Festive spirits are nowhere to be found at Party City
Comparable sales for the third quarter, which ended April 2, were off 7.1% in company stores and 7.4% in franchised locations. It's certainly not the kind of sales performance that is likely to make other party goods retailers like Wal-Mart
The inventory growth is at least as frightening as the sales and margin trends, at a whopping $26 million, or 42% higher than the same period the previous year. This came as chain-wide sales dropped 6.4%, a troubling divergence.
The company attributed the bulk of this inventory bloat to its new distribution network and improved in-stock positions, but any savvy retail investor should take this information with a grain of salt. Let me see now... sales down, markdowns up, inventory way up: Does that give us any inkling of what the next quarter might bring? I'll give you a hint. In its previous earnings statement in February, Party City forecast an improvement in margins and profitability by the fourth quarter, but today, management declined to offer any guidance.
Party City has had a hangover for a while now. Last August, the chief financial officer stepped down. At the end of March, the CEO left for greener pastures. Shortly after that, the company hired Credit Suisse First Boston to explore strategic alternatives. On the earnings call today, it was confirmed that there is no search underway for a new chief executive; instead, a special committee consisting of the board of directors and several key officers is running the company.
Loyal readers of The Motley Fool will recall Rick Munarriz mulling over strategic alternatives for Party City back in March; it seems there may be some interested suitors. That's the only reason I can offer for the share value holding in the mid-teens, although the company is being careful to say that "there can be no assurance that the consideration of various strategic alternatives by the special committee will lead to any action by Party City, including a definitive proposal or agreement with respect to a strategic combination on terms that the board of directors believes will be in the best interest of shareholders." In other words, you might wait a tad before taking the plunge and buying Party City shares.
Fool contributor Timothy M. Otte has been known to dress up for a clambake. He owns shares in Wal-Mart, but none of the other companies mentioned in this article.