Fitch Ratings downgraded Party City Holdco Inc. to CCC (substantial credit risk) from B- (significantly elevated risk), citing “rapid deterioration” in the Woodcliff Lake-based accessories retailer’s operations and liquidity and a “likely untenable” capital structure.
In a Nov. 11 rating action commentary, the credit agency wrote that, under its rating case assumptions, Party City and its subsidiaries Party City Holdings Inc., Anagram Holdings LLC and Anagram International Inc., “will generate significant negative free cash flow” in 2022 and has “limited liquidity headroom to navigate further missteps.”
Due to a number of factors – such as supply chain challenges, rising input costs and “mis-execution” – Fitch said the company’s financial results have “steadily weakened” throughout the course of 2022. And with leverage likely to remain elevated in coming months, the agency forecasts that Party City will be in a difficult position to address its capital structure, which substantively matures in 2025/2026, and would be at risk of default “unless operations meaningfully improve over the next 12-18 months.”
Fitch estimated that Party City needs to generate about $150 million in earnings before interest, taxes, depreciation and amortization (EBITDA) to service its interest expense and annual capital expenditures.
However, analysts note the “timing and confidence in this turnaround is uncertain” and that Party City “will also need to address its 2025 and 2026 maturities before they become current liabilities.”
Though Fitch is not currently projecting a material recession or significant consumer slowdown in the U.S. over the next two years, Party City’s “low ticket-, event- and holiday-driven business mix may be affected if one were to occur,” the agency said.
The downgrade comes as the party goods retailer targets $30 million in cost cuts following flat sales during its pivotal Halloween season.
In an effort to offset the impacts of lower demand and inflationary pressures, Party City said it is reducing its corporate workforce by 19% and trimming costs associated with raw materials, operations, marketing and information technology. The company did not say how many jobs will be affected, but noted the reduction will come from a combination of position eliminations and leaving open positions unfilled.
For the quarter ending Sept. 30, Party City recorded total net sales of $502.2 million, a 1.6% decrease from the third quarter of 2021. Its adjusted loss came in at $1.39 per share — wider than Wall Street analysts’ estimates of $0.10 per share.
The company also revised its business outlook for the third time this year. It now expects full-year revenue of between $2.14 billion to $2.19 billion instead of its previous forecast of $2.15 billion to $2.23 billion.
In discussing Party City’s third quarter results Nov. 8, Chief Executive Officer Brad Weston said inflationary pressures continue to impact consumers’ ability and willingness to shell out money on celebrations.
“Looking ahead, we anticipated the current macro backdrop to persist and are taking action to best position the business in this environment and for the longer term,” he said. “We will continue on the path of progressing our transformation strategy but will be addressing structural cost opportunities and increasing operating efficiencies given the challenging environment.”
Founded 36 years ago in East Hanover, Party City is the largest retailer of party goods in the U.S., Canada and Mexico. It operates more than 900 company-owned and franchise outlets under the Party City, Halloween City, Toy City, Factory Card and Party Outlet brands.
Last fall, it became the first company to win an award under the state’s Emerge Program, a $14.5 billion job creation package launched using funding from the New Jersey Economic Recovery Act of 2020.
A media representative from Party City did not immediately respond to a request for comment Wednesday regarding the Fitch Ratings outlook.