Party City Corporation Business Information, Profile, and History

Company Perspectives:

With an unparalleled selection of party merchandise and everyday discounts of up to 50% off manufacturer's suggested retail pricing, Party City is the one-stop shopping place for all your party needs.

History of Party City Corporation

Party City Corporation is the top U.S. chain of superstores dedicated to a one-stop approach to retailing party goods. The Rockaway, New Jersey-based company is comprised of nearly 500 stores, almost half of which are company owned; the balance are operated by franchisees. Party City stores are mostly located in the eastern United States, but are also represented in a total of 37 states. In addition there are two stores in Portugal and five in both Puerto Rico and Spain. A typical Party City store ranges in size from 10,000 to 12,000 square feet and carries some 30,000 items. Although Halloween accounts for as much as one-quarter of yearly sales, Party City is continually promoting seasonal holidays, from traditional occasions such as New Year's Eve and the Fourth of July to modern marketing-driven events such as Father's Day and Super Bowl Sunday. Moreover, outlets offer a wide array of merchandise dedicated to birthday parties, bar mitzvahs, wedding and bridal showers, and baby showers. Products include costumes, gift wrap, balloons, greeting cards, personalized invitations, tableware, catering supplies, candy, and party favors. Party City also sells less obvious items, such as fog machines, which provide a popular special effect at Halloween.

First Store Opening: 1986

Party City was founded by Steve Mandell, the son of a retailer who grew up dreaming of opening his own store. He started out his business career as a manufacturer's sales representative. From 1972 until 1986 he served as president of The Marketing Group, an independent sales representative firm that handled such items as school supplies, stationery, and party goods. Recognizing that party goods was highly fragmented--with a lot of small mom-and-pop operations, a large number of retailers carrying limited supplies, and no big players dominating the market--Mandell decided to specialize in the business when he struck out on his own to realize his long-cherished goal of running his own retail operation. In 1986, after scraping together $125,000, he opened a 4,000-square-foot store in East Hanover, New Jersey, naming it Party City. The operation was immediately successful and within a year Mandell started planning for a second location. He also began to hear from people asking to franchise the Party City concept, and as a result Party City began its evolution into a national chain. After his first year in business Mandell also decided to concentrate on Halloween, so that in 1987 a quarter of his store was turned into a "Halloween Costume Warehouse." The move proved highly successful and led to the company's ongoing focus on the holiday, and the major impact that the month of October would have on the company's bottom line. Year-round, Party City stocked an inventory of Halloween costumes, if for no other reason than to make customers aware of the items for the next Halloween season.

The first Party City franchise store opened in 1989 and by 1990 Mandell also owned four Party City stores. At this point he incorporated the business as a franchising operation, with his stores forming the core of the chain. By the end of 1990, Party City outlets numbered 11; five more franchised stores were added in 1991, 16 in 1992, and another 26 in 1993, bringing the total to 58. The company's annual revenues in 1993 topped $2.4 million and net profits approached $235,000. During these first four years of operation, Mandell refined the Party City concept, including store design, product mix, choice of suppliers, and the implementation of systems. With a successful store model in hand, Mandell in late 1993 decided to de-emphasize franchising in favor of opening company-owned stores, which would generate greater returns for the corporation than it could receive on fees and royalties from franchised outlets, as well as allow Mandell to better control the destiny of Party City. While franchisees might maintain a tighter control on inventory, Mandell was insistent that company-owned units would be amply stocked with a wide range of merchandise. The first of these company-owned stores opened in Orlando, Florida, in January 1994, followed by six others later in the year. To help support this change in strategy, Mandell brought in two equity investors. Party City also opened 42 franchise stores (with one closing) in 1994, bringing the total number of units in the Party City chain to 99. Also in 1994 Mandell hired a chief financial officer: David Lauber, a seasoned executive with Mother's Stores, a 170-store chain specializing in maternity and children's clothing.

Going Public: 1996

Party City was clearly trending up, with sales in 1994 improving to $8.85 million and net profits exceeding $540,000. Strong growth continued in 1995, as nine more company-owned stores as well as 35 new franchised operations were added to the chain, and revenues for the year totaled $23.1 million with net profits approaching 1.3 million. Mandell now talked about a chain of 1,000 stores and made plans to fuel further expansion by taking the company public, a move welcomed by a number of investors who saw Party City as a possible "category killer"--the huge store phenomena spawned by Toys 'R' Us and emulated by other retailers including Office Depot and Home Depot. Like these other retailers, Party City had the potential to leverage its size to gain discounts from suppliers that would allow it to stock an even greater selection of goods at lower prices than those of its competitors. Moreover, party supplies in the United States had grown into a business worth more than $3 billion a year and was accelerating at a 10 percent annual clip. Children's birthday parties were a significant engine of growth for the category, as expressed in an 1998 Business Week overview of the party-goods superstore: "Boomer parents with fewer kids, longer working hours, and a hefty dose of parental guilt have spawned party mania. 'Parents are competing with other parents to have the most fabulous party,' says Mary Meehan, a partner with Minneapolis-based trend consultant Iconoculture.'" In addition, boomers, in an attempt to stay young, were spurring growth in adult parties, especially Halloween, which to Party City had become comparable to the Christmas season for most retailers. In March 1996 Party City completed its initial public offering, selling 1.7 million shares at $10 each, netting $15.1 million. In addition, Mandell and another top executive each sold 150,000 shares. By the end of 1996 the chain reached the 200 mark in units with the opening of 20 company-owned and 32 franchised stores. For the year, revenues were more than double the amount generated in 1995, growing to $48.5 million, and net profits almost tripled, reaching $3.76 million.

Party City continued its high-flying ways in 1997, opening 57 company-owned stores, as well as purchasing 24 outlets from franchisees or affiliates, including all of the stores owned by Mandell. Business was so strong that the company declared a 3-for-2 stock split at the end of the year. Annual revenues now topped $141.7 million and net profits totaled $7.7 million. Investor confidence in the company peaked in March 1998 as the price of its stock reached $35.25 per share. Then concerns set in when the company failed to meet third quarter projections. Within six months the share price dipped below $10 and analysts dropped coverage. Nevertheless, Mandell persevered. By the end of the year Party City had launched another 69 company-owned stores and acquired 22 units from franchisees, while another 15 franchise units were also opened. Mandell was now indicating that Party City planned to open another 100 company-owned stores in 1999 and that he was now thinking in terms of building a 1,500-store chain in the near future, but behind the scenes Party City was having trouble handling its rapid growth.

Mandell Stepping Down in 1999 Reorganization

A worsening situation came to a head in March 1999 when the company announced that it was unable to conduct a year-end inventory of its stores or complete its 1998 audit, and was therefore unable to comply with SEC filing regulations. Management blamed the failure on turnover in the finance department, which prevented the company from installing a new inventory tracking system made necessary by its rapid growth. Nevertheless, the delay placed Party City in technical default of covenants on loan agreements and caused an immediate drop in the price of its stock, which quickly lost almost half its value, a slide further exacerbated by talk of selling assets that emanated from inside Party City. The company also faced a number of class-action lawsuits from disgruntled shareholders who claimed the company had misrepresented or omitted information to artificially inflate the price of its stock. Some of the suits further charged that insiders unloaded shares before the March audit announcement. When the year-end audit was still not completed in May, the NASDAQ suspended trading of Party City stock, then delisted it in July. A restructuring effort was quickly mounted, starting with changes in the ranks of top management. In late May, CFO Lauber resigned, and less than three weeks later Mandell stepped down as chairman and CEO, although he retained a directorship and stayed on as a $50,000 per month consultant. This arrangement only lasted until September 1999 when Mandell resigned as a director and gave up his consulting contract as well. He remained, however, Party City's largest shareholder with a stake of more than 20 percent in the company.

Replacing Mandell as CEO on an interim basis was board member Jack Futterman, a former pharmacist who once headed Whelan's Drug Stores before becoming the CEO at Pathmark Stores Inc., where he was a pioneer in the drugstore/supermarket combination. Futterman managed to steer Party City clear of bankruptcy primarily because investors still believed in the chain's basic business model and vendors were willing to accommodate the company because the potential of large bulk sales to Party City remained highly desirable. In early July 1999, Party City had outstanding borrowings of $58.6 million against its $60 million line of credit and was in dire need of refinancing. One of its major shareholders, Sidney Craig (husband of Jenny Craig), whose sons were Party City franchisees, played a pivotal role in saving the company by involving Los Angeles-based investor Michael E. Tennenbaum, who was able to arrange a $37 million cash infusion in exchange for a sizeable stake in the business. Party City raised an additional $9.8 million by selling 18 stores to franchisees. At the end of these maneuvers, the chain had a market capitalization of just $100 million, 25 percent of what it was worth a year earlier, but at least it was in a position to stock up for the all-important upcoming Halloween season.

With its finances stabilized, Party City also launched a search for a new chief executive to replace 65-year-old Futterman. After three months the board settled on James Shea, who had previously served as president of the Lechters housewares chain, as well as holding executive positions with Eddie Bauer, May Department Stores, and Target Stores. Taking over in December 1999, Shea focused on establishing a technical infrastructure capable of supporting a major retail chain, investing heavily in point-of-sales and inventory systems. He also led an effort to redesign the stores, which according to research were too dark for customers. As a result, halogen lights replaced overhead fluorescent fixtures, and the merchandise was organized by categories rather than the previous supermarket-aisle approach. In a new circular orientation, seasonal merchandise moved to the center of the store, forcing customers to pass by everyday items, and children's and adults' party items were clearly separated. The changes gave rise to a new prototype for a Party City store, one with high-energy colors and vivid signage, and merchandise organized according to category zones such as Kid's Parties, Grown-up Parties, Party Basics, Costumes, and Cards, as well as an inviting area where balloons were inflated. In addition, the prototype featured a centrally located "power aisle" running the length of the store and offering holiday and seasonal fare. All of the other category zones were clearly visible from this center aisle.

Party City's recovery culminated in its return to the NASDAQ in the summer of 2001. As the company again achieved profitability the price of its stock rose accordingly. The company suffered a minor setback early in 2002 when a 28-store Canadian franchisee, Partyco Holdings, went out of business. Of more importance to the fortunes of the company was the acquisition of 13 rival Paper Warehouse stores in Seattle. Moreover, Party City was well positioned to take advantage of the misfortunes of its nearest rivals. Paper Warehouse with its 140 stores was delisted by the NASDAQ in June 2002, and 170-store Factory Card Outlet emerged from Chapter 11 bankruptcy protection only months earlier. All told in 2002, Party City posted revenues of $423.5 million, with net profits of $17.2 million. Because a soft economy and the looming threat of war with Iraq dampened customer enthusiasm, Party City lost some momentum in the early weeks of 2003, yet the company appeared well positioned in the coming years to greatly increase its 6 percent share in a large and still highly fragmented market.

Principal Subsidiaries: Party City Michigan, Inc.

Principal Competitors: Factory Card & Party Outlet Corp.; Hallmark Cards, Inc.; Paper Warehouse, Inc.

Chronology

• Key Dates:
• 1986: Steve Mandell opens first Party City store.
• 1990: Party City is incorporated.
• 1994: First company-owned store opens.
• 1996: Company goes public.
• 1999: Mandell resigns as CEO and chairman.
• 2001: Company resumes trading on the NASDAQ following delisting in July 1999.