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Why Party City Stock Was Getting Deflated Today

Jeremy Bowman, The Motley Fool

What happened

Shares of Party City (NYSE: PRTY) were getting left out of the party today after the festive retailer posted disappointing second-quarter results, offered weak guidance, and said it would sell all 65 of its Canadian stores to Canadian Tire. As a result, the stock closed down 18.3%.

So what

The news was especially disappointing for investors, as Party City had given the impression in its first quarter that it had turned the corner following issues with its helium supply, though that bugaboo came back to haunt it this time, as well.

Costumes in the window at a party store.

Comparable sales in the period fell 2.1% as overall revenue ticked up 0.5%, to $563.9 million, though that was well short of analyst expectations of $572.1 million. The company also blamed tariffs on China for the weak performance as the import taxes helped push down gross margin 390 basis points, to 37.1%. That led to a steep drop in net income, which fell from $39.2 million the year before to $20.2 million, or from $0.40 a share to $0.22. That result was also significantly worse than estimates at $0.36.

CEO James Harrison explained: "Overall, in the second quarter we continued to experience headwinds from direct and indirect impacts of the helium shortages and higher helium costs in many of our markets. Additionally, results were negatively impacted by the flow through of temporarily higher freight costs incurred in late 2018 and non-recurring inventory markdown costs associated with planned store closures."

Simultaneously, the company announced it would sell its Canadian subsidiary to Canadian Tire, though it signed a 10-year wholesale supply agreement with the tire chain -- meaning it will retain a lower-risk revenue stream from those stores. Terms were not disclosed, though the company said it would use the proceeds to pay down debt.

Also during the quarter, Party City said that it initiated sale and leaseback transactions on three stores, which generated proceeds of $128 million and a gain of $58.4 million. That's another sign the company is desperately trying to relieve its $1.9 billion debt burden, which accumulated from a series of acquisitions earlier in its history. Its interest expense in the quarter, $30.2 million, was greater than its adjusted net income.

Now what

Party City also lowered its guidance for the year. It now expects revenue of $2.4 billion-$2.45 billion, down from a previous range of $2.49 billion-$2.54 billion. The company sees comparable sales of flat to down 1%, compared to 1% growth previously, and management expects adjusted earnings per share of $1.26-$1.36, down from an earlier forecast of $1.61-$1.72. It also upped the number of expected store closures this year from 45 to 55.

Party City shares are dirt cheap according to conventional metrics, trading at a price-to-earnings ratio (P/E) of less than 4, based on this year's expected earnings. However, the company is clearly in retreat, closing down stores and selling off assets to pay down debt.

Given that and today's results, it's not surprising to see the stock tumbling.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com