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Dress Up As Donald Trump For Halloween And Buy Party City Stock

Dress Up As Donald Trump For Halloween And Buy Party City Stock

Summary

I interviewed the VP of Investor Relations at Party City.

Party City will not be negatively impacted by Amazon which helps make it a strong buy.

A 13 forward P/E multiple doesn’t factor in the potential growth from Mexico and Europe.

The Saturday Halloween will make this quarter’s numbers beat estimates.

Party City (NYSE:PRTY) is a stock I have highlighted and recently purchased at $ 16.30. It is one of the few retailers that won’t be negatively impacted by Amazon (NASDAQ:AMZN). If you look at other retailers in this sainted category, they have had superb stock performances. The automotive repair retailers such as O’Reilly Automotive (NASDAQ:ORLY) and AutoZone (NYSE:AZO) are up 60% and 43%, respectively, in the past 12 months.

These retailers aren’t hurt by Amazon, because customers value getting car parts that day because they have an urgent need to use their cars as soon as possible. Jewelry companies are also unaffected by Amazon because consumers like to learn about the products and get comfortable with this important purchase (possibly a wedding ring). Signet’s stock (NYSE:SIG), which I have recommended recently, is up 32% in the past 12 months.

Party City has a few counterpunches to Amazon to ensure a moat of protection. The first reason is the metallic balloons can’t be sold online because they would deflate in the mail. Second, consumers tend to wait until the last minute to get costumes and party goods. Third, consumers like to try on costumes before purchasing them. It’s part of the Halloween experience to go into stores and look at the merchandise. Fourth, consumers like to buy goods together in collections which are coordinated by Party City. Finally, it isn’t a zero-sum game with Amazon because Party City has wholesale customers that sell on Amazon.

I did a phone interview with Deborah Belevan, who is the VP of Investor Relations at Party City, to learn more about the company. She has been at Party City since March, which is right before it did its IPO. She has previously been the Manager of Investor Relations at Meridian Gold and the Director of Investor Relations at Interactive Brokers (NASDAQ:IBKR).

Because we are currently in Party City’s quite period, I couldn’t record the call, but I will review my takeaways from the discussion in this article. I will write the questions I asked and have her answers combined with my thoughts on the topic. These aren’t direct quotes, so when I write “I”, I’m referring to my own thoughts. When I write “Deborah said” I’m referring to her responses. It was a very helpful discussion probably because Party City is a recent IPO.

Question: I just want to clarify how your license agreements work. When you have a deal, say with the NFL, do you have exclusivity to sell their party goods items through your wholesale business? Or do you make money from a royalty if another manufacturer sells NFL party goods?

Party City pays a royalty fee for the rights to sell branded products through its retail channels. With these licenses, Party City can earn a profit on the wholesale and manufacturing business as well. For products such as the Minions, which it doesn’t have a license for, it can only make money through the retail channel. PRTY is still working on making an agreement to own the licenses of Warner Bros.’ items. Party City doesn’t own exclusive agreements to wholesale these items, but it does dominate the sales of these products because of its size. The company doesn’t sell much licensed product to dollar stores because they have such a low amount of SKUs. It does wholesale its balloons to dollar stores.

Question: How many store-within-a-store concepts are in Australia and Europe? How do you generate traffic to your European websites if there isn’t consumer awareness? I’m confused about how the strategy to use an online presence will be effective at driving awareness. How long will it take to gain consumer awareness internationally (Europe and Australia)? Which is the country you would be most likely to begin aggressively opening stores in outside of Canada, Mexico, and America?

I believe it can be a significant source of growth with the Mexican expansion coming in the next few years and the European and Australian expansions coming afterwards. With the forward P/E of 13, Party City isn’t given much credit for this potential international growth. I would describe it in as the exact opposite position of Netflix (NASDAQ:NFLEuropeX). For Netflix, investors are willing to price it as if the international expansion will go exactly according to plans. Party City has 100 store-in-store concepts in Australia and 1/3rd of that in Europe. These stores aren’t branded Party City stores. They are just party stores aimed to grow the category. The company earns a wholesale profit on these stores. Party Delight which is the European party website was purchased by Party City because it already had significant exposure. It only has 10,000-12,000 SKUs because the market is smaller. It additionally has the Amscan business in Europe which sells wholesale items.

The countries most like the U.S. which would be the first to have expansions are the U.K., Australia, and Germany in that order. The U.S. is unique in the sense the people have the mentality to plan expansive parties to “do it big.” I asked about FIFA being a potential way to crack this market and Deborah said it definitely was. I have been to Italy, Ireland, and France, and I think they plan just as many parties as Americans. They just need to understand the concept of buying napkins, plates, and cups to match in order to create a theme. These markets will provide growth in the next 10 years.

Question: Will sales per square foot be similar in the Mexican stores to existing stores outside of Mexico or will it be better because Hispanics give you a sales lift in America? What are the other party good stores in Mexico? Do they have any pop-up stores? Did you do a store in store concept in Mexico before striking this joint venture? Is there a unique set of products you will have in Mexico because of the difference in culture (e.g. pi?atas)?

With the expansion in Mexico, Party City didn’t do store-in-store because of its success in Hispanic communities in America. Mexico has a similar culture, with regards to parties, to America. Quincea?era celebrations allow for new SKUs to be introduced and boost sales in Mexico. The stores in Mexico are franchised, so PRTY makes a royalty profit on the joint venture. Learning about which FIFA products sell well in Mexico can help the European expansion.

Question: With the acquisition of ACIM, you are expanding your reach outside of the party goods category. Who are your competitors in this area? For example, if you increase your business selling to SeaWorld (NYSE:SEAS), who are you taking share from? Will the growth in this business come from new customers or expanding existing relationships?

Accurate Custom Injection Moldings allows for a higher percentage of wholesale goods to be manufactured by Party City and adds to the number of non-party goods customers it serves. When Party City goes after clients such as Buffalo Wild Wings (NASDAQ:BWLD), TGI Fridays, and Applebee’s, they are typically buying products from firms such a Sysco (NYSE:SYY). I think if Party City combines its offering of non-party items (like cups and utensils) along with party goods for events such as the Super Bowl, it can steal customers from Sysco and grow the B2B division.

Question: Is your relatively low percentage of online sales a testament to the fact that party goods and costumes need to be bought in-person? Does this cause you to be insulated from competition from Amazon? What is a bigger source of competition during a typical Halloween season Amazon or Spirit Halloween‘s 1,000 pop-up stores?

Of course, it would be difficult to get an investor relations person to admit who it felt was the bigger competitor. Therefore, I asked about the sales lead-up to Halloween. She said there was a huge burst in sales right before Halloween because customers wait until they have a party to go to before buying a costume. This leads me to believe Amazon isn’t a long-term killer of Halloween brick-and-mortar stores. I still think Party City should purchase Spirit Halloween to expand this business. Deborah mentioned the ability to try on costumes in stores and to return costumes up to 3 days before Halloween as a competitive advantage. She also mentioned the innovation which is the Halloween wall at Party City. The company displays all the top-selling costumes on a huge wall in the stores.

Question: Are you planning on experiencing any bump-up in sales due to the 2016 election?

Deborah said it was definitely a possibility. I think this election will have huge spending, so any company with a connection to it should see a boost in sales. I joked about the possibility of Donald Trump costumes doing well which can actually be a real possibility. There has been a huge influx of people ironically buying Donald Trump hats and New York’s top googled costume for Halloween was Donald Trump as you can see from the graph below. This can have an effect on sales if people decide to buy Trump costumes outside of Halloween just like how they bought “Frozen” costumes just to play dress up in 2014.

Question: Is a Monday Halloween in 2016 going to be better or worse than this year’s Saturday Halloween (in terms of what historically happens)?

2016 will have a Monday Halloween which will negatively affect numbers slightly as it changes adult habits. It doesn’t affect the children’s business as they always celebrate, no matter what day it is.

Question: Are you planning on using Periscope for marketing?

Deborah said the company wasn’t using Periscope yet. I explained the importance of it because of the visual nature of costumes. I hope the marketing team takes my advice and reads my article about the Periscope Summit because it could drive sales growth in 2016. It could really be successful when a new costume is released.

In conclusion, my interview with Party City’s VP of Investor Relations reinforced my bullishness on the stock. This year’s Halloween season should be great because of the Saturday Halloween. The stock trades at 13 times 2016 estimates, so low-to-mid same-store sales growth this quarter should send it higher. Any retailer that can avoid Amazon’s wrath will have an increasing stock price.

Article Source: seekingalpha.com
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