Shares of the nation's leading retailer of party supplies, Party City (NASDAQ:PCTY), are recovering this morning following yesterday's earnings-induced hangover. There was little cause for celebration at the New-Jersey based company, as first-quarter losses widened to $3.1 million on sales that slumped nearly 4% to $98.6 million. The $0.18 loss was 50% steeper than last year's but still came in two cents ahead of estimates.

Party City operates around 250 stores (with a similar number managed by franchisees), each brimming with brand-name and private-label merchandise for any occasion. Whatever the occasion -- from St. Patrick's Day to July Fourth to the Super Bowl to wedding showers -- Party City is a one-stop shopping destination for any party-related paraphernalia. Halloween, though, is Party City's specialty, with costumes, decorations, and candy accounting for one-fifth of last year's sales.

Same-store sales at company-owned units dropped 5.2%, with franchisees reporting a 2.9% decrease in comps. Seasonal sales bounced 5% but were unable to offset an 8.7% drop in everyday merchandise (which typically represents 75% of first-quarter sales). The company is undergoing a product transition in this area, which management says will be evident in the second half of the year.

Party City's first quarter ended Oct. 2, but figures for the critical October period were also provided. Same-store sales registered a 3.1% monthly decline, with net revenues falling 2.3% to $105.9 million. Halloween sales apparently got off to a slow start, and when last-minute shoppers finally did pile into the stores, there were widespread reports of sold-out costumes.

I can attest to this, as I fought through a packed Party City store the day before Halloween to find a costume for my 2-year-old son. Many of the shelves were bare, but he still managed to spot a pirate sword, which he immediately brandished, chasing other children down the aisles. All swashbuckling aside, the inventory seemed too sparse for the crowd, and doubtless a few probably left for competitors such as Walgreen (NYSE:WAG), Target (NYSE:TGT), Wal-Mart (NYSE:WMT), or local costume shops.

Like a good host preparing for the next soiree, Party City is sprucing up its stores. It will likely continue to see a modest decline in comps over the next couple quarters as its merchandise is overhauled, but should emerge stronger after the process is complete. Americans love to throw parties and are quick to find any excuse to do so. But Party City might also give investors reason to smile, with a forward price-to-earnings ratio of 11, an enterprise value-to-free cash flow ratio of under 6, and a market cap ($240 million) that is less than half of last year's revenues, which were $516 million.

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Fool contributor Nathan Slaughter owns none of the companies mentioned.