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Strategies & Market Trends : Pancho Villa's Short Analysis File -- Ignore unavailable to you. Want to Upgrade?

To: Pancho Villa who wrote (4)	9/25/1998 4:29:00 PM
From: Pancho Villa	Read Replies (1) \| Respond to of 287

PCTY: When will the party stop? Another puppy heade for $5. My post last december at Roger's is still 100% on the money (towards the end). Herb did an A+ job recently: Herb on TheStreet: Why Nobody's Celebrating at Party City By Herb Greenberg Senior Columnist 8/24/98 8:47 AM ET Is the fun over for Party City (PCTY:Nasdaq)? Seems that way. Going into Friday its stock had already lost nearly half its value over the past month, the result of earnings that were nothing to celebrate. But by midday Friday its stock lost another 32% before recovering to post a loss of just 7% on speculation the company was guiding analysts to lower their estimates. CFO David Lauber was on a plane and couldn't be reached, and a spokesman said Party City, as a matter of policy, doesn't comment on speculation. What's clear is that the good times have clearly stopped rolling for the 308-store party goods chain. One look at its balance sheet shows why: Debt, crucial to the company's ambitious expansion plans, has nearly tripled. What's more, inventories continue to rise. That's troubling for a company that says most of its business is done between Halloween and Christmas. Does the rising inventory merely reflect the company's fast growth? Perhaps, but with 20,000 different items in each store, it could also represent excess merchandise, in which case the company could be forced to dump the unsold goods at or below cost. Such an event, according to the company's financials, "could have an adverse effect" on business. A boilerplate warning? Sure, but with a company that has as many possible pitfalls as Party City, boilerplates can't be taken lightly. Neither can the prices the company has been paying to buy back its franchises, including those owned by several of its execs. Most of the prices have tended to be at prices equal to around half their sales. By contract, Party City's stock, even after its recent slide, trades at slightly more than one time sales. If biz is so good, why are the franchisees selling -- and why are they selling at fire-sale prices? And if biz is so good, why is the company putting a lower value on the stores, when it buys them, than Wall Street is putting on the stores through the purchase of its stock? Let's just say someone either paid too much (for the stock) or too little (for the stores). Finally, immediately prior to joining Party City, CFO Lauber was CFO of Mother's Stores, a maternity chain that had been acquired in October 1993. After the acquisition, Lauber stayed on as a consultant. In January 1994 Mother's filed for bankruptcy reorganization. If he calls to discuss any of these issues, his comments will be immediately posted. Short Positions Autodesk anguish: An item here last month questioned whether Autodesk (ADSK:Nasdaq) would have to report a lousy quarter because of the Asian crisis, which had led to warnings from rivals Parametric Technology (PMTC:Nasdaq) and Structural Dynamics (SDRC:Nasdaq). At the time, the CFO told me that Autodesk would be warning-free. As it turns out, not only did Autodesk not issue a warning, it beat Wall Street's estimates. However -- ahem -- it warned that, my oh my, the Asian crisis has finally caught up with its customers and, don't ya know it, the next quarter or two may be a tad on the weaker-than-expected side. Funny how that works. CNBC: My two minutes of fame continues Tuesday, barring a market calamity, with Bob Sellers and Felicia Taylor on CNBC's Today's Biz, which airs from 6 to 8 a.m.; I can usually be found at around 6:40. My SI posts start 12/25/97 Tappis and all you will find this interesting. RE: (Party City Corp) PCTY. Done with the homework. IMO some time in 98 shorts will start partying big time. Revenue growth has been achived through buying franchised stores, opening new ones and about 10% growth in same store sales. One very interesting fact is that when buying the franchised stores they have never paid more than about 0.5 times annual sales and even less! However their current market cap places them at over two times annual sales! and an outrageous PE since for the first nine months of 97 they have only made $.05/share. Assuming management knows the value of franchised stores better why are the dummy investors paying more? Perhaps they have some incredibly good plans to improve profitability! Is this a typical revenue growth story with the promise of potential profits that will never come? The latest 10Q does not discuss at all future business plans and/or how they expect to become profitable. From Zacks the consensus earnings for 98 is $1.32/share with a high of 1.40 and a low of 1.20. It would be nice to have someone call them and have them explain how they expect to achive this rather challenging feat. Balance sheet is fairly clean but IMO they cannot generate the cash flow required to continue growing revenues without issuing either equity or debt. [Actually, whether this is a profitable business worth growing is an open issue!]. It is very likely these guys are creating a classic revenue growth shop, a frequent trap for dummies during a crazy bull market era and they just don't care whether adequate risk adjusted returns can be made. It is interesting to notice they were much more profitable under the mainly franchise system! One posibility is that after royalty payments franchises were hurting and complaining, wanting to get out and then some clever bankers decided to suck the dummies in by raising money to buy worthless revenue! S13s reveal insiders and the investment houses recommending the stock [JP Morgan among them] as significant 5% or more stock holders. IMO Nothing to worry about. Let's hope the split, upgrades, Zacks strong buy rating, continue to pump this sucker and them we will take over. IMPORTANT: The crucial step is have someone verify these guys have no chance to improve profits margins.