Party City Corporation Reports First Quarter Fiscal 2006 Results and Preliminary Net Sales for Halloween Season; During Halloween Season, Same-Store Net Sales Growth Continues and Total Net Sales Rise 5.5%

Business Wire, Nov 9, 2005

ROCKAWAY, N.J. -- Party City Corporation (Nasdaq: PCTY), America's largest party goods chain, today announced its operating results for the first fiscal quarter ended October 1, 2005, as compared to the prior fiscal year period ended October 2, 2004. The Company also reported preliminary net sales for the five-week period ended November 5, 2005, which includes the Halloween selling season.

First Quarter Results

Party City reported a net loss for the first quarter of fiscal 2006 of $5.6 million, or 32 cents per basic and diluted share. The Company, which typically reports a seasonal net loss in its first fiscal quarter, had a net loss of $3.1 million, or 18 cents per basic and diluted share, for the comparable period in the prior fiscal year.

The recent results were primarily attributed to: (i) a decrease in merchandise margin due to increased promotional activity and transitional costs of approximately $0.6 million (pre-tax) due to the ongoing shift to self-distribution; (ii) higher advertising expenses related to an expansion of both brand and product advertising in advance of the Halloween selling season; (iii) legal and professional fees of approximately $1.4 million (pre-tax) principally associated with the proposed merger of the Company, which was previously announced on September 27, 2005; and (iv) a non-cash expense of $0.5 million (pre-tax) related to the new accounting treatment for the expensing of stock options in accordance with Statement of Financial Accounting Standards No. 123(R).

As previously announced, same-store net sales for Company-owned stores increased 1.8% in the first quarter of fiscal 2006 as compared with the first quarter of fiscal 2005, reflecting an increase of 1.5% in same-store net sales of non-seasonal merchandise and a 2.0% rise in same-store net sales of seasonal merchandise. Same-store net sales for franchise stores also increased 1.8% over the same period. Total net sales for Company-owned stores were $100.6 million for the first quarter of fiscal 2006, increasing 2.0% as compared with $98.6 million in the first quarter of fiscal 2005. In addition to the growth in same-store net sales, the increase also reflected the initial sales from 10 temporary Halloween stores operated by the Company under the new Halloween Costume Warehouse brand, which opened late in the first quarter of fiscal 2006. Total chain-wide net sales (which include aggregate sales for Company-owned and franchise stores) were approximately $205.0 million for the first quarter of fiscal 2006, an increase of 1.4% compared with $202.3 million in the first quarter of fiscal 2005.

Gross profit declined approximately $0.7 million to $26.1 million, and expressed as a percentage of net sales, declined to 25.9% for the first quarter of fiscal 2006 from 27.1% in the same period of fiscal 2005. This was primarily due to the Company's decision to adopt a more promotional stance in its efforts to drive sales growth, as well as the transitional costs associated with the ongoing shift to self-distribution, partially offset by a decline in store occupancy expenses primarily due to lower depreciation.

Store operating and selling expenses increased $2.1 million to $26.4 million, and expressed as a percentage of net sales, rose to 26.2% for the first quarter of fiscal 2006 from 24.6% in the same period last fiscal year, primarily reflecting the Company's expanded advertising initiatives, as well as increased store productivity.

General and administrative expenses increased $1.4 million as compared to the year-ago period, to $11.1 million for the first quarter of fiscal 2006, primarily due to the merger-related costs and expensing of stock options, which amounted to $1.9 million in the aggregate. Expressed as a percentage of net sales, general and administrative expenses were 11.1% for the first quarter of fiscal 2006 and 9.9% in the same period last fiscal year. Excluding the acquisition-related costs and stock option expensing, general and administrative expenses declined 4.8% comparing the first quarter of fiscal 2006 and 2005.

Franchise profit contribution was relatively stable at $2.1 million for the first quarter of both fiscal 2006 and 2005.

Cash on hand at the end of the first quarter of fiscal 2006 was $10.6 million, including $4.8 million in advances outstanding under the Company's loan agreement primarily related to working capital requirements during the quarter. This compared with $18.6 million, with no loan advances outstanding, at the end of the first quarter of fiscal 2005.

The Company's inventory level was $108.0 million at October 1, 2005 compared to $81.7 million at October 2, 2004. The $26.3 million increase was largely due to: (i) an initiative to improve in-stock positions in Company-owned stores; (ii) inventory needed to support the self-distribution program for both Company-owned and franchise stores; (iii) the opening of 10 temporary Halloween Costume Warehouse stores; and (iv) the timing of seasonal merchandise as compared with prior years.