What happened

Shares of Party City (PRTY) were diving today after the nation's biggest party supplies retailer posted a disappointing earnings report for the first quarter and slashed its guidance for the year. The report also added to fears that Party City could be forced into bankruptcy because of its heavy debt burden.

As of 1:15 p.m. ET, the stock was down 61.1%.

A group of masks on display.

Image source: Getty Images.

So what

The party-themed retailer said revenue increased 1.4% to $433 million, missing estimates at $435 million, while comparable sales were up 2.1%. That result also seemed disappointing as the country was still in the full throes of the pandemic in Q1 2021 with vaccines not yet released to the general public, so Party City missed out an opportunity to grow sales in the economic rebound.

Profitability numbers also weakened as gross margin declined 380 basis points to 31.9%, while operating expenses rose 260 basis points to 35.1% of sales as inflation and supply chain issues weighed on profitability. Adjusted per-share loss, meanwhile, expanded from $0.05 in the quarter a year ago to $0.22, which was worse than estimates at a per-share loss of $0.12. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) also plunged from $32.4 million to $4.6 million.

CEO Brad Weston acknowledged challenges from the omicron variant of the coronavirus early in the quarter, and said, "As expected, our bottom line results were impacted by elevated costs, including greater than anticipated freight and commodity cost pressures that ramped later in the quarter."

Now what

Looking ahead, Party City expects supply chain constraints and inflationary pressure to continue to pose challenges, and the company slashed its guidance for the year. It now sees revenue of $2.225 billion to $2.3 billion, representing an increase of 2.5% to 6%, but expects comparable sales between -1% and 2%.

It also called for full-year net income according to generally accepted accounting principles (GAAP) of $30 million to $48 million, down by roughly half from its previous guidance, but forecast adjusted EBITDA of $235 million to $265 million, a reflection of the interest payments on the $1.56 billion in debt it's carrying, more than $200 million of which is due in the next year.

Party City finished the quarter with just $32.6 million in cash, so it will need to roll that over that when it comes due, likely at a higher interest rate. Given that, the latest results seem to materially increase the probability of a bankruptcy.