Party City Corporation Reports Results for Second Quarter and First Si

    Business Editors

    ROCKAWAY, N.J.--(BUSINESS WIRE)--Feb. 4, 2005--Party City Corporation (Nasdaq: PCTY), America's largest party goods chain, today reported its operating results for the second fiscal quarter and six months ended January 1, 2005, as compared to the prior fiscal year periods ended December 27, 2003.

    Second Quarter Results

    Party City reported net income for the second quarter of fiscal 2005 of $14.7 million, or 74 cents per share on a diluted basis. This compares with net income of $19.3 million, or 98 cents per diluted share, for the same period last fiscal year.
    The Company attributed the decline in net income primarily to a decrease in net sales as compared with the year-ago period and higher expenses related to investments in strategic initiatives, particularly merchandising and logistics, that are expected to generate net benefits beginning in the fourth quarter of fiscal 2005.
    As previously announced, net sales for Company-owned stores were $166.8 million for the second quarter of fiscal 2005, a decrease of 4.9% as compared with $175.3 million in the second quarter of fiscal 2004. Same-store net sales for Company-owned stores decreased 5.6% in the second quarter of fiscal 2005 as compared with the second quarter of fiscal 2004, while same-store net sales for franchise stores decreased 2.8% for the same period. Total chain-wide net sales (which include aggregate sales for Company-owned and franchise stores) were approximately $356.8 million for the second quarter of fiscal 2005, a decrease of 3.0% compared with $367.7 million in the second quarter of fiscal 2004.
    Gross profit declined $4.7 million to $65.9 million for the second quarter of fiscal 2005, and, expressed as a percentage of net sales, declined to 39.5% from 40.3% in the same period last fiscal year. The decline on a percentage of net sales basis reflected a slight decrease in merchandise margin, as margin improvements in some product categories were offset by higher distribution costs, increased occupancy costs from new stores, and additional depreciation. The higher distribution costs reflected the volume of initial deliveries through the new distribution centers, which were not yet sufficient to leverage the related operating costs.
    Store operating and selling expenses were essentially unchanged at $36.3 million for both the recent and year-ago quarters, as higher advertising expenses during the Halloween selling season were offset by reduced store level compensation. As a percentage of net sales, store operating and selling expenses increased to 21.8% for the second quarter of fiscal 2005 from 20.7% in the same period last fiscal year.
    General and administrative expenses increased $3.2 million to $10.7 million for the second quarter of fiscal 2005, and, expressed as a percentage of net sales, increased to 6.4% for the second quarter of fiscal 2005 from 4.3% in the same period last fiscal year. This was primarily due to increased corporate staffing and related occupancy and other expenses to support the Company's strategic initiatives in merchandising, planning and allocation and logistics, as well as certain one-time professional fees in anticipation of the store re-set which is now in the process of being implemented.
    Franchise profit contribution held steady at $5.7 million for the second quarter of both fiscal 2005 and 2004, as an increase in the number of stores paying franchise royalties was offset by an increase in corporate expenses allocated to the franchise segment during the quarter.
    Cash on hand at the end of the second quarter of fiscal 2005 was $49.2 million compared with $20.6 million at the end of the second quarter of fiscal 2004. The increased cash position resulted in part from a higher accounts payable balance related to the timing of certain merchandise payments. The Company had no advances outstanding under its loan agreement at the end of the second quarter of fiscal 2005.
    Company inventory levels increased 15.4% to $69.6 million for the second quarter of fiscal 2005 compared to $60.3 million in the same period last fiscal year, primarily due to re-merchandising and logistics initiatives, as well as improving in-stock positions in the Company-owned stores.

    Six-Month Results

    Net income for the first six months of fiscal 2005 was $11.6 million, or 59 cents per diluted share. This compares with net income of $17.3 million, or 88 cents per diluted share, for the same period last fiscal year.
    As previously reported, net sales for Company-owned stores were $265.4 million for the first six months of fiscal 2005, a decrease of 4.5% as compared with $277.9 million for the same period in fiscal 2004. Same-store net sales for Company-owned stores decreased 5.4% for the first six months of fiscal 2005 as compared with the first six months of fiscal 2004, while same-store net sales for franchise stores decreased 2.8% for the same period. Total chain-wide net sales were approximately $559.0 million for the first six months of fiscal 2005, a decrease of 2.7% compared with $574.8 million for the first six months of fiscal 2004.
    Gross profit was $92.6 million (34.9% of net sales) for the first six months of fiscal 2005, as compared with $98.9 million (35.6% of net sales) for the same period of fiscal 2004. Store operating and selling expenses were $60.5 million (22.8% of net sales) for the first six months of fiscal 2005, as compared with $62.2 million (22.4% of net sales) for the same period of fiscal 2004. General and administrative expenses were $20.4 million (7.7% of net sales) for the first six months of fiscal 2005, as compared with $15.7 million (5.6% of net sales) for the same period of fiscal 2004.
    Franchise profit contribution was $7.8 million for the first six months of fiscal 2005, as compared with $8.4 million for the same period of fiscal 2004.

    Management Perspective

    Commenting on these results, Nancy Pedot, Party City's Chief Executive Officer, stated: "While we are far from satisfied with our financial results for the second quarter, we have continued to follow a well-defined road map to strengthen Party City's infrastructure, shopping experience and financial performance. During the first half of fiscal 2005, we made strategic investments in logistics, merchandising, planning and allocation, and other areas to support our initiatives. Our investments, along with the decline in same-store net sales, adversely impacted financial results in the near term. However, these investments have paved the way for the introduction of new products, coordinated assortments and centralized distribution."
    Ms. Pedot added, "For the fiscal third quarter, we expect to see a continuation of the recent trend of mid-single digit decreases in same-store net sales, along with further investments in our initiatives and efforts to clear out older merchandise to make room for our new products. Consequently, we have revised our gross margin outlook for fiscal 2005 and currently do not expect to see an improvement in gross margin until the fourth quarter of this fiscal year. However, we remain confident that in the fiscal 2005 fourth quarter, our new product and merchandising initiatives will lead to stronger net sales results, and, along with our investments in logistics, systems and improved business processes, will drive an increase in margins and profitability over the same period last year."

    Store Growth and Chain Update

    During the first six months of fiscal 2005, the Company opened one store and closed two stores, compared with six store openings and one store closing during the same period last fiscal year. The Company also added three franchise stores and closed one store in the first six months of fiscal 2005 as compared with 13 franchise store openings during the same period last fiscal year.
    Party City Corporation is America's largest party goods chain. Party City currently operates 248 Company-owned stores and has 259 franchise stores in the United States and Puerto Rico. To learn more about Party City, visit the Company's website at http://www.partycity.com.

    Except for historical information contained herein, the statements in this release are forward-looking and made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve known and unknown risks and uncertainties, which may cause our actual results in future periods to differ materially from forecasted results. Those risks and uncertainties include, among other things, the effect of price and product competition in the party goods industry in general and in our specific market areas, our ability to anticipate customer demand for products and to design and develop products that will appeal to our customers, our ability to open new stores successfully and/or to identify, execute and integrate acquisitions and to realize synergies, the availability and terms of capital to fund capital improvements, acquisitions and ongoing operations, our ability to manage successfully our franchise program, our ability to improve our fundamental business processes and reduce costs throughout our organization, our ability to attract and retain qualified personnel, changes in costs of goods and services and economic conditions in general. Please see our filings with the Securities and Exchange Commission for a more complete discussion and analysis of these and other risks and uncertainties. You are cautioned not to place undue reliance on such forward-looking statements, which are made as of the date of this release, and we have no obligation or intention to update or revise such forward-looking statements.

PARTY CITY CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts)

Quarter Ended Six Months Ended January December January December 1, 27, 1, 27, 2005 2003 2005 2003 -------- -------- ---------- ----------- Statement of Income Data: Total revenues $174,290 $182,560 $ 276,839 $ 289,535 ======== ======== ========== ========== Company-owned stores: Net sales $166,779 $175,304 $ 265,381 $ 277,924 Cost of goods sold and occupancy costs 100,884 104,705 172,741 179,033 -------- -------- ---------- ---------- Gross profit 65,895 70,599 92,640 98,891 Store operating and selling expense 36,277 36,290 60,536 62,169 -------- -------- ---------- ---------- Company-owned store profit contribution 29,618 34,309 32,104 36,722 General and administrative expense 10,661 7,498 20,383 15,657 -------- -------- ---------- ---------- Retail profit contribution 18,957 26,811 11,721 21,065 -------- -------- ---------- ---------- Franchise stores: Royalty fees 7,511 7,216 11,338 11,123 Franchise fees -- 40 120 488 -------- -------- ---------- ---------- Total franchise revenues 7,511 7,256 11,458 11,611 Total franchise expense 1,772 1,562 3,620 3,221 -------- -------- ---------- ---------- Franchise profit contribution 5,739 5,694 7,838 8,390 -------- -------- ---------- ---------- Operating income 24,696 32,505 19,559 29,455 Interest (income) expense, net (25) 112 32 312 -------- -------- ---------- ---------- Income before income taxes 24,721 32,393 19,527 29,143 Provision for income taxes 10,011 13,103 7,908 11,803 -------- -------- ---------- ---------- Net income $ 14,710 $ 19,290 $ 11,619 $ 17,340 ======== ======== ========== ========== Basic earnings per share $ 0.86 $ 1.14 $ 0.68 $ 1.03 ======== ======== ========== ========== Weighted average shares outstanding -- basic 17,151 16,867 17,128 16,856 ======== ======== ========== ========== Diluted earnings per share $ 0.74 $ 0.98 $ 0.59 $ 0.88 ======== ======== ========== ========== Weighted average shares outstanding -- diluted 19,845 19,624 19,813 19,620 ======== ======== ========== ==========

PARTY CITY CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share information)

January 1, July 3, December 27, 2005 2004 2003 ---------- -------- ------------

ASSETS Current assets: Cash and cash equivalents $ 49,182 $ 27,845 $ 20,550 Merchandise inventory 69,585 57,357 60,281 Deferred income taxes 9,601 9,298 7,428 Other current assets, net 17,089 11,371 17,835 --------- -------- ------------ Total current assets 145,457 105,871 106,094 Property and equipment, net 45,774 48,762 48,715 Goodwill 18,614 18,614 18,614 Other assets 4,561 4,170 5,201 --------- -------- ------------ Total assets $ 214,406 $177,417 $ 178,624 ========= ======== ============

LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 59,257 $ 38,364 $ 34,458 Accrued expenses and other current liabilities 36,291 32,689 36,062 --------- -------- ------------ Total current liabilities 95,548 71,053 70,520 Long-term liabilities: Deferred rent and other long-term liabilities 9,477 9,526 9,905 Commitments and contingencies Stockholders' equity: Common stock, $0.01 par value; 40,000,000 shares; 17,938,479 shares issued and 17,191,467 outstanding at January 1, 2005; 17,835,778 shares issued and 17,088,766 outstanding at July 3, 2004; and 17,721,850 shares issued and 16,974,838 shares outstanding at December 27,2003 179 178 177 Additional paid-in capital 47,606 46,683 44,611 Retained earnings 67,536 55,917 59,351 Treasury stock, at cost (747,012 shares for all periods presented) (5,940) (5,940) (5,940) --------- -------- ------------ Total stockholders' equity 109,381 96,838 98,199 --------- -------- ------------ Total liabilities and stockholders' equity $ 214,406 $177,417 $ 178,624 ========= ======== ============

PARTY CITY CORPORATION AND SUBSIDIARY

STORE AND OPERATING DATA (in thousands, except store data)

Quarter Ended Six Months Ended January December January December 1, 27, 1, 27, 2005 2003 2005 2003 --------- -------- -------- --------

Operating Data: (Decrease) increase in Company- owned same store sales (5.6%) 3.7% (5.4%) 3.8% (Decrease) increase in franchise same store sales (2.8%) 7.0% (2.8%) 5.7%

EBITDA (a) $ 29,252 $ 36,395 $ 28,447 $ 37,147 Other Information: Depreciation and amortization $ 4,556 $ 3,890 $ 8,888 $ 7,692 Cash flow provided by (used in): Operating activities $ 33,464 $ 33,929 $ 26,059 $ 34,724 Investing activities (3,230) (2,081) (5,231) (3,529) Financing activities 335 (15,901) 509 (14,017) Balance Sheet Data: Cash and cash equivalents $ 49,182 $ 20,550 $ 49,182 $ 20,550 Working capital 49,909 35,574 49,909 35,574 Total assets 214,406 178,624 214,406 178,624 Advances under loan agreement -- -- -- -- Stockholders' equity 109,381 98,199 109,381 98,199 Store Data: Company-owned: Stores open at beginning of period 249 247 249 242 Stores opened -- -- 1 6 Stores closed (1) -- (2) (1) -------- -------- -------- -------- Stores open at end of period 248 247 248 247 ======== ======== ======== ======== Average Company-owned stores open in period 249 247 249 245 ======== ======== ======== ======== Franchise: Stores open at beginning of period 259 253 257 241 Stores opened -- 1 3 13 Stores closed -- -- (1) -- -------- -------- -------- -------- Stores open at end of period 259 254 259 254 ======== ======== ======== ======== Average Franchise stores open in period 259 253 258 251 ======== ======== ======== ========

Total stores chainwide 507 501 507 501 ======== ======== ======== ========

Chainwide sales - in thousands $356,760 $367,687 $559,044 $574,814 ======== ======== ======== ========

    (a) Our definition of EBITDA is earnings before interest, taxes, depreciation and amortization. We use EBITDA to determine a portion of our executive compensation, as our incentive compensation payments are partially based on our EBITDA performance measured against budget, and we believe EBITDA provides additional information for determining our ability to meet future debt service requirements. EBITDA is also widely used by us and others in our industry to evaluate and price potential acquisitions. Furthermore, EBITDA is commonly used by certain investors and analysts to analyze and compare companies on the basis of operating performance and to determine a company's ability to service and/or incur debt. EBITDA should not be construed as a substitute for net income or net cash provided by operating activities (all as determined in accordance with generally accepted accounting principles) for the purpose of analyzing our operating performance, financial position and cash flows as EBITDA is not defined by generally accepted accounting principles. Our computation of EBITDA may not be comparable to similar titled measures of other companies.

PARTY CITY CORPORATION AND SUBSIDIARY

RECONCILIATION OF EBITDA TO NET INCOME AND CASH PROVIDED BY OPERATING ACTIVITIES (in thousands) (Unaudited)

    Because we consider EBITDA useful as an operating measure, a reconciliation of EBITDA to net income follows for the periods indicated:

Quarter Ended Six-Months Ended January December January December 1, 27, 1, 27, 2005 2003 2005 2003 -------- ------- ------- -------- EBITDA (a) $29,252 $36,395 $28,447 $37,147 Depreciation and amortization (4,556) (3,890) (8,888) (7,692) Interest income (expense), net 25 (112) (32) (312) Provision for income taxes (10,011)(13,103) (7,908)(11,803) ------- ------- ------- -------- Net income $14,710 $19,290 $11,619 $17,340 ======= ======= ======= ========

    Because we also consider EBITDA useful as a liquidity measure, we present the following reconciliation of EBITDA to our cash flow provided by operating activities:

Quarter Ended Six-Months Ended January December January December 1, 27, 1, 27, 2005 2003 2005 2003 -------- -------- ------- -------- EBITDA (a) $29,252 $36,395 $28,447 $37,147 Interest income (expense), net 25 (112) (32) (312) Provision for income taxes (10,011)(13,103) (7,908)(11,803) Non-cash interest 40 40 80 80 Deferred rent (285) (117) (412) (240) Deferred taxes (866) -- (866) -- Stock based compensation 3 24 11 148 Provision for doubtful accounts 21 (77) (49) (140) Other 30 6 (95) 10 Tax effect on non-qualified stock options 62 -- 62 -- Changes in assets and liabilities: Merchandise inventory 12,072 32,946 (12,228) 5,627 Accounts payable (2,625)(27,854) 20,893 (3,551) Accrued expenses and other current liabilities 9,324 8,662 3,940 11,065 Other long-term liabilities (1) (12) 58 (119) Other current assets and other assets (3,577) (2,869) (5,842) (3,188) ------- ------- ------- -------- Net cash provided by operating activities $33,464 $33,929 $26,059 $34,724 ======= ======= ================

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CONTACT: Party City Corporation Gregg Melnick, 973-453-8780 or Comm-Counsellors, LLC Edward Nebb, 203-972-8350

KEYWORD: NEW JERSEY INDUSTRY KEYWORD: RETAIL EARNINGS SOURCE: Party City Corporation

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