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Party City files for bankruptcy with plans to restructure mounting debts

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The Party City in Clifton, NJ on January 16, 2023.

CNBC | Mike Calia

Retailer party city filed for Chapter 11 bankruptcy protection in a bid to restructure its heavy debt load and keep its doors open after supply chain problems, rising inflation and a consumer slowdown reduced sales.

The longtime retailer, best known for its Halloween costumes and party decorations, has been hurt by historic inflation and a dwindling market value. It decided to file for bankruptcy in November after financial advisers determined it was the best way to save the business, the retailer wrote in a court filing on Wednesday.

Party City’s business has been growing and reached approximately $2.35 billion in revenue in 2019. But for years, it has faced increasing competition from e-commerce brands and large retailers. And instead of expanding its digital business, the company burned through cash by keeping about 800 stores open across the country.

“They are competing against Walmart, Target, Amazon and the dollar stores and supermarkets,” said Joe Feldman, an analyst at Telsey Advisory Group who has covered Party City since its 2015 IPO. bankruptcy loomed.

During the Covid pandemic, sales ground to a halt as stores across the country were forced to close and consumers stopped celebrating the typical events they relied on Party City to host – birthday parties, graduations and Halloween.

As the world began to return to normality, Party City was hit once again by supply chain issues and a helium shortage, which crippled one of its best-selling products: balloons.

“They weren’t catching up as quickly. Business was slower. You were leaning on some external events and, again, here we are. There’s just been an erosion in the last couple of years,” Feldman said.

The bankruptcy filing, filed late on Tuesday, comes as consumers cut back on spending and retailer debt continues to weigh on the business. As of Sept. 30, the company reported having $1.67 billion in debt, with cash available of $122 million.

While bankruptcy puts a host of new pressures on the retailer, the party isn’t over yet. Comparable store sales for Party City’s most recently reported quarter, ended Sept. 30, were down 3.2% year-over-year but up 11.2% from 2019.

The company is using the bankruptcy as an opportunity to restructure its debt and keep fewer stores open.

“As we take this important step to put our business on stronger financial footing for the future, we are more committed than ever to inspiring joy by making it easier for our customers to create unforgettable memories,” said Party City CEO Brad Weston, in a Tuesday press release.

“We appreciate the commitment of our team members and the continued support of our partners as we further enhance our position as the one-stop shop for celebrating life’s special moments.”

Claims for Relief, Secured Bankruptcy Loan

Party City said on Wednesday it had struck a deal to reduce its debt and has already received support from a group that owns more than 70% of its first-evidence debt to move forward with its bankruptcy plan, according to court documents. and a filing with the US Securities and Exchange Commission.

Party City has secured a $150 million bankruptcy loan and will seek approval on Wednesday from the US Bankruptcy Court for the Southern District of Texas to use half of those funds to immediately pay salaries and vendors, among other expenses.

In the court filings, David Orlofsky of consulting firm AlixPartners, the company’s director of restructuring, noted that “ongoing and historical inflationary pressures and falling share prices” have led the company and its team of advisers to move forward with the restructuring under bankruptcy. The move will allow Party City to fix its balance sheet and avoid liquidation.

As the company emerged from a pandemic slump in sales, it had a new problem to contend with: a liquidity squeeze and a slowdown in consumer spending. He hired retail consulting firm AlixPartners to explore his options, most notably securing new funding to operate the business, but when they were unable to find new lenders in late 2022, they focused on preparing a bankruptcy filing and securing the support of investors. creditors.

During the retailer’s last earnings call in November, Weston said a more challenging economic environment was preventing shoppers from spending freely on celebrations. As a result, he told investors the company intended to cut costs by $30 million, which included reducing its corporate workforce by 19%.

As of Wednesday, the company had 16,330 full-time and part-time employees and 240 temporary workers, Party City noted in court filings.

Jonathan Reid, a credit analyst at Fitch Ratings, said Party City filed for bankruptcy because it saw two challenges ahead: rising interest rates and the threat of slower retail sales. However, unlike other retailers who have filed for bankruptcy, he noted that their business remains stable and anticipates that Party City will emerge from bankruptcy a stronger company with a smaller store footprint.

Party City operates approximately 823 stores, of which it owns 770, according to court documents. As part of the bankruptcy, Party City is seeking approval to cancel leases on 28 stores. It is also considering closing other stores.

Shares in Party City jumped 10% in premarket trading on Wednesday and remained flat at midday. As of Tuesday’s close, the shares traded for just 37 cents and the company’s market value was around $42 million.