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Party City - Initiating Coverage (Part Two)
Jory M. Eisenberg, CFA, FRM - Senior Analyst - Special Situations
James Goldstein, CFA - Senior Analyst - Retail & Gaming
Noah Schucking - Analyst - US Retail
EXECUTIVE SUMMARY.
- In this report, we present a 5-year projection model for Party City’s business and analyze separate creditor recoveries for each of Anagram and Party City (ex Anagram) under an assumed restructuring event at the end of FY2024. In Part 1 of our report, we analyze Party City’s two business segments, discuss its recent financial performance and analyze its capital structure.
- We believe with the recently expanded ABL commitment and our estimated borrowing base limits, the Company will have adequate liquidity available to finance its working capital needs for the foreseeable future. ABL terms were recently amended in July 2022, increasing commitment amount to $562 mn up from $475 mn previously.
- Negative impacts from COVID are now in the past with no apparent permanent hit to its sustainable customer base. Despite the temporary hit to EBITDA and liquidity in 2020, the Company managed to significantly reduce its debt balance on a permanent basis in the process by ~$460 mn (net of new cash raised).
- Cost headwinds are anticipated to remain with respect to helium shortages, labor cost inflation and supply chain disruptions although are ultimately expected to be transient expenses which will abate over the coming quarters. Underlying product demand for Anagram and other core Party City product lines remain relatively stable and demonstrate recession-resistant and Amazon-resistant tendencies that have been persistent over time.
RELATIVE VALUE
Party City was negatively impacted by mandated retail store closures in Q1-Q2 2022 related to COVID which ultimately led to a 21% y-o-y decline in revenue and a 65% decline in Adj EBITDA with the PRTY market cap declining to a low of $25 mn in March 2020 down from a high of $700 mn earlier in Q4 2019. This culminated in a coercive debt exchange in July 2020 that ultimately allowed the Company to reduce its net debt amount by ~$463 mn. Since 2020, revenue and Adj EBITDA reverted to FY2019 levels by the end of FY2021 although the Company has recently experienced some EBITDA margin pressure in 1H2022 related to helium shortages which impacted its balloon sales at both wholesale and retail and ongoing cost pressures and supply chain disruptions.
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