BofA: Party City Comps Could Be Driven Higher By Better Halloween Timing, Licensed Merchandise, Store Acquisitions

Party City Holdco Inc PRTY has a bull in Bank of America Merrill Lynch, with the research firm citing multiple drivers for comp outperformance in 2019 and consistent operating margin expansion as reasons for a Thursday upgrade. 

The Analyst

Analyst Elizabeth Suzuki upgraded Party City from Neutral to Buy and increased the price target from $17.50 to $20, suggesting 29-percent upside.

The Thesis

Lackluster performance by Party City stock was mainly due to soft comps in recent years, Suzuki said in a Thursday note. (See the analyst's track record here.)

Earnings and sentiment could improve if comps were to accelerate, the analyst said. 

Three clear catalysts could accelerate Party City's comps, Suzuki said:

• A more favorable calendar for Halloween beginning next year, when the holiday will fall on a Thursday. Suzuki expects Halloween sales, which declined from 25 percent of total sales in 2015 to 20 percent in 2017, to begin to accelerate in 2019 and reach a peak in 2021.
• A strong line-up of franchise films — with "Frozen 2"  being the most important — are expected to lead to an uptick in licensed product sales for Party City. The release of several other costume-centric films will also boost growth, Suzuki said. 
• Party City can realize a revenue boost from the ongoing acquisition of franchise locations.

More margin is being brought in-house at the retailer, the analyst said, both through increasing direct sourcing and self-manufactured sales.

BofA still sees risk in growing online competition and high leverage. The firm raised its 2018 and 2019 earnings per share estimates for Party City; the figures are approximately 4- and 8-percent higher, respectively, than the consensus.

The Price Action

Party City shares have gained about 11 percent year-to-date. The stock was up 2.1 percent at the time of publication Thursday at $15.80. 

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Photo by Ed!/Wikimedia.