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Party City Has Recovery Potential

- By Robert Stephens, CFA

With shares tumbling 47% over the last 12 months, party supplies retailer Party City Holdco Inc. (PRTY) had a disappointing year.

Although it now trades at a low valuation, an evolving strategy is expected to boost its bottom line over the medium term. An increasing focus on omnichannel capabilities as well as further investments in enhancing the customer experience may improve its competitive advantage.


The business is also seeking to become increasingly efficient, employing more data analytics in order to differentiate its products.

Having underperformed the S&P 500 in the last year, the stock seems to offer a wide margin of safety. A successful recovery could be ahead.

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Digital investments

Increased investments in the company's digital operations is improving its financial prospects. Party City recently launched a broader site replatforming that included more content and products. This resulted in increased customer engagement, with a faster browsing experience and easier checkout system generating a positive response from consumers.

Party City is also investing in its omnichannel experience. It is expanding its buy online, pick up in store initiative, while a larger number of available products online is enhancing its overall appeal. This dovetails with the creation of a Party City-branded storefront on Amazon (AMZN), which provides greater scope to offer an increasingly unique range of products. This contributed to a 33% increase in e-commerce comparable sales in the most recent quarter.

The retailer also plans to ramp-up its Kazzam marketplace pilot, which allows consumers to book entertainers and organize parties. Currently active in 15 markets, Party City is now moving to the second stage of the pilot, which is to improve customer acquisition. As part of this initiative, it is deploying Kazzam to 15% of its stores in order to drive consumer awareness, which it expects to become a key growth catalyst in the long run.

Strategy shift

Improving the in-store customer experience remains a key area for the company as it seeks to enhance its competitive advantage. It recently completed phase one of its retail productivity initiative, which is expected to optimize labor, improve the operational performance of stores and simplify its product offering.

Party City is also looking to improve its relationship with customers by gaining a deeper understanding of their needs, which will allow it to creat more targeted marketing campaigns and provide additional opportunities for personalization. It now has a database of over 25 million identifiable customers, which could help leverage its marketing efforts.

The retailer is also benefiting from widening its distribution to include non-traditional party channels such as sporting and entertainment venues.

Risks

Like other retailers, higher input costs are putting pressure on Party City's margins. In the most recent fiscal year, the gross margin declined by 20 basis points. There are also risks ahead from the prospect of higher tariffs. If implemented, they could lead to declining margins should the company decide to absorb them. Alternatively, should they be passed on to consumers, they could lead to lower sales over the medium term.

In response to higher costs, the company is enacting measures to boost productivity. It may also benefit from a differentiated vertical model versus its industry peers, providing it with the opportunity to mitigate the potential impact of changing tariff policy. As part of this strategy, it has re-engineered its products, accelerated resourcing efforts and increased the self-manufactured share of its product range.

Outlook

Party City's evolving strategy is expected to improve its financial performance over the next year. Its earnings per share are forecasted to increase 10% in fiscal 2020. Since the stock has a price-earnings ratio of 6, this suggests it offers a wide margin of safety.

With additional investments in its digital channels as well as the customer experience, Party City could enjoy an increasingly competitive position versus peers. Improved analytics and the launch of its Kazzam marketplace may also enhance its growth prospects, while productivity efforts could offset cost increases and the risk of higher tariffs.

Having fallen heavily in the last year, the stock appears to offer good value for investors. It could deliver an impressive recovery.

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This article first appeared on GuruFocus.