Desperately Seeking Something to Celebrate

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Growing losses dampen spirits at the largest U.S. retailer of costumes, decorations and favorsRockaway

The balloons are deflating, the fruit punch is losing its kick and there?s not much dancing at Party City these days. The largest U.S. retailer of party supplies has been beset by rising losses and departing executives and last month retained financial advisor Credit Suisse First Boston to explore alternatives that include a possible sale of the company.
?We know Party City is open to buyout offers, but we don?t think they are selling from a position of strength given their weak performance in the most recent quarters,? analyst Laura Richardson of broker-dealer BB&T Capital Markets says in a report. ?We believe this weakness may affect the offers they receive from potential buyers, which in turn could prolong the sales process.?
For the fiscal third quarter ended April 2, the Rockaway-based retailer of costumes, novelties and decorations reported a net loss of $7.2 million on revenue of $101.4 million; the red ink rose from a loss of $5.6 million on revenue of $101.6 million for the year-ago period. Party City stock has been hovering between its 52-week high of $16.39 per share and its low for the period of $11.25 per share.
In an earnings conference call last week, Party City executives described the company?s revamped merchandise and new store layout plans as a fresh start. Last year Party City began changing its inventory to carry more nonseasonal products. The intent was to generate more consistent sales and make the company less reliant on holidays like Valentine?s Day and Halloween.
Party City, which has 247 company-owned and 258 franchise stores in the U.S. and Puerto Rico, has also been struggling to cope with an exodus of executives. CEO Nancy Pedot resigned in March and was replaced on an interim basis by Vice Chairman Michael Tennenbaum. Senior Vice President Warren Jeffery left last December and CFO Linda Siluk was replaced last August by Gregg Melnick, a former vice president at Dow Jones.
?The board?s recent initiatives are likely to take the company in a different strategic direction, which is their prerogative,? Pedot said as she departed. ?For me personally, I believe this is an appropriate time to pursue other opportunities.?
Party City, which had revenue of $516 million in fiscal 2004, faces heated competition from both larger and smaller rivals. Wal-Mart?s vast selection of merchandise includes Halloween costumes?a Party City staple?and decorations for special events. Rival Party America of Alameda, California, has ballooned through acquisitions from 36 stores to 290 locations in just 18 months. Party America had revenue of $160.6 million in fiscal 2004 and says the acquisitions could boost sales by 40% this year.
Meanwhile, some independent party-supply stores have been holding their own against Party City. The Party Pros in Piscataway remains profitable in spite of a Party City that opened a few hundred yards away six years ago.
?We started about 12 years ago,? says Party Pros owner Upen Shah, 44, who runs the store with six employees. ?We have customers who shop at Party City also,? Shah says, ?but they come back to us and say ?You have everything we need here.??
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