said it had entered into an agreement with creditors who hold more than 70 percent ($900 million) of its secured first lien notes in a debt for equity swap.
Getting the creditors on board was crucial to Party City’s plan to restructure its business. The retailer has secured a $150 million loan from its creditors with half expected to go to paying employee wages and vendor invoices.
Party City has been buffeted in recent years by changes in consumer behavior, store closures and supply chain challenges tied to the pandemic. A shortage of helium has also weighed heavily on a company that counts balloons among its key sales drivers.
The chain, which currently operates more than 800 stores (700+ corporate), has closed 28 locations and is evaluating others to determine if they warrant continued investment.
Party City in November reported a one percent decline in total third quarter sales with same-store revenues down 3.6 percent. The chain’s comps were up 11.2 percent compared to the third quarter in 2019.
Brad Weston, Party City president and CEO, said in a statement that the company has made “significant strides” in transforming its business and that new funding will put the “business on stronger financial footing for the future.”
The Chapter 11 filing follows previous steps that Party City has taken to put its financial house in order.
Mr. Weston, speaking on the chain’s November earnings call, pointed to reasons for optimism, including a rebound in balloon sales, which were up 62 percent compared to the same period in 2019. He called Party City’s balloon business “a key differentiator” in the company’s strategy. “Our focus on driving strong improvements to quality and innovation in our assortments as well as thoughtful pricing as we seek to offset higher expenses continues to strengthen sales performance versus the pre-pandemic timeframe,” he said.
Party City’s CEO was also upbeat about the retailer’s next gen stores (primarily remodels) and its omnichannel capabilities.
“We opened 15 next-gen stores in Q3, totaling 174 Next-Gen stores as of the end of the quarter,” said Mr. Weston. “These stores continue to average a mid-single-digit sales increase versus control stores with a run rate that delivers a payback period on each store of less than 24 months on average.”
- PCHI Enters into Restructuring Support Agreement with Senior Secured Noteholder Ad Hoc Group to Advance Transformation and Enhance Market Leadership from Strengthened Financial Position – Party City Holdco Inc.
- Party City Reports Third Quarter 2022 Results And Updates 2022 Business Outlook – Party City Holdco Inc.
- Party City Holdco Inc. (PRTY) Q3 2022 Earnings Call Transcript – Seeking Alpha
Discussion Questions
DISCUSSION QUESTIONS: What are the biggest challenges that Party City leadership will face in coming months as it goes through the bankruptcy process? Do you expect the retailer to emerge more viable for the long haul once it goes through its Chapter 11 reorganization?
Poll
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Carol Spieckerman
President, Spieckerman Retail
Paula Rosenblum
Co-founder, RSR Research
It looks like the Party is over — for now. With more than 800 stores and $2 billion in sales there is still something here, but it needs a re-set. The biggest factor is restoring market demand, which does appear to be gaining some traction post-COVID-19, despite the inflation pressure. Declaring bankruptcy is an extreme step but necessary based on their financial situation. And while bankruptcy can permanently scar a brand, others have emerged successfully and I believe Party City has a chance.
Party City’s biggest challenge is the same one Bed Bath & Beyond is facing, the perils of category-killing. Everyone from mass retailers to hard discounters, drug, grocery, and dollar stores sell party supplies. Combined, these competitors are near-ubiquitous. I can’t see Party City re-emerging as a strong individual player, yet it may have a future as an intellectual property play for a portfolio company. Party City shop-in-shops might make sense.
The first lien creditors are swapping debt for 70 percent of the equity? That means this will become a financial play rather than a retail play. Sadly, we know how that goes in retail.
All bankruptcies are a financial play. I used to say they were AAF (all about fees). A lot of money will be made.
Cynical, but absolutely correct.
God knows I lived through enough of them. The “estate” of companies that go 7 seem to live on for years.
Let’s assume bankruptcy allows Party City to get its enormous debt levels down and to restructure the business so it has a better financial foundation. Where does that leave it? Still vulnerable in my opinion. Why? Because the problems aren’t just about debt. They are about relevance. Party City used to be one of the main games in town for occasions and events. Now it’s more of an also-ran. Spirit Halloween has taken a big slice of the Halloween market. Target has improved its party offering — including with its Spritz own-brand. Many others have muscled in too. Against these changes, Party City has stood still and has lost sales and customers. It needs to reinvent and reinvigorate and that’s a tall order.
Hi Neil! You have to remember that Amscan is part of this story as well, and they sell paper plates, etc. to all different retailers. In fact, the only way Party City scaled at all was that merger. Why they didn’t talk about “no parties during a pandemic” is utterly lost on me. Their wholesale business will likely be healthy.
The party supply business never scaled well (yeah, another one I was in for five years!). I used to call it a “sweat business.” Meaning the owners of a store or small chain really had to care and work hard for very low ticket items.
This story is different, and I still can’t believe PC didn’t even mention any of it in its pre-filing story. The business became more scalable when it became vertical. So Amscan, which sells paper goods to the universe, and Party City are now one, under the corporate banner of PCH. The world will always need paper goods.
The franchisees (not included in the bankruptcy) will face some confusion from customers, but otherwise, will provide consistent income to the parent company.
BUT — how did no one mention that there haven’t been a ton of parties over the past three years? That would certainly dampen the party supply business.
So yes, I think the entity will survive for the long haul. This is a unique category killer and should be able to do well in total. Particularly for juvenile birthday parties, one-stop shopping is handy.
Another piece that no one else has mentioned is Amscan’s skill in locking up big licenses — if you want party supplies with Disney, Marvel, DC and such characters, you are talking to Amscan. (When no one’s going to movies — not as much demand for movie themed party supplies — but now that movies are back, so will the parties.) And then you get the vertical integration with Party City retail which cuts out a layer of warehousing. I agree, PCH’s fundamentals are still strong.
Unless a business underwent some kind of once-in-a-lifetime trauma — and I’ll include LBOs in there — that accounted for the filing, it’s likely to have the same issue(s) coming out that it did going in. In this case, a real question as to whether (selling) “party supplies” is a viable business model … particularly when what they sell is available in so many other spots. I’ll be kind and categorize Mr. Weston’s discussion of a differentiation based on balloons as enthusiasm, but it’s not hard to picture many people coming away with a much different impression.
Dive a little deeper: Party City is far more than a retailer. They “manufacture and distribute party goods found in over 40,000 retail outlets worldwide, including Party City stores as well as independent party supply stores, mass merchants, grocery retailers, dollar stores and others.”
– They Manufacture in 10 locations – Approximately 24% of retail sales are manufactured in-house.
– Distribute 45,000 SKUs in 100 countries
– Global Sourcing from 5 countries and nine cities.
– Product design 8,000+skus a year.
They are not just a category killer. In many cases, they are the category designer, manufacturer and distributor to your favorite retailers (even those based in Minneapolis and Bentonville).