Party City Holdco Inc. (NYSE: PRTY) completed its initial public offering (IPO) in April 2015. Although this was less than a year ago, life as a public company puts it under greater scrutiny. Despite the short time frame, it is appropriate to analyze how investors would have done if they had invested not long after the IPO.
Party City is a retailer of party goods and is a vertically integrated supplier. Founded in 1947, the company had about 880 locations at the time of the IPO and claimed to be the only coast-to-coast network of party supercenters in the United States and Canada. The company's market share of the retail party goods industry was about 22% based on its 2014 sales. Management estimates it is a $10 billion industry. Party City undertook a series of acquisitions between 2005 and 2010 designed to build scale and vertically integrate the company to capture greater margins. This includes the 2005 merger of Party City and wholesaler Amscan Holdings.
Management outlined a number of growth initiatives. One is expanding the store base, with the potential to boost the count by about 50% in North America at a rate of about 30 stores a year. Additionally, management hopes to drive additional profitability from existing stores, including remodeling and relocating shops. Expanding e-commerce, growing internationally and pursuing acquisitions are also part of its growth plans.
An Overview of the Financials
In 2014, sales rose more than 11% to about $2.3 billion. Same-store sales rose 5.8% as both the number of transactions and the amount spent per transaction increased. This drove income from operations nearly 44% higher, to $243.1 million. This excludes a $7.5 million for the impairment of a trade name in 2013. The margin expanded from 7.4 to 11.9%.
The majority of Party City's sales are generated from its retail operations. This accounts for about 70% of the company's top line and the balance from its wholesale operations. Retail represents more than 75% of its gross profit.
In April, Party City sold about 21.9 million shares at a price of $17. This was at the high end of the $15 to $17 range that was given prior to the IPO being completed. There was plenty of demand for the shares.
Private equity (PE) firms Thomas H Lee Partners (THL) and Advent International owned 93% of Party City, which they purchased in 2012, with the remaining interest bought by other investors, including management. After the offering, the two PE investors had a stake of 75%. Although the two investors did not offer any shares, Party City paid them a $30.7 million termination fee related to the management agreement. The remaining proceeds, about $315 million, were used to redeem senior payment-in-kind (PIK) notes.
Is the Party Over?
Party City's stock had a successful debut. The first day, the stock closed at $20.70, a jump of nearly 22%. If an investor decided to jump in after about a week, he would have paid about the same price. The closing price was $20.65 on April 22, the fifth day after the IPO.
The subsequent months were not kind to investors. On Jan. 11, 2016, the stock closed at $11.98, or a loss of roughly 42%. By way of comparison, the Russell 2000 Index, which serves as a benchmark for small-cap stocks, fell 18% during the same time period. Although no one is happy losing money, this feels worse for investors, since Party City's stock lost more than twice the small-cap index.
Party City still has a lot of debt despite repaying some with the IPO proceeds, and interest expense continues to weigh on the bottom line. For the first nine months of 2015, income from operations increased 19.5% to $101.6 million, but interest expense was about the same amount. The company's revenue rose 3.1% versus a year ago, to over $1.5 billion. Same-store sales grew 0.8%.