Party City files for bankruptcy to restructure piling debt

Retailer Party City has filed for Chapter 11 bankruptcy protection, toppled by a heavy debt load as inflation hits consumers' wallets and dents sales.

The company said Wednesday it struck an agreement to reduce its debt and has already received support from a group holding more than 70% of its first lien debt to move forward with its bankruptcy plan, according to court papers and a filing with the U.S. Securities and Exchange Commission.

Party City has secured a $150 million bankruptcy loan and will seek approval from the U.S. Bankruptcy Court in the Southern District of Texas on Wednesday to use half of those funds to immediately pay wages and vendors, among other expenses.

The bankruptcy petition, filed late Tuesday, comes as consumers fall under pressure and the retailer's debt continues to weigh on the business. As of Sept. 30, the company said it had $1.67 billion in debt, with available liquidity of $122 million, made up of $30 million in cash and $92 million of revolver availability.

Party City's CEO Brad Weston noted during the company's last earnings call in November that a more challenging economic environment was keeping shoppers from spending as freely on celebrations.

To manage through the tougher period, Weston told investors that Party City would work to cut costs by $30 million. He said that would include reducing its corporate workforce by 19%.

CFO Todd Vogensen said its goal for $30 million in annual savings would help improve the company's financial position "as we navigate what could be a challenging macro environment in 2023."

In a declaration to the court, David Orlofsky of consulting firm AlixPartners, the company's chief restructuring officer, noted "continued and historic inflationary pressures and a declining stock price" led the company and its team of advisors to move forward with restructuring under bankruptcy so they can fix their balance sheet and avoid liquidation.

Besides mounting debt loads, the business has struggled to keep up with changing consumer behavior, especially with the rising dominance of e-commerce and big box retailers.

"They're competing against Walmart, and Target and Amazon and the dollar stores and grocery stores," said Joe Feldman, an analyst at Telsey Advisory Group who had covered Party City since its IPO in 2015. "They're trying to fix the car while it's still on the highway and everybody else is kind of speeding along around them."

Feldman dropped coverage of Party City on Dec. 30 due to concerns that the struggling company was going to file for bankruptcy.

Covid-era supply chain issues and heightened freight costs exaggerated the party store's issues, but business had already started slipping in 2019 as the company struggled to adapt to online shopping and faced a helium shortage that put a dent in their top-selling product, balloons.

"They weren't upgrading as quickly. The business was slower. You lay on a few external events and again, here we are. It's just been an erosion over the past couple of years," said Feldman.

Shares of Party City jumped 10% premarket Wednesday and were halted. As of Tuesday's close, shares traded for just 37 cents and the company's market value was about $42 million.

—CNBC's Melissa Repko contributed to this report.

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