By Neil Saunders
Party City closes the first half of its fiscal year on an upbeat note. Total revenues for the quarter are up, with growth showing a slight sequential improvement on the prior period. The bottom line is also looking more robust following last quarter’s acquisition fueled loss; here net income is up by 10.9% over 2016.
The addition of 59 new stores provides a fillip to growth on the retail side where sales rose by 6.3%. Additions like Granmark will also continue to help Party City push into lucrative Latin American markets.
That said, much of the growth, in particular on the sales side, has been driven by recent acquisitions and the drive to internationalize the business. The addition of 59 new stores, through both a process of acquiring previously franchised operations and new openings, also provided a fillip to growth on the retail side where sales rose by 6.3%.
In our view, these trends have further to run. New stores will boost growth for the rest of this fiscal year. Meanwhile, additions like Granmark will continue to help Party City push into lucrative Latin American markets. As such, we are broadly confident about the near-term outlook for the company.
That said, the soft comparable sales numbers are a concern. Although Party City was up against some reasonably tough prior year comparatives, a growth rate of 0.1% is anemic and highlights the fact the company has made no real retail progress since last year. It also reverses the modest rise of 1.7% in the prior quarter.
While we believe same-store numbers will strengthen as the company comes up against easier comparatives, we are concerned that the weakness is symptomatic of a much more competitive retail environment, exacerbated by some unfavorable customer traffic trends in locations where Party City trades.
Party City is working hard to connect with consumers, especially in the digital space. Kazzam, the online party planning service it is developing, provides an excellent showcase. Punchbowl – the online greetings and invitation platform – provides another opportunity to create customer connections and potential sales.
Regarding locations, although most Party City shops are outside of failing malls, there is no doubt that some of the strip malls and centers they rely on for trade have seen shopper footfall wane. This has taken the edge off sales, especially those driven by casual shoppers who buy one or two things when passing the stores. Fortunately for Party City, a lot of its trade comes from destination shoppers who make a deliberate trip to stores to fulfill their party needs. As such, we do not see this issue as a major downside, but more of a lost opportunity.
The other challenge — the threat from competitors — is far more serious. Although many generalist players like Target and Walmart do not have the depth and specialism of Party City, they have become adept at catering for the major calendar occasions. Our data shows the number of consumers using such stores for their party needs has increased and shows no signs of slowing down. The low prices and convenience of the generalists are key drivers of their trade and are the dynamics with which Party City needs to compete.
Despite these challenges, we are encouraged that Party City is working hard to connect with consumers, especially in the digital space. Kazzam, the online party planning service it is developing, provides an excellent showcase for its products. The recent investment in Punchbowl — the online greetings and invitation platform — provides another opportunity to create customer connections and potential sales.
In our view, Party City is doing the right things to stimulate growth and has a solid plan for the future.
Neil Saunders is managing director of GlobalData Retail.