Party chains spooked by soft Halloween sales

DSN Retailing Today, Nov 8, 2004

The party supplies category and several leading specialty chains are demonstrating resiliency, despite the sobering impact of the war in Iraq and election year political squabbling about job losses and whether or not the country is safe.

Although the party category tends to be somewhat "recession-proof," it appears the Nov. 2 presidential election did have an impact on the national celebratory mood and Halloween in particular. In early October, Party City revised downward expectations for same-store sales at its 508 company-owned and franchised stores to a low to mid single-digit decrease afar earlier anticipating a low single-digit increase.

In the party channel, Halloween is the equivalent of Christmas for most other retailers so this year's expectations of disappointing sales were made even more so because Halloween fell on a Sunday, giving revelers Friday and Saturday nights to don costumes and act silly. In the case of Party City, the nation's largest party chain, approximately 20% of its annual sales of $1 billion are related to Halloween.

For the nation's second-largest party retail chain, Party America, Halloween also is important, and ceo Marty Allen will be glad when the election is over.

"Our Halloween sales have been a t little soft," Allen told DSN Retailing Today the week prior to Halloween, attributing the softness to the nation's focus on the election.

Allen said he expected sales to surge as Oct. 31 grew closer, as is typically the case with Halloween and other seasonal categories.

"It is almost like customers are playing a game of chicken with retailers, waiting to see when merchandise will be marked down," Allen said.

While external factors played a role in consumer demand for Halloween merchandise this year, internal factors at both companies will be influencing their sales going forward. In the case of Party City, it is in the midst of a merchandising, marketing and operational transformation that has led to substantial gross margin and profitability improvements at the expense of top-line growth.

According to comments made by ceo Nancy Pedot at a recent investor conference, Party City plans major shifts in its assortment during the coming year with stronger merchandise coordination and an increased lineup of exclusive items. Merchandising will also change, as Party City resets stores with more aisle cut-throughs adding endcap display space, a cleaner in-store graphics package and an advertising circular that will be less price-and item-driven.

Circulars will deliver a more comprehensive message about product and ways to put together a great party. New instore technology has also led to a dramatic reduction in transaction time.

"We are also working on a design for a new prototype store that we will use to format five to seven stores in 2005," Pedot said.

Major developments are also under way at Party America. This company was relatively unknown until the late 1990s, when it came out of bankruptcy under a new management team led by Allen with financial backing from Gordon Brothers. Following its 1998 emergence from bankruptcy, the company self-funded organic growth for several years then made a size able acquisition in 2003 when it bought 100 stores operated by Paper Warehouse.

More recently, the company completed an even-larger acquisition and bought 170 stores from Party Concepts. The combination of those two deals has transformed Party America into the nation's second-largest party retailer behind Party City.

"We are continuing to aggressively open new stores, expand our franchise organization and will look at future acquisitions or mergers where they make sense," Allen said.

Integration of the acquired stores will begin in early January with a major upgrade of store system. Plans call for the installation of new point-of-sale systems, in all stores, that will allow for improved collection of transaction information.

The acquisition won't affect Party America's organic growth plans for 2005, when six to eight new stores are planned, according to Allen. However, in 2006 and beyond, new-store growth could be affected as the company focuses on driving productivity at existing stores and acquired units.

The party supplies business is divided into two main components. There is what's known as the everyday aspect which accounts for anywhere from 60% to 80% of sales and involves products for birthdays, anniversaries, weddings and baby showers. Then there is the seasonal aspect, the best example of which is Halloween, but also includes Christmas, graduation and other holidays.

"Every retailer deals with inventory management issues, but our seasonality makes it 10 times harder," Allen said. "We are the only retailers that deal with virtually every season."