Seeking Alpha • Sep 03
Party City Stock: It's Party Time
Summary
Party City at 2x FY2021 operating income and $200 million market cap is priced like future bankruptcy is likely.
Party City has a confluence of factors that makes it compelling as a trade, especially Halloween being soon.
After Bed Bath & Beyond, Revlon and Redbox, Party City is well-poised to be a next big retail trade.
As a fundamental investment, Party City could be a melting ice cube or quality business and still bring large returns from current levels.
The fundamental thesis provides margin of safety for a near-term trade and target of 50% upside.
Overview
Party City (PRTY) is the largest integrated party supplies and party costumes producer, wholesaler, and retailer. It has a market cap of a paltry $201 million at last Friday’s close, whilst having $2.171 billion in revenue in FY 31 December 2021, giving it a Price/FY 2021 revenue ratio of 0.092x. Being priced as though it has an impending liquidation is the result of its sizeable debt load. Party City has net debt of $2.33 billion, giving it an EV/FY2021 revenue of 1.07x. Party City made a net loss of $6.5 million in FY 31 December 2021, with interest costs of its high debt load eroding away operating profit. Operating income was $96.9 million in FY 31 December 2021, and thus at its current market cap, the stock trades at 2.07x its FY 2021 operating income.
Thus, the stock has the Ben Graham classic value romanticism of having a deep value appearance, maximum market pessimism reflected in the stock price, plus has an asset (its wholesale business Amscan) within the company that could be a high-quality business. The business could be stagnant and with a high debt load but it is priced similar to companies already in bankruptcy.
Potentially too, Party City could become a high-quality Phil Fisher style business play rather than a Graham style deep value play on a mediocre business. Fundamental bulls on the stock have a contrarian view that the company is a quality business on the brink of a revenue turnaround, with a fair value of $30 being attainable in the long run. We should also note that Party City’s largest shareholder, hedge fund CAS Investment Partners added to its holdings at above $6 earlier this year.
So, there are two bull case scenarios for Party City as a long-term fundamental investment. The first, that it could be a cheaply priced melting ice cube or a cigar butt that’s due for its last fulfilling puff. Or it could be a long-term quality business compounder in the turnaround scenario. Either could bring tremendous long-term upside from the sub $2 levels that the stock has been lingering around.
The fundamental bull cases for Party City are of relevance to me, but not in making a long-term fundamental investment in the stock. I view Party City to be most interesting as a near-term trade for a significant potential return in the lead up to Halloween. That there is a good fundamental bull-case is of relevance for the margin of safety in my trade, as the fundamental investment thesis is helpful for near-term trading sentiment and that a potential near-term price floor has been reached.
Indications are that this Halloween season is looking strong for Party City, with its announcing plans for 20,000 hires for the season (versus 17,000 last year). Recent weeks' trading volume in Party City has been significantly elevated versus average, with the stock generating significant retail interest and Reddit and social media mentions. In recent months, other small cap, struggling retail names Bed Bath & Beyond (BBBY), Revlon (REV) and Redbox, have seen temporary price surges multi-fold higher from their lows. Although we have seen a recent significant sell-off in the market, we should note that the surges in Revlon and Redbox took place during the market’s bear period. Party City has a concentration of shareholding held amongst its largest shareholders and an elevated short interest (18% of float). With its paltry market cap due to its debt load, it will not take a lot of positive news flow for Party City stock to see a big move higher.
There are also two pieces of news flow which give Party City stock an all-clear to have an upward surge in the lead up to Halloween. Latest quarterly results were fair, with an earnings beat and revenue almost in-line. Meanwhile, a lingering concern that its largest shareholder – CAS Investment Partners - might need to sell its stake amidst the fund’s decline this year should have lifted amidst a rebound in its top positions.
Party City has reached the high $2.60 levels on two occasions in recent weeks before retracing back to its current sub $2 levels. I view that the combination of the above factors in the nearer term should see Party City head back to the high $2 levels again before it breaks $3. Therein, there is the potential for more than 50% near-term upside in my view, depending on where one enters Party City stock, amidst its sub $2 dips.
Whilst for the purpose of my trade, I will be exploring the bullish case for Party City as a longer-term fundamental investment, I do not have high conviction yet whether the longer-term case will play out. Rather, I am very bullish on Party City as a near-term trade. For this reason, if the trade thesis does not appear to be playing out, I am prepared to fold and trade quickly and revisit the stock again.
Party City
Per annual report, Party City describes itself:
“we are a leading party goods company by revenue in North America and, we believe, the largest vertically integrated supplier of decorated party goods globally by revenue...Party City has grown to become what we believe is the largest operator of owned and franchised party superstores by revenue in the United States.
Party City’s fully integrated operations today are the result of the original Party City retailer being acquired in 2005 by the parent company of Amscan, a designer, manufacturer and distributor of party goods. Subsequent acquisitions of other party goods retailers followed which ultimately brought Party City to be the industry’s largest integrated player. Party City had various private equity owners in the early 2010s before an IPO in 2015 when it debuted at $17. Debt levels have always been high.
Party City’s declining revenue and margins prior to the pandemic were the result of a variety of factors. Competition from Amazon (AMZN) and Big Box retailers, a helium shortage and poor layout and merchandising execution in their stores are some factors. Issues of competition and the helium shortage persist presently.
Party City’s current CEO Brad Weston was appointed to the role in April 2020. The company has since embarked on a variety of strategic initiatives, notably enhancing the in-store experience through remodeling or opening new stores dubbed “NXTGEN stores”. Given the pandemic’s impact on celebrations and the supply-chain, it has yet to be determined how successful is the new CEO’s turnaround and execution versus his predecessor. But there is some reason to be optimistic, given Weston’s previous background as CEO of Petco. There are also similarities of Party City with Petco, Petco being a private equity controlled highly leveraged retail business which turned around from struggling operating performance and gradually reduced debt.
As shown below, Party City’s debt levels have always been high, although it has had higher debt levels in the past compared to those presently. Besides, Party City does not face any major debt repayment soon. It has a senior note due in 2023 with a carrying amount of $22.779 million which is not sizeable, whilst its next major debt repayment is due in 2025 ($206 million).
Party City
Source: Annual report
Next, let’s look at Party City’s financials. Operating income in FY2021 was $96.9 million and the company had a net loss of $6.5 million as interest costs eroded income. The company recorded a large net loss in FY2020 due to the pandemic. In FY2019, Party City suffered a decline in revenue and significant decline in operating margins and operating income. Its FY2019 major net loss was the result of extraordinary items, primarily goodwill impairment.
Seeking Alpha
Seeking Alpha
Source: Seeking Alpha
Party City as a classic value cigar butt