Party City Restructures Debt in Chapter 11 Protection

Competition and high inflation rates led to the bankruptcy filing of Party City.

Party City filed for Chapter 11 bankruptcy in an effort to restructure its large debt load as inflation and supply chain concerns and the cutback on spending from consumers hurt its profit margin.

Known for its widely advertised Halloween decorations and other items used for various celebrations, Party City  (PRTY) - Get Free Report was forced to file for bankruptcy protection on Jan. 17, according to court documents.

The party supply retailer secured a $150 million bankruptcy loan and is seeking approvals today from the U.S. Bankruptcy Court in the Southern District of Texas.

If the court approves the use of the money, 50% of those funds will be used to pay wages and vendors.

Party City hired AlixPartners, who are turnaround and restructuring consultants, to serve as its financial adviser in November.

Party City Files Bankruptcy to Stay Afloat

The company decided in November that filing for Chapter 11 protection was the best strategy to keep Party City afloat as its market cap dwindled, according to its court filing.

Competition from big box and online retailers  such as Target, Walmart and Amazon ate into the company's profit margin as it focused on maintaining its 823 stores across the country. 

Revenue reached $2.35 billion by 2019, but Party City did not prioritize its ecommerce business.

Joe Feldman, an analyst at Telsey Advisory Group., stopped coverage of the company on Dec. 30 after analyzing the company since its 2015 IPO.

Party City faced competition everywhere, including grocery and dollar stores, he told CNBC.

Sales mostly stopped during the covid-19 pandemic as consumers stayed home and avoided celebrations that generated the most sales for the company such as Halloween, birthdays and other events.

Balloons were a mainstay of Party City and were popular among consumers, but the company faced a global helium shortage, cutting into its sales again.

The lack of upgrades and fewer sales were contributing factors to Party City's bankrupty, Feldman said.

Party City reported $1.67 billion in debt with available liquidity of $122 million including $30 million in cash and $92 million of revolver availability as of Sept. 30, 2022.

Sales at Party City were mixed -- they declined by 3.2% year-over-year but were up 11.2% versus 2019 as of Sept. 30, its latest reported quarter. 

Party City operates 823 stores and owns 770, according to court documents. It is seeking approval from the court to terminate 28 store leases and could close more stores.

“As we take this important step to put our business on stronger financial footing for the future, we are as committed as ever to inspiring joy by making it easy for our customers to create unforgettable memories,” Party City’s CEO Brad Weston said in a statement.

Party City Reaches Agreement With Lenders 

Party City said it had already reached an agreement to lower its debt. The plan received approval from a group owning over 70% of its first-lien debt, according to its bankruptcy court documents.

David Orlofsky of consulting firm AlixPartners, the company’s chief restructuring officer, said Party City chose to file for Chapter 11 because of "continued and historic inflationary pressures and a declining stock price” in an effort to avoid liquidation and obtain cash flow for its operations.

AlixPartners was hired to obtain new financing, but no creditors stepped up to the plate last last year. 

A slump in retail sales and rising interest rates impacted Party City's margins, said Jonathan Reid, a credit analyst for Fitch Rating. The company should emerge from bankruptcy protection with fewer retail stores, he added.

Shoppers had cut back on spending as they tightened their budgets last year, Weston said during a November earnings call. The company has slashed its budget by $30 million by laying off 19% of its corporate employees.