DEEP DIVE 

Party City’s Rise & Fall (And Rise Again)

Party City is THE largest party supply store in the country and it’s not even close. But, in 1999, they were overgrown and teetering on the verge of bankruptcy. This is the story of the rise and fall and rise (again) of Party City:

Party City’s Origins

Party City came about in 1986 when Sales Consultant Steve Mandell noticed something.

A few of his clients had contracted Mandell to help sell party-supply products on their behalf. And, while doing research, he realized that there were no major competitors in the industry. 

Most customers only had a few options: A retailer might have an aisle dedicated to a limited selection of party supplies. Or, there were also a dwindling number of boutique specialty stores that were fragmented across the country.

So, Mandell decided to act.

He scraped together $125K and opened a small store in East Hanover, New Jersey, and named it “Party City”. Mandell knew that Halloween costumes and decorations would be a major part of the business.

So when planning out the store’s configuration, he dedicated 1/4 of the store’s floorspace to Halloween items. The rest of the store would be dedicated to items for any kind of party.

Product – Market Fit

For a new specialty retailer, it can take years to gain meaningful traction. But, Party City was successful almost immediately. After the first couple years, he began franchising the idea to expand quickly across the country.

By 1993, Party City had 58 locations. Seeing the store’s popularity nationwide, Mandell decided to redirect the business’s focus from franchising to company-owned stores. However, he maintained the same aggressive rate of expansion.

Over the next 2 years, Party City added 90 new locations for a total of 148 stores!

During this expansionary period, the popularity of children’s parties and themed parties had also grown. All the while, not a single major competitor entered the market.

Party City was unstoppable. The company went public for the first time in 1995, issuing 1.7M shares at $10/share. They used the revenue to open 52 more locations.

Between 1995 and 1997, Party City 6X’d their revenue from $23.1M to $141.7M.

In 1998, the stock had peaked at $34.

But something was wrong…

Over Expansion

The company was expanding so quickly, they didn’t give themselves enough time to catch up. As a result, they failed to adjust/upgrade certain systems to account for the company’s rapid growth. One of those systems was their inventory management.

When it came time for them to produce their 1998 10K report for investors, they couldn’t come up with an accurate Net inventories number. They weren’t tracking inventory at every store, so they were forced to do the unthinkable and delayed the release of the report. 

Party City failed to produce an updated 10K for 4 months!

They were scrambling to track down accurate inventory numbers on nearly 300 locations across the country. In May of 1999, NASDAQ was forced to halt trading of the stock. By July, it was delisted from the exchange.

However it wasn’t the delisting that brought the company to the verge of bankruptcy  – it was the blowback from the missing inventory number. The delayed 10K report caused a huge selloff of Party City stock. The price plummeted, which triggered a default with their creditors.

When they finally filed the report, the damage had already been done. Party City was hit so hard by the market’s reaction that they were unable to deliver on their debt covenants. 

By July of 1999, the stock had fallen from $34 to $3.

Rebuilding

Then, previous investors began to pile on. They filed class-action lawsuits claiming that Party City had misreported their inventory in the quarterly before 1998. Eventually, the Board of Directors was forced to remove Steve Mandell and start fresh.

Mandell’s departure instilled confidence in the remaining investors. The board acted quickly to raise $10M selling company-owned stores to franchisees. They then raised another $37M through stock warrants and loans.

Party City fell quickly, but their comeback was even quicker. By the end of 1999 Party City was back on track:

• They fixed their inventory management system
• They were re-listed on the NASDAQ
• They ended the year with 393 locations

Since then, they’ve been bought out by private equity in 2005, then went public AGAIN in 2015 as $PRTY.

Today, Party City has nearly 900 locations in 46 states with a supply chain that has become almost entirely vertically integrated.

Happy Halloween!

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