Having a Ball with Party City


By Gene Marcial How many retailers go out of their way to put up stores anywhere near those of behemoth Wal-Mart? Not many -- and particuarly not stores selling some of the same stuff Wal-Mart also carries. The mass merchandiser almost always smothers the competition wherever it sets up shop, prompting many smaller outfits to either close or move to locations farthest from any Wal-Mart.

But not Party City (PCTY), America's largest party-goods chain store, with 200 company-owned outlets and 244 franchised stores in 35 states. "We love to be near a Wal-Mart or a Target," says Party City CEO Jim Shea, who says the company is always on the lookout for locations that are close to a Wal-Mart because "the goods that we sell -- party stuff and the like -- are much more varied in style and assortment than what Wal-Mart has." The giant retailer attracts droves of customers, "including the types that go for our party stuff," adds Shea.

The closer Party City's stores are to a Wal-Mart or a Target store, "the more chances we have in attracting some of their customers," says Shea. The party-goods market is estimated at $12 billion, including crossover categories, such as candy and sweets.

"UNBELIEVABLE." Although it has virtually no following among analysts on Wall Street, Party City's stock has been an astonishing winner: It has more than quadrupled in a year -- zooming up from $3.35 a share in mid-April of 2001, to 14 on Apr. 15, 2002. The company has "unbelievable same-store comparative sales -- up about 13.5% for company-owned stores and 9.7% for franchised stores," notes Gary Giblen, director of research at C.L. King & Associates, an independent research boutique in Albany, N.Y. On Apr. 15, he raised his earnings and sales forecasts, as well as his price target on the stock.

For the year ending June 30, 2002, Giblen lifted his estimate to 74 cents a share from 72 cents, and his fiscal 2003 numbers to 96 cents from 92. Party City earned 56 cents per share in fiscal 2001. Giblen also boosted his revenue estimates for 2002, to $433.2 million from $431 million, but stayed with his 2003 sales estimate of $509.2 million. In 2001, sales totaled $395.9 million. Giblen, who rates the stock a strong buy, also increased his price target, to 20 from 18 a share.

The increased estimates reflect Party City's recent acquisition of 13 stores in Seattle from Paper Warehouse. The purchase, says Giblen, will greatly enhance Party City's sales in that growing market, where the company had only two stores.

"COCOONING" PLAY. Party City offer a wide selection of merchandise for celebratory occasions, such as birthdays and anniversaries, as well as for seasonal events, including the highly popular Halloween and Thanksgiving holidays. The company is a play on "cocooning" -- or home-focused lifestyle -- which started even before September 11, according to Giblen. Dollar volumes in party-goods sales have been growing at 4% to 5% a year, he notes -- and are accelerating, "thanks to the homeward-bound ethos that has grown even more pronounced after the September 11 attacks."

Party City, says Giblen, is "by far the largest and most sophisticated player -- and still has ample room to expand its 6% share of the vast market." He adds that it's also by far the cheapest home-oriented retailer compared with its peers. Based on 2003 earnings estimates, Party City trades at 14.5 times earnings, vs. 17 to 41 for other companies in the industry, including Michael Stores (MIK), Bed Bath & Beyond (BBBY), and Pier One Imports (PIR).

In terms of sales per customer, Party City may also be the cheapest, with the average being just $20. So, it's a good thing Party City plops its stores in high-traffic areas, like in Wal-Mart's neighborhood. Marcial is BusinessWeek's Inside Wall Street columnist


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