Why is Party City closing profitable stores?
Party City has announced plans to close 45 stores. A surprise to some is that all the stores are four-wall profitable — some “extremely profitable” — and yet management says it is taking the action to improve profitability.
The chain typically closes between 10 and 15 stores each year. The announced closures represent about five percent of Party City’s 870 stores in North America.
On the retailer’s first-quarter conference call, Jim Harrison, CEO, said that when conducting its annual store portfolio review, management shifted the focus to market level performance and productivity rather than isolated stores. Due to the retailer’s vertical model, most stores are profitable independently on a four-wall basis.
He noted that Party City has consolidated the party retailing industry since 2007 with acquisitions of Factory Card & Party, iParty and other independents. With the acquired banners re-branded to Party City, the analysis deemed that many markets are now over-saturated with party stores.
Mr. Harrison expects to better maximize inventories with the closures and a substantial portion of the closed store sales will transfer to nearby locations. “This decision will allow us to better leverage our operating spend in these markets, which would be accretive to adjusted EBITDA on a full year basis,” he said.
The market optimization also creates “capital flexibility” for selective new openings in under-penetrated markets in the future. Party City sees the opportunity to open more than 200 stores in the U.S. and Canada. A pilot of slightly smaller stores (7,000 to 10,000 square feet) may offer more opportunities.
Probed by analysts, Mr. Harrison insisted that “nothing changed in the markets per se” because online has increased its share of retail sales. The closing came despite 40 percent of Party City’s online orders coming from BOPIS. He stressed the move “really is driven by our overall focus on capital allocation, debt reduction and moving our leverage ratio toward our target of three times.”
Party City’s first-quarter earnings were in line with expectations, but sales were below targets as a continued global helium shortage is impacting its balloon business.
- Party City Announces First Quarter 2019 Financial Results And Updates Helium Availability Status – Party City
- Party City Holdco Inc. Q1 2019 Earnings Call Transcript – The Motley Fool
DISCUSSION QUESTIONS: Do you see more benefits than drawbacks in Party City’s decision to evaluate the health of leases by market rather than individual store performance? What role should any online opportunities or competitive pressures play in such real estate decisions?