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Two Words on Party City: Keep Buying

- By Jonathan Poland

In October, I explored Party City Holdco Inc. (PRTY) while the stock was only slightly higher than it is today. Of course, the market then sold off and by mid-December, Party City's stock had dropped below $10 for the first time since 2016, spurred by soft sales and lowered guidance.


The retailer cut its full-year revenue outlook from between $2.4 billion and $2.9 billion down to $2.43 billion to $2.46 billion and full-year earnings per share from between $1.76 and $1.87 down to $1.60 to $1.65.

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Party City sells party goods through retail stores across North America, Europe and Australia as well as online at partycity.com. It generates the majority of its profit by manufacturing and wholesaling its own party goods, which are sold at its stores and through other retailers and distributors. This has helped it keep costs low and revenue on an upward trend, a trend that is still in place despite its recent guidance.

Financial performance

"Keep the party going" is the motto of the modern day American. There is a holiday almost every week of the year now. People are born, have birthdays and anniversaries and celebrate national dog, popcorn, kiss, groundhog or pizza days all year long. There are also weekly and month-long celebrations, like Black History Month in February. As a result, Party City will remain in business for a long time.

Tariffs may be a huge concern for other companies, but even if a 25% tariff on Chinese manufactured goods is implemented, it would only translate to a $12 million additional expense to Party City, something it can easily absorb. The company has been finding cheap labor outside of China for years.

With the stock trading at just 7 times forward earnings, 1.1 times book and 0.5 times sales, having Party City in the portfolio still makes sense. The risks are still in the the financial plans. The company has been buying back many of its stores, raising the long-term debt, which currently sits at $1.6 billion. If successful, buying back franchised stores will help the company control the quality of service, further improving sales and profits.

Considering its potential longevity, a price-earnings ratio of 15 for Party City would be more than fair. At that level, if the company reports earnings of $1.65 in 2018, look for the stock to rebound even further. Previously, expectations were for $2 per share in 2019. But even if those are lowered to around $1.85, shares would price above $27 per share at 15 times.

Disclosure: I am not long or short PRTY.

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This article first appeared on GuruFocus.