Elmsford, N.Y.-based Party City Holdco Inc. (PRTY) is a party goods manufacturer that operates through retail and wholesale segments. Its shares have jumped 66.9% in price over the past three months, and 503.9% over the past year. PRTY’s stellar price performance can be attributed to a massive rebound in sales with celebrations and social festivities gradually returning to their pre-pandemic level.

PRTY has gained 247% over the past nine months and 51.2% year-to-date. The stock is currently trading 15.9% below its 52-week high of $11.06, which it hit on June 9.

While PRTY’s strong sales growth across all core categories bodes well for the stock, its store closures could be headwind. In addition, the company’s high debt levels could  make investors uncomfortable. Although the stock has been maintaining strong momentum, the company’s divestiture of a significant portion of its international retail operations could be a concern.

Here is what we think could influence PRTY’s performance in the near term:

Uncertainty Surrounding Business Operations

As of March 31, 2021, PRTY’s total number of corporate Party City stores stood at 751, compared to 757 in the first quarter of 2020. Since the company’s operations are heavily dependent on social events, any reinstated restrictions related to the resurgence of COVID-19 cases could negatively impact its business.

Although the company’s total revenues rose 3.1% on a reported basis year-over-year to $426.8 million in the first quarter, ended March 31, 2021, its net third-party wholesale revenues declined 15.8% on a reported basis, primarily because of its divestiture of a significant portion of its international retail business. Also, PRTY’s principal balance of debt net of cash stood at $1.3 billion 0 million during this period.

Positive Development

In March, PRTY selected GEP’s GEP SMART, a leading procurement software platform, to better analyze and identify the company’s saving and spending opportunities across all categories. This platform should  enable the company to drive efficiency, achieve maximum ROI and thereby, drive greater value to the organization.

Mixed Growth Prospects

A $0.16 consensus EPS estimate for the current quarter, ending June 2021, indicates a 124.2% rise year-over-year. However, PRTY’s EPS is expected to decline 70% in the next quarter, ending September 2021. Its EPS is estimated to increase 226.5% in 2021 and 33.9% next year. Analysts expect the company’ revenues to rise 11.9% in the current year and 2.3% next year. But PRTY’s revenue is expected to decline 7% year-over-year to $496.5 million in the next quarter.

Consensus Price Target Indicates Potential Downside

Currently trading at $9.30, analysts expect the stock to hit $3.5 in the near term, indicating a 62.4% potential decline. Their price targets range from a low of $3 to a high of $4.

POWR Ratings Reflect Uncertainty

PRTY has an overall C rating, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. PRTY has a C grade for Quality and Growth. The company’s 18.1% gross profit margin, which is 47.8% lower than the 34.6% industry average, is consistent with its  Quality grade. Also, PRTY’s mixed earnings and revenue growth estimates justify its Growth grade.

It has an A grade for Momentum, given its 503.9% price return over the past year.

In addition to the grades we’ve highlighted, one can check out additional PRTY ratings for Sentiment, Stability, and Value here. The stock is ranked #28 of 38 stocks in the B-rated Specialty Retailers industry. For other top stocks in this industry, make sure to click here.

Bottom Line

Although the bullish sentiment around  PRTY’s better than expected top- and bottom- line performance and sales rebound in the last reported quarter has fueled the  spike in its stock price, given the company’s high debt load and store closures caused by the pandemic, we think its long-term prospects look uncertain. So, we think investors should wait until the company fares better fundamentally before buying the stock.

PRTY shares were unchanged in premarket trading Wednesday. Year-to-date, PRTY has gained 51.22%, versus a 15.04% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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