If you happened to be holding a long position (betting the price will increase) in Party City (NYSE: PRTY) on November 6, you would have experienced a loss of over 67 percent by the start of the next trading day. After reporting Quarter 3 2019 earnings figures before trading hours on November 7, the stock entered a massive freefall into the red. After the dust settled, PRTY bottomed out at 1.68 USD, a price roughly 86 percent below its 52-week high of 12.31 quoted on February 27, 2019. What information from the earnings report caused such a dramatic drop in Party City’s stock price?
Instead of reporting neutral profit numbers on the morning of November 7, investors were caught by surprise after Party City announced a gargantuan loss for the most recent fiscal quarter. Though sales figures did not miss by too wide of a margin (540.2 million vs. 551.1 million expected by analysts), actual earnings figures depicting profit (or loss) were atrocious. Going into the earnings report, Wall Street was expecting Party City to break even, or report earnings of 0.00 per share. Instead, the party supplies firm announced a quarterly loss of 28 cents per share. More importantly, this figure was on a non-GAAP basis, cause for real fear in the eyes of Party City’s investors.
GAAP, or Generally Accepted Accounting Principles, are accounting standards that aim to improve the clarity and consistency of financial statements in order to create a more transparent method of communication to company investors. GAAP figures are used very often on Wall Street due to their established reputation of constituting a holistic and honest approach to a given company’s financial performance over a period of time. Highlighting the dangers of non-GAAP figures, Investing Answers, an online financial dictionary, explains, “Non-GAAP earnings can also be deceptive when applied incorrectly. The measures are especially unsuitable for firms saddled with high debt loads or those that must frequently upgrade costly equipment. Furthermore, non-GAAP earnings can be used by companies with low net incomes in an effort to "window-dress" their profitability.”
This is what Party City attempted to do by using non-GAAP earnings figures as the primary method of showcasing the financial performance of the firm. Because Quarter 3 2019 was so awful, prioritizing GAAP earnings would have wreaked havoc. However, since all public companies in the United States are required to include GAAP figures somewhere in financial reports, Party City could not hide the true numbers.
On a GAAP basis, PRTY profit data was one hundred times worse than from Quarter 3 2018 (-3.02 per share in Q3 2019 vs. -0.03 per share in Q3 2018). The company anticipates to encounter even more destructive difficulties throughout the remainder of 2019. According to financial advice company, The Motley Fool, “Management believes this year will wrap up with sales of no more than 2.38 billion, a same-store sales decline of 2 to 3 percent, and a GAAP net loss of between 1.86-1.94 per share.” To put it lightly, such figures are—less than ideal.
On the qualitative side, Party City's management attributed much of the horrific numbers to helium shortages, as well as weak in-store Halloween sales. In addition, the recent data surrounding both helium and Halloween markets are not promising either. Helium, a light element used to inflate balloons, has seen its supply dwindle extensively over the past years. As a result, a massive shortage has occurred, leaving prices to soar, which in turn makes it more expensive for customers to have balloons filled at chains such as Party City.
Regarding Halloween sales, latest data indicates that both spending and participation for 2019 have gone down. According to ABC News Radio Online, Halloween spending has dropped from 9 billion to 8.8 billion, with only 172 million Americans participating, compared to last year’s 175 million. As you can see, key metrics that allow Party City’s business model to thrive are on the downtrend.
In order for Party City to remain relevant, not only will the firm’s helium suppliers need to discover cheaper ways to extract helium from the ground, but the company must also establish a broader selection of items to incentivize customers to purchase more goods. Otherwise, the party will come to an end sooner rather than later.