Shares of Party City Holdco Inc. /zigman2/quotes/209141609/composite PRTY -3.52% soared 34.6% in Monday trading after the retailer swung to a third-quarter profit, but GlobalData Retail warns that 2020 could leave lasting damage on the company’s financials.
Net income totaled $239.7 million, or $2.24 per share, after a loss of $281.5 million, or $3.02 per share, last year. Adjusted EPS of 10 cents was well ahead of the FactSet consensus for a 32-cents-per-share loss.
Revenue of $533.8 million was down from $540.2 million last year, but beat the FactSet consensus for $489.3 million. Comparable sales growth of 8.3% was attributed to strength in the company’s core categories, including balloons, birthdays, and entertaining.
Digital sales in North America, which includes services like buy-online-pickup-in-store, were up 36%.
“The total sales decline for the month of October reflects the strategic reduction in Party City and Halloween City stores versus the prior year period,” said Brad Weston, Party City’s chief executive, on the company’s earnings call, according to a FactSet transcript.
“As mentioned on our last call, we planned conservatively for Halloween this year, given the truly extraordinary environment as a result of the pandemic and election uncertainty,” Weston said. “We positioned ourselves for a decline from an inventory, assortment, and expense standpoint as well as from a Halloween City pop-up store perspective.”
Weston also talked about the changes that the company has made to improve the in-store experience, such as a pilot for a new layout that makes stores easier to navigate and a new balloon shop.
Despite all of the good news, GlobalData Retail says there could be bad news down the line. Managing Director Neil Saunders notes the $765.3 million operating loss for the first nine months of the year.
“In our view, Party City will not be able to make this up as it rounds out the year, which means 2020 will leave a permanent financial scar that will weaken the company’s balance sheet moving forward,” he wrote.
Saunders says families have spent money to make life at home during the pandemic a little more festive at a time when going out and gathering with family and friends is curtailed. As long as stores remain open, it’s “unlikely” the company will sink the way it did in the second quarter.
Coronavirus cases, however, are on the rise , with the U.S. averaging more than 111,000 cases per day over the past week.
Party City is in a better operational position than it had been previously due to its digital investments Saunders said, but the future is uncertain.
“Looking ahead, Party City will not get back on track until the pandemic is over,” Saunders said.
“There is as also a downside risk that as virus cases spike another more serious lockdown could be on the horizon. This could damage sales,” Saunders said.
Party City stock has also rallied 34.6% for the year to date while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.53% has gained 9.9% for the period.