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Can Party City Find Reasons To Celebrate Post-Bankruptcy?
Party City will exit bankruptcy with its debt load reduced by almost $1 billion and nearly 800 stores intact now that it has received approval from the U.S. Bankruptcy Court for the Southern District of Texas. The retailer will follow its Plan of Reorganization to emerge with a stronger capital structure and more liquidity to help it pursue renewed profitability.
Party City filed for Chapter 11 bankruptcy in January due to retail-wide pressures like the COVID-19 pandemic and global supply chain uncertainty, as well as more specific challenges like the 2019 helium shortage. At the time, it had slightly more than 800 stores, but the company shuttered “less productive locations” and renegotiated leases during the proceedings as part of its efforts to cut costs.
The pandemic in particular took a significant toll on operations as parties were put on hold. Adjusted EBITDA for Q3 2022, the last period reported before Party City entered bankruptcy, was $2.4 million. In comparison, the retailer reported an adjusted EBITDA of $119.5 million for Q4 2019 and $188.9 million for Q4 2018.
However, more and more people are opening up to events, which could bode well for party supply sales. As of May, 67% of consumers were comfortable with going out to a party or social event, according to data from Morning Consult. Rising interest in social gatherings will be key to Party City reversing its initial decline and rebuilding its business.
Party City will also likely lean into its next-gen stores, which offer features including dedicated checkout for balloons, fresh signage, and a design aimed at reducing clutter. The company had been opening its next-gen stores, largely through remodeling, through the end of Q3 2022 when they accounted for 174 locations in its fleet, according to data shared on a call with investors. Redesigned stores saw a mid-single-digit sales increase on average and paid back the cost of the remodel within 24 months. Party City was aiming to have this layout make up the majority of its footprint within the next several years.
Party City is emerging from bankruptcy at the right time to take advantage of the Halloween surge. The retailer operated 149 seasonal Halloween pop-ups in 2022, up from 90 in 2021, though it has yet to announce how many it will have this year. Taking full advantage of costume sales in a post-COVID environment could be key in enabling the revived Party City to hit the ground running.
Discussion Questions
How will the greatly reduced debt load help Party City improve its operations and hopefully return to its former profitability? Are there any lessons Party City should take from other companies in how to manage inventory and cut costs in a post-COVID world?
Poll
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Carol Spieckerman
President, Spieckerman Retail
Perry Kramer
Managing Partner, Retail Consulting Partners
The cancellation of $1 billion of debt removes a millstone that was weighing down Party City, while leaving the business fairly intact in terms of store numbers and operations. This gives it much better prospects going forward. However, it does not mean the company is on a completely firm footing. Even without loan interest, in its last quarter before filing for bankruptcy, the company posted an operating loss of $153.5 million, or a loss of $20.5 million before goodwill impairment. A lot of work is needed to rebuild the financials, especially as the company has a new $562 million loan. Nor has the bankruptcy removed all of the strategic issues facing Party City on the retail side – a more constrained consumer buying fewer party items, rising competitive pressures from generalists like Walmart, Amazon and Target, the ever-expanding Spirit Halloween taking a larger share of the spooky occasion, and the continued rise of online. The bright spot should be the wholesale business where Party City really needs to focus if it is to succeed.
For everyone who is having a party and wanted to dress-up or decorate, Party City has been the go-to store. With the number of social gatherings post Covid-19 increasing, the business should rebound, but pricing is of high importance in inflationary times. One of the most negative aspects of the party goods and seasonal products segment of retail is the pack-away model. This is a costly burden on Party City and its competitors. Optimally, the more the retailer sells out of seasonal products, the less it has to pack away. But bringing that process down to a science is very difficult. Buy right, sell more seasonal product, pack away less, and keep prices within reach of even its most modest customers. Easy for me to say…
Supply chain issues, COVID, and “helium shortages”? Okay, that last one would seem to be unique, yet surely not a deciding factor. Party City is in a perilous business called category killing that continues to mercilessly take down niche retail players. Halloween and the holidays may give Party City false hope. The future is far from certain.
This is another private equity rescue. As a result, we will see limited new investment in the stores as previously planned, tighter control of inventory, and razor cut on expenses. The way out for the private equity entity will be an IPO. The focus must be on generating revenue and profits, leaving the company as a skeleton of its old self.
The lesson, even without the challenges of COVID-19, is to watch market trends. Twenty-three percent of party goods were sold online. That takes a big chunk of revenue away from the stores. That is enough to destroy the bottom line. In a current survey, for what it is worth, 55% of shoppers prefer to buy thier party goods online. The future is tenuous for Party City.
The lesson learned is that when the world is locked down, parties stop happening. The key to long term scalability for Party City is it’s integration with Amscan and verticalization. Otherwise, the business just doesn’t scale. As long as we don’t have another pandemic of helium shortage soon, all should be well.
PS. My last cio gig was for one of PC’s competitors, who eventually ate them
Verticalization (you just invented a new word) may be the answer here, Paula. It is hard for a family of four in Harlem or East Harlem (New York) to buy mylar, helium-filled balloons for their children’s birthdays at today’s prices and, yet, Party City should love to engage that demographic (and other, similarly positioned ones)!
Verticalization is a real word. It just means they make what they sell. As we both know, while margins in the Party supply business are good, with an average ticket of under $2.00 and stuff that’s easy to move and/or lose, it takes a lot sweat to keep things on order. Double the margin and things get more interesting.
Amscan also has tremendous value in its licensing know-how – if you want Marvel, Disney, etc. you go to Party City. Legacy properties will keep families coming back, but I would keep an eye on Disney’s pre-strike fumbling of new-movie production – and of course the longer the studios take to settle the WGA & SAG-AFTRA strikes, the less value will be extracted from licenses in the next couple years.
(My company has a couple pieces of artwork licensed to Amscan, posting this comment makes me think we might have new licensing opportunities with them since new movies will be a while coming…)
Unfortunately bankruptcy didn’t address Party City’s root challenge, which is their closed supply chain that prevents them from offering the same level of product innovation as their competitors. As part of a larger company that controls almost 80% of manufacturing for the entire party product industry, Party City is competing against themselves by selling the same stuff in their stores that they are selling wholesale to their competition. Why go into a Party City store when you can order the exact same stuff online from any number of sources. And party planners are now just a click away for advice, personal shopping or installation. It’s going to be a tough climb to rebuild profitability.
You all have covered what Party City should do business-wise so I am going to put on my consumer hat. After all, watching how consumers shop is what I do for fun and profit.
I was part of the planning committee for my 50th high school reunion this past weekend. Our event was an all out celebration so I made many trips to our local Party City.
I admit I hadn’t visited much before the reunion, but I found many things I had hunted for in other stores – there’s a marketing opportunity here.
This Party City is a next-gen store that was remodeled after the pandemic. It’s bright, easy to shop, and the service was excellent. This store has a Halloween shop that almost rivals Spirit Halloween. Perhaps Party City is ripe for repositioning?
Party City needs to diversify in multiple directions, First area should be a continued focus on wholesale and having the right systems to be able to interchange wholesale and retail inventory seamlessly, Next, It should look to evaluate a partner for store within a store concept, third better marketing and marketing with partners for event planning, (especially recurring events)… reunions and annual corporate events.
There are miles left in the journey if they are able to approach the model differently.
Reduction of Party City’s debt by nearly $1 billion gives the company extra money to make its stores better, streamline operations, and sell improved products, leading to more profit. Party City faced problems during the pandemic and helium shortages that affected its earnings. As more people begin hosting parties again, Party City can sell more party supplies. The company also has new store designs that attract customers and boost revenue. Halloween is a big opportunity for them too.
With less debt, Party City can make improvements, learn from successful companies, manage inventory efficiently, cut costs wisely, use data for decisions, embrace online sales, and adapt to changing customer preferences in the post-COVID world.
Yes, of course a greatly reduced debt load will help. That having been said, this strikes me as the kind of business I’m surprised exists; at least at any large scale, as it seems like it could easily be filled by existing stores like Michaels, or WalMart or…well, anyone who sells general merchandise, really. And a word of caution: balloons are on the radar of the do-gooders, so building a business model on that seems iffy.
The reduced debt load certainly allows more room to focus on consumer experience, and driving top line sales. This is a needed freedom during this stage of rebuilding for Party City.
In a post Covid world, not only do they have to manage inventory and cut cost, they also need consumers to feel safe with social gatherings. Perhaps this is an opportunity for Party City to demonstrate thought leadership on what parties or smaller gatherings look like in a post-covid (but it’s still here) world.
In the end, this is a slow and steady race for Party City where their past normal may not exist but there is certainly room for a new normal.