What happened

Shares of Party City Holdco Inc. (NYSE:PRTY) surged today on news that the company was buying back close to 20 million shares of common stock. Shareholders unsurprisingly celebrated the move, sending the stock up 12.5% as of 11:47 a.m. EST.

A group of young people toasting with champagne glasses, with a 2018 balloon in the background

Image source: Getty Images.

So what

Party City said it would acquire 19,841,694 shares for $242 million from the Advent-Party City Acquisition Limited Partnership, which constitutes all of Advent's shares in the company. Management said it would fund the share repurchase with borrowings from a revolving credit facility.

Party City CEO Jim Harrison explained the move: "We believe this transaction provides an opportunity to increase shareholder value and is immediately accretive to earnings per share." Party City's repurchase is equal to about a sixth of the total shares outstanding, and will therefore lift earnings per share by the same amount. That explains why the stock is up double digits today.

Now what

Today's gains follow an 8% decline two weeks ago, when the company announced a non-dilutive secondary offering as a major shareholder sold 10 million shares in the company; the stock has now regained those losses.

In the announcement, CEO Harrison noted the company's strong free cash flow, and the benefit from the tax reform bill that was just signed into law.

While the repurchase will help prop up the company's earnings per share, it does nothing to help the underlying business, which is struggling: Comparable sales slipped 2.6% in the most recent quarter, or 1.2% excluding the impact of hurricanes. Taking on debt to buy back stock has not always been a wise move for retailers, so investors should keep an eye on key metrics like comparable sales and gross margin.

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.